In The Competitive Sun Belt, Multifamily Deals Require Fast, Flexible Financing

From Florida to Texas to Phoenix, the nation’s largest REITs and private equity groups are scouring the Sun Belt for the best assets. With so much equity flooding the markets, it can be difficult for family offices and middle-market firms to close deals without getting beaten to the punch by larger shops, which can raise and deploy capital at a moment’s notice.

To help their clients stay competitive in these markets, lenders are working to offer financing solutions that have components beyond a simple mortgage. Having fast, flexible financing means that smaller investment groups can arrive at the table just as quickly — and bid just as competitively — as the equity behemoths.

“There is a lot of capital at work in today's market, so for the smaller middle-market real estate companies, it's all about execution and finding reliable sources of capital,” KeyBank Real Estate Capital Senior Vice President Alan Isenstadt said. “If we can tailor a solution based on our clients’ needs, we can help them close in a few weeks.”

Rather than offering just a standard mortgage, Isenstadt said, KeyBank has seen great success building customized loans that offer some form of gap financing. These tailored solutions can give clients the flexibility to renovate properties, acquire more units or build up their cash flow before moving to long-term financing.

These custom plans are ideal for Sun Belt markets like Orlando, Florida, Houston, Phoenix and Las Vegas — towns where job growth is strong and baby boomers are flocking to retire. These markets are full of Class-C or Class-B assets that were built in the 1980s or 1990s that can be repositioned to appeal to new arrivals.

Isenstadt explained how he helped put together a plan for a condominium in Tampa. The asset was fractured, and the client only wanted to purchase 200 of the building’s 300 units. After those had been repositioned and the client’s business model had been proven, the plan was to acquire the remaining 100 units and move to a more permanent loan through Freddie Mac or Fannie Mae.

The loan structure was tailored to the client’s exact needs. The bridge loan used for the initial acquisition included a construction loan component, as well as funds held in reserve to acquire the remaining units.

The barrier to entry was finding financing for the project, and the client's former lender, a local bank, was capped at a lower loan-to-value rate that would not work, Isenstadt said.

“We were able to provide a commitment to solve for the entire business plan from acquisition, through capital expenditures and future buyouts of the remaining units,” he said.

On a project in Houston, KeyBank helped a client finance and close on a property in 18 days with a bridge-to-agency loan. The seller was private equity giant Blackstone, and the client needed to move very quickly, because the deal required a significant hard-money deposit. 

“If they had been waiting on the agencies for a deal, then it simply would not have gone through,” Isenstadt said. “Now the client had the pre-payment flexibility that would allow them to seek a fixed-rate permanent loan at any time.”

Part of the reason KeyBank is able to move so quickly is because the company has access to myriad capital markets products, including agencies like Fannie and Freddie, the Federal Housing Authority, commercial mortgage-backed securities and life insurance companies.

“One of the advantages to using KeyBank is that we are a one-stop-shop,” Isenstadt said “We provide clients with a variety of options and work with them to find the best solution to execute on their business plan.” 

In 2018, one of Isenstadt's clients was bidding on a four-property portfolio in Dallas. Two of the properties had been stabilized, but the other two were under 80% occupied. The client was looking for a permanent solution, but still had apartments to renovate. The client preferred to finance the two stabilized properties with a fixed-rate permanent loan through Fannie Mae, and use KeyBank's balance sheet for the remaining two properties. 

Isenstadt helped the client finance the acquisition with a combination of a bridge loan on two of the properties, and provided an additional unsecured credit facility to finance the remaining renovations at the two properties that were being financed with Fannie Mae.

That sort of flexibility is important for KeyBank’s clients, because many of them, including family offices and smaller REITs, are looking to hold on to properties long term. 

Isenstadt emphasized that in these Sun Belt markets, there is no set-in-stone strategy. Some firms are buying up properties built in the 1980s that require significant upgrades, and working to bring in higher rents. Others are buying Class-A properties that the client can operate more efficiently than its current owner thanks to economies of scale. 

“Every property is different and one firm's take will be very different to another,” Isenstadt said. “KeyBank's job is to consult with clients on their goals and provide the best financing structure that complements the business plan.”

This feature was produced in collaboration between Bisnow Branded Content and KeyBank Real Estate Capital. Bisnow news staff was not involved in the production of this content.