These are some informations I could gather during GP foreclosure or capital calls.
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During a general partner (GP) foreclosure on a multifamily property, how lender protect its capital:
Non-recourse loans with bad boy carve-outs: Many bridge lenders provide non-recourse loans, meaning the borrower is not personally liable. However, they include "bad boy" carve-outs that trigger full recourse if the borrower commits certain bad acts like fraud or voluntary bankruptcy filing.
Abandonment may constitute default: If the GP abandons or surrenders control of the property during foreclosure, it could be considered an unpermitted transfer that violates the loan agreement and triggers the guarantor's full recourse liability for the unpaid loan balance. This incentivizes the GP to stay engaged.
Lenders can pursue guarantor for losses: Even with non-recourse loans, bridge lenders often require the GP to sign a limited guarantee to be liable for lender losses from things like misuse of rents or failure to maintain the property. This provides some protection if the GP neglects responsibilities during foreclosure.
Ability to expedite taking control: Bridge lenders may push for a deed-in-lieu to more quickly take control of a defaulted property versus a lengthier foreclosure process. However, deeds-in-lieu have some risks that the borrower could later challenge the transfer.
Flexibility to work out solutions: Major bridge lenders emphasize their flexibility and creativity to structure deals around a borrower's unique needs. This suggests more willingness than banks to negotiate mutually agreeable resolutions on a troubled asset.
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Multifamily bridge loans:
Loan Size:
$1 million and up
Loan Term:
Short-term, typically ranging from 6 months to 3 years
Most common range is 12-24 months
Extension options may be available
Interest Rates:
Higher than permanent financing, often in the teens
Rates vary based on creditworthiness and collateral
Generally 7-10.5% for multifamily, 15-24% for other commercial properties
Amortization:
Typically interest-only payments
Maximum Loan-to-Value (LTV):
Up to 75% of total project cost
Capped at 70% of the completed or stabilized property value
Fees:
Origination fees, legal fees, closing costs typically 1.5-3% of loan amount
Fees can include appraisal, administration, escrow, title policy, and notary charges
Other key characteristics of multifamily bridge loans:
Fast closing process, with funds available quickly
Eligibility based more on property value than borrower credit
Often used for acquisitions, renovations, lease-up, or repositioning
Provided by private lenders, venture capital firms, and commercial real estate lenders
Need to be refinanced or paid off quickly via sale or permanent financing
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here is how extension options can impact the overall cost of a multifamily bridge loan:
Extension fees: Exercising an extension option on a multifamily bridge loan typically requires paying an extension fee to the lender. This fee is commonly 0.25% or more of the loan amount. So extending the loan adds an extra cost.
New rate caps may be required: Lenders often require the borrower to purchase new interest rate caps in order to exercise an extension option. Rate caps act as interest rate hedges to limit the borrower's exposure to rising rates on floating-rate bridge debt.
Rate cap costs have increased: The cost of interest rate caps is tied to benchmark rates like SOFR. As SOFR has risen from 0.5% in March 2022 to over 5% more recently, the cost of rate caps has gone up drastically. Having to buy new, more expensive rate caps to extend the loan increases costs for the borrower.
Extensions used when rates are high: Borrowers commonly use extension options when interest rates remain high at the original bridge loan maturity date. The "extend and pretend" strategy hopes rates will be lower when the extension period ends. But there is no guarantee rates will fall, so the borrower risks paying high rates for even longer by extending.
Opportunity cost of capital: Even if the interest rate does not change when the loan is extended, there is an opportunity cost to having capital tied up in the bridge loan for a longer period instead of refinancing to a permanent loan with a lower rate. The higher bridge loan payments over the extended term increase the total cost.
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here are the key factors that determine the number of extension options lenders offer for multifamily bridge loans:
Lender's risk appetite and flexibility: The number of extension options is largely at the discretion of each individual lender. Some lenders are more flexible and willing to offer multiple extension options, while others may have stricter terms.
Borrower's creditworthiness and track record: Lenders are more likely to grant extension options to experienced borrowers with strong credit and a proven history of successful multifamily investments. Riskier borrowers may receive fewer or no extension options.
Property performance and stabilization timeline: If the lender believes the property will take longer to stabilize and meet the criteria for permanent financing, they may offer more extension options upfront. Conversely, if the property is expected to stabilize quickly, fewer extensions may be granted.
Market conditions and interest rate expectations: In volatile market conditions or when interest rates are expected to change significantly, lenders may offer more extension options to give borrowers flexibility to time their exit.
Negotiation between borrower and lender: The specific number of extension options is often negotiated on a case-by-case basis between the borrower and lender. Borrowers with strong negotiating power may be able to secure more extension options.
In summary, the number of extension options for a multifamily bridge loan is determined by a combination of the lender's policies, the borrower's qualifications, property-specific factors, market conditions, and individual negotiation. Typical bridge loans offer anywhere from zero to two 12-month extension options, but this can vary widely depending on the specific lender and deal characteristics.
