We're working with a developer who's completing a garden-style apartment in DFW. They financed the senior construction loan through a regional bank at modest leverage and layered in preferred equity to get to 72% LTC. This pref piece compounds monthly and has a minimum multiple that the investor must hit upon pay-off (refi/sale). The developer wants to pay off their preferred equity investor given the rising cost of compounding interest - not to mention softening rents, occupancies, and construction delays. We've identified multiple lenders targeting projects approaching Certificate of Occupancy or, ideally, in lease-up with some cash flow in-place. Terms are 24 or 36 months with one or two 6-12-month extension(s). These lenders are sizing to either a Y2 or Y3 stabilized NOI, burning off concessions from Y1 to Y2 and can underwrite up to 3% rent growth in years 2 and 3. They're looking to solve for a stabilized economic occupancy of 88-95% and a 7.75-8.50% debt yield. For projects still under construction, hold-backs or earn-outs may be available to achieve TCO. Pricing is S+285-425 - some groups are wider, but mid 300s seems to be competitive for market. An at-the-money cap is generally required, capitalized in the deal with SOFR floors ranging from 400-500bp (while term SOFR sits at 5.32% today). Prepay is generally 12-18mo minimum interest. 1% origination fee and 25-50bp exit fee - some can be higher but waived if refinanced with Fannie or Freddie. For developers who have expensive preferred equity or are facing pains with their construction lender (banks who want $ off their books, loan maturities, etc.), "construction-to-bridge" money is widely available. Although it may result in a cash-in or cash-neutral scenario, this strategy can achieve a lower blended cost-of-capital and provide additional term for developers, particularly those who do not wish to sell in the current environment and/or believe treasury rates will be materially lower in 2025 and beyond. Please reach out if we can be a resource in any way. #apartmentdevelopment #multifamilyinvesting #constructionfinancing #bridgeloans #capitalmarkets Greysteel
Great Job Landon! Hard to do in current market rates.
Commercial Real Estate Consultant | ARGUS Instructor at UCLA Extension
8moHaven’t heard of “construction-to-bridge” loans to help pay off preferred equity during the lease-up phase of a new development until now. Also, interesting that these lenders are sizing to Y2 or Y3 stabilized NOI & underwriting conservative annual rent growth of 3%. Rather than a construction-to-permanent loan, this is an intermediate step to take out the construction loan. Can eventually structure a perm loan to take this out. Thanks Landon Cibulka for sharing the post & your thoughts. Great intel. Appreciate you explaining general structure & terms. #CREValueAdd 👈 Follow