On multiple occasions, I’ve seen sponsors come to me with deals that they achieved a price reduction on, not once, but twice.

It looks something like this:

1st price: 3.9% cap
2nd price: 4.5% cap
3rd price: 5.1% cap

All in the matter of a few months.

The problem is, agency lending on the 5.1% cap is staring at 5.75% to 6%, and when amortizes, gets to a constant above 7%. (The loan constant is calculated by dividing the yearly debt service by the total loan amount, and gives you a sense of how much you are paying your lender yearly. On a 1M dollar loan, a loan constant of 7% would mean that your yearly debt service, including principal and interest payments, will be $70,000.)

Which means that the Yield on Cost on the deal would need to be north of 7% for the deal to be positively levered. That would be over 190 basis points of YOC increase. (More when you consider that the cap rate of 5.1% going in is a day one YOC of sub 5% when including closing costs/capex etc.)

That’s hard to achieve, especially in a recession, when you want to be conservative on your rent growth/value-add assumptions.

In come the banks the credit unions.

They’ve barely been used for multifamily in the past few years (agency lenders, Fannie Mae and Freddie Mac had been taking the vast majority of the market share), but they’re incredibly relevant now.

I’m seeing these types of lenders beat agency pricing by 50+ basis points, with long term fixed rates, and some I/O. That means, that while agency rates are between 6.15% and 6.75% as of today, you could still find local banks and credit unions that will lend at 5.5% to 5.75%. (It’s not easy of course. Most banks are pricing at 7%, but I am seeing it done on select properties in select locations)

For the first time in some time, Multifamily lending is not commoditized. Everyone is not going to the same lenders. Everyone is not getting the same terms. Finding the right lender could be the deciding factor in whether a deal is doable or not. And mortgage brokers are extremely valuable, much more valuable than they have been in times when debt capital has been abundant.

I’m happy to connect with any credit union or bank representative who’d like introductions to sponsors. I think it could be a great value-add for the clients we raise equity for.