What COVID-19 Means for Build-to-Rent Financing
- The COVID-19 crisis will increase build-to-rent opportunities.
- Borrowers need to more diligently advocate for build-to-rent financing.
- Build-to-rent financing can differ depending upon the type of the development.
Capital Markets Overview
With COVID-19 disrupting businesses, a handful of capital providers are sitting on the sidelines, according to George Maravilla, SVP of Tower Capital. Terms are more conservative than in February but have improved from mid-March, he said at an IMN “Build-to-Rent Market Insights” webinar. In a session on build-to-rent financing, he commented that with the current economic conditions, traditional banks are still figuring out how to go forward with processing loans.
Terms are not what they were before the coronavirus crisis. However, Maravilla noted, “Banks are still lending. Non-recourse banks are still quoting deals. With the agencies for permanent financing, rates are really low, but there are a handful of new holdback requirements. You’re not getting the leverage you once were and they are limiting borrower cash out.”
Maravilla stated non-bank lenders with large balance sheets are actively pursuing deals. “Their pricing is a little bit wider than it was. But they’re reaching out to us wanting to get a look at our deal flow,” he said. “They’re looking at lower leverage deals.”
Institutional equity providers are focused on distressed assets and the opportunity costs. They are looking to invest with lower risk and higher yield, he added. Many are preferring to finance existing assets over new construction financing.
COVID-19 Effects on Appraisals and Loans
Ed Steffelin, SVP of George Smith Partners, opined that it’s still a wild card as to whether appraisers will factor in higher vacancies and lower rents. Even if COVID-19 causes a decline in rent collections, single-family rentals across REIT portfolios are seeing up to 70% renewal rates, partly attributable to “sheltering in place” practices, said James Dobbie, president of Avanta Residential.
However, Dobbie also asserted lenders are requiring greater reserves and more information on when reserves can be released. He advised borrowers to give appraisers solid information and to be more diligent in advocating their projects in the best possible light.
Different Types of Build-to-Rent Financing
Steffelin described two build-to-rent models. The first type is the horizontal or linear multifamily project without attached garages. The second is the purpose-built community with traditional single-family homes or townhomes.
The products are financed differently. “Most equity folks like both,” Maravilla stated. “They like the optionality that comes with build-to-rent and being able to exit in multiple ways. But they also like the number of potential institutional investors that can be their exit on a horizontal apartment.”
On the debt side, build-to-rent can look like typical multifamily construction. Maravilla explained a home builder financing deal often has an A&D (acquisition and development) component with a 50% loan-to-cost ratio, and then a construction component at 75% loan-to-cost.
“For horizontal apartments, it’s pretty straightforward. It looks like apartment financing—anywhere from 50% to 80% loan to cost depending on your risk tolerance. And the permanent financing is likely an agency execution,” he said. REITs, banks and other lenders such as life insurance companies also provide permanent financing. Plus, there are lease-up bridge loans for both build-to-rent products. These options can help when time is running out on a construction loan or the borrower wants more time to negotiate a better loan-to-value deal for permanent financing.
Optimistic on Build-to-Rent Financing
Dobbie described build-to-rent as “a new wrinkle in the multifamily industry” with growing momentum. “Better days are ahead of us and it’s a good time to be in this space,” he said.
Maravilla agreed, pointing out build-to-rent’s solid fundamentals, value proposition and demographics remain unchanged. He predicted that in the post-coronavirus environment, the sector would gain popularity with renters less attracted to urban density, and apartment life with elevators and small balconies—instead of a yard. Plus, he voiced optimism that more capital providers would be “dipping their toes back into the water” in the near future.
Listen to the full IMN webinar, here.