Bridge - Agency or straight to Agency?

Question

Of those who are buying larger multifamily assets how many of you utilize a bridge loan before putting permanent financing in place opposed to going straight into permanent Freddie/Fannie debt (or HUD or any type of permanent financing)?

The Pros/Cons of utilizing bridge financing seem to be:

Pros: Flexibility, easier and more certain to close (depending on the lender).Cons : More fees / expensive.

Anything else?

Is it deal size dependent? i.e with a smaller deal ( >75 units) the extra fees might outweigh what the deal can support?

What is your strategy / thoughts?

Brian Burke · Answer

I’ve done it both ways. The only way to decide is to model it both ways and see which way is the most advantageous.  Having said that, I don’t use HUD financing because it’s a complete pain, and I don’t use fixed rate debt unless I plan to hold the property to the end of the loan term.  If the plan is to renovate and hold for 3-5 years, it makes no sense to finance with 10 year fixed rate debt as the yield maintenence will destroy your returns.

But using 7 or 10 year floating rate agency debt gives you the advantages of long term debt with the flexibility to exit or refinance when the timing is right with minimal penalty.

Bridge allows higher leverage, but that comes with additional risk.  Sometimes that’s justified.  It also compromises cash flow because the interest rate is higher. Sometimes that’s justified too.  Just have to model it both ways and see how the deal performs, and if that performance aligns with your (or your investor’s) goals.

Gino Barbaro · Answer

@Spencer Gray

90% occupied for at least 90 days, that's what agency defines as stabilized. Anything below that, you will need to go to either bridge or community bank. I love community banks with low down payments, and then refinance to agency debt.

They have some really good bridge products out there. It really depends upon the strategy you are employing, and that is how you will figure out the best debt

Gino

Greg Scully · Answer

@Spencer Gray - It's very deal dependent.  My first multi family investment (with partners) was done with a bridge loan.  It is a heavy value add and would not have met agency lending requirements.  A local bank backed out late based on our experience level relative to the project scope, which left bridge lending as the last option.

Scott Morongell · Answer

@Spencer Gray very deal specific. Depends what your business plan is for the asset and whether or not it qualifies for agency debt out of the gate. Model it all 3 ways and see what best works for you. Like Brian mentioned if your only holding for 5, there is no need for 10-12 yr fixed debt. Many sponsors consider this "conservative" but they're only really analyzing the entry of the deal when the exit is more important.

Tj Hines · Answer

@Spencer Gray

I’d be very careful getting into any type of mezzanine financing unless you have a great deal of experience executing your business plan and doing it on time and on schedule.

Just my experience value add projects depending on how much heavy lifting is needed can go over the expected deadline.

We are in one of the longest economic cycles we’ve seen. You don’t want to get caught out there when it’s time to refi out and you can’t because the market has contracted.

You should be looking to get into long term fixed debt 10 or 12 yr term non recourse. Take this route especially if you’re a beginner. That is of course if you know someone who has rehabbing construction experience as a operator and partner with them.

Just my experience value add projects depending on how much heavy lifting is needed can go over the expected deadline.

Spencer Gray · Answer

Hey @Gino Barbaro thanks for responding -

Do you think it makes sense then to close with a bridge even if the property is stabilized and then refinance to agency hopefully with a better T-3? Or if the asset is already stabilized go straight into agency to avoid the extra round of fees?

We have a great relationship with a local bank and almost always close with their bridge product regardless of being stabilized or not but have been contemplating whether it's worth it to just go straight to Fannie/Freddie. These are B class

moderate value add and hold/projects.

Arthur Cordoves · Answer

Just finished reading this thread.

Seems like you all have done a couple deals structured this way. Would appreciate it if you could share with me the lending sources that you've enjoyed working with for the bridge to agency product.

Thank you!

Spencer Gray · Answer

@Tj Hines I was specifically talking about bridge financing, similar to a construction loan, that is a short term (2-3 years with extensions), i/o, usually with a floating rate that we plan to take out within the first year of ownership. We normally take it out with fixed, non recourse agency debt 10-12 yr term or non recourse FHA/HUD 223(f) w/ a 30 year term. We started using a bridge into HUD deals since we were more confident closing with a bridge then closing with HUD as it gives us extra time to go through the process.

We have also used bridge loans before before taking it out with fixed agency financing. The reasoning is that it gives us more time to weigh our options and doesn't put us into a corner, especially if finance contingencies are waived and hard earnest money was put up. I've heard horror stories about Fannie Mae re-trading on terms and we don't want to be forced into a long term debt product with unacceptable terms or loose hard money and loose a good deal. That being said, it's not cheap to pay almost 2x fees but could be cheaper than to loose earnest money.

I've just noticed not as many operators using a bridge product if they are planning on using agency, and wanted to either confirm or deny that observation.

We have used mezzanize financing for HUD assumptions that are already somewhat mature, bringing the LTV down to 75%+-, but rarely on deep value add deals.

Justin Kane · Answer

bridge loans are used quite a lot then refi at stabiliization

Bridge -> Agency or straight to Agency?

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