Commercial Investment Real Estate is the magazine of the CCIM Institute, the leading provider of commercial real estate education. CIRE covers market trends, current developments, and business strategies within the commercial real estate field.
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FINANCING FOCUS A Bridge to Success Interim loans can span the multifamily lending gap. by Jeffrey M. Goodman Nonstabilized or underperforming properties — where the occupancy level is below the minimum required by Fannie Mae, Freddie Mac, and Department of Housing and Urban Development loans or income is depressed due to operational and market challenges such as concessions or outdated units — have an urgent need for fnancing so investors can enhance occupancy, perform needed improvements, or engage better 14 14 May | June | 2013 y J ne 2013 June 013 management to make the property competitive and ultimately increase the bottom line. Yet, despite Reis data showing a drop of nearly 32 percent in the multifamily vacancy rate between fscal year 2010 and FY 2012 (from 6.6 percent to 4.5 percent), loans for underperforming multifamily properties remain hard to obtain from traditional lending sources, which are still focused on stabilized properties. Interim Solutions A bridge loan can provide multifamily borrowers with time to work through the issues that may prevent a property from obtaining a permanent loan today. Interim fnancing also gives new buyers of underperforming properties the capital they need to make renovations and other improvements, allowing the borrower to increase the property's income and resulting value over the bridge loan's term. Bridge loans usually ofer 12- to 24-month terms that provide borrowers additional time to implement their value enhancement strategies. Another advantage of bridge fnancing is it can be nonrecourse, which means that, except in certain circumstances, the lender has no claim against the borrower's assets other than the property in the event of a default. Qualifications Borrower experience is a primary qualifcation consideration: Bridge loans are not for novice real estate investors. Te best candidates are well-capitalized, reputable borrowers who have prior experience and an existing presence as owners of multifamily properties in the target market. Eligible properties are typically located in stable or improving markets that have a solid and growing employment base. Attractive properties are found not only in big-city urban locations but also in stable and growing suburbs of major metropolitan areas, as well as in certain secondary markets. Te key is the demographics of each market and how they relate to the property and its story. Commercial Investment Real Estate George Diebold/Getty Images; ; Paul Velgos/Getty Images i In a strengthening multifamily market, bridge financing can be an attractive option for investors seeking to acquire or reposition multifamily properties with low occupancy numbers, planned renovations, or other operational challenges. High demand in today's market has created a scarcity of stabilized properties with attractive yields. In response, owners and investors are seeking more transactional flexibility and higher yields on properties that do not meet the criteria for permanent loans. For example, in hard-hit multifamily markets such as the southeastern U.S. and California's Inland Empire, which are strengthening after hitting bottom, investment in transitional properties that need updating is heating up.