Life companies are in a strong position to lend in 2013–especially to the high-quality apartment properties they often target.
“We expect life companies will pick up business–they all have increased allocations this year,” says Faron Thompson, international director for Jones Lang LaSalle.
Life companies have built a reputation for competing very hard for high-quality multifamily properties and offering flexibility that few other lenders can match. This year, life companies appears to be growing their apartment lending into new areas as Fannie Mae and Freddie Mac have been ordered to scale back their activity.
Life companies already increased their volume 18 percent in 2012, according to information from the Mortgage Bankers Association. “Life companies last year were very effective at competing with Fannie Mae and Freddie Mac for high-quality, low-leverage deals,” says Brian Stoffers, president of CBRE's debt and equity finance group. “They cherry-picked some really nice product.”
That seems likely to continue this year as Fannie Mae and Freddie Mac manage the decline in their multifamily lending volume ordered by their federal regulator this March. Fannie Mae and Freddie Mac continue offer lower interest rates overall to apartment borrowers, with typical rates working out to about 150 basis points over the yield on 10-year Treasury bonds. Life company spreads are typically higher, at around 175 basis points, says Stoffers.
Flexibility helps life companies compete. Because life companies don’t have to pool commercial mortgages together to sell to investors on the bond markets, they have much more flexibility than other permanent mortgage lenders.
New class-A apartment properties are especially attractive–even if the properties have not fully filled with residents. Fannie Mae and Freddie Mac program lenders have to wait until a property has leased up. “Life companies will do a full permanent financing at 50 percent occupancy,” says Thompson. Some form of credit enhancement usually protects the life company lender in case there is a problem with the lease up. After the lease up is complete, the credit enhancement usually burns off.
Low-leverage deals, in which the loan amount is significantly less than 80 percent of the value of the property, are also attractive to life company lenders. Now life companies are expanding their low-leverage lending from class-A properties to include class-B apartment properties, competing hard with Fannie Mae and Freddie Mac to make these deals. “They are beating the agencies at that,” says Stoffers.
Balance sheet flexibility is on display with a loan to the Bascom Group to refinance Avena Apartments in Thornton, Colo. Built in 2009, the 385 apartments at Avena Apartments are currently 93 percent occupied. CBRE Capital Markets group arranged a $38 million permanent mortgage from a life company to replace the existing high-interest mortgage on the property, which had a fixed interest rate of 5.25 percent. The interest rate on the new loan will float, starting at 2.75 percent. The lower rate will save the borrower $1 million a year in interest expenses, according to CBRE.
The floating-rate mortgage answers the borrower’s need for maximum proceeds and prepayment flexibility. “With the new financing in place, our cash on cash returns will be dramatically improved,” said Jeff Fuller, senior vice president–acquisitions for The Bascom Group.
Life company lenders have come a long way since the late 1980s and early 1990s, when they competed with S&L lenders to makes risky loans that led to high delinquency rates. “They got over their skies a little bit,” says Stoffers. Since then, however, life companies have had a nearly relentless focus on high-quality assets. “They’ve been in business ever since with extra low delinquency rates.”