The Lynd Co. in San Antonio seems like the kind of company that wouldn't be affected by last summer's credit meltdown. It didn't go to the now-absent CMBS market to finance apartment deals. Instead, it relied on government agencies—Freddie Mac and Fannie Mae—to complete almost all of its 45 deals in the past five years.

True, as the debt market either dried up or became more treacherous, Freddie and Fannie kept liquidity flowing. Even so, it has not been business as usual for people who use the two agencies to finance their multifamily transactions. “You do see a difference in Fannie and Freddie,” says Samuel J. Kasparek, Lynd's CFO. “They don't have to compete with conduits. They're pushing back more than they have in the past.”

Lenders agree. Those with capital sources placing deals with Freddie, Fannie, and insurance companies see the same thing. “There's no question that underwriting requirements have tightened up over the past year,” says Dave Roberts, president and COO of Grandridge Real Estate Capital, a full-service commercial lender based in Birmingham, Ala.

Indeed, multifamily lenders are reacting to the credit crunch and fallout of the CMBS market by taking a harder look at a number of factors during the underwriting process, including past and future rents, available equity, and ancillary revenue.

Even for companies with large portfolios such as Camden's, lenders are tough when evaluating deals.
Camden Property Trust Even for companies with large portfolios such as Camden's, lenders are tough when evaluating deals.

TRENDING BACKWARD The rules have definitely changed. Lenders used to take into consideration, for example, whether a multifamily owner projected rent growth of 3 percent a year over the next five years. That's no longer the case, says John Chappelear, senior vice president of operations for Kettler, a multifamily owner and builder based in McLean, Va. “Six months ago, you could make a deal based on future rents,” Chappelear says.

Players bigger than Chappelear are seeing this as well. “Underwriting criteria has gotten much tougher,” says Richard Campo, chairman and CEO of Camden Property Trust, a Houston-based REIT. “Lenders are not looking at trending rents.”

Regardless of the apartment owner's or builder's size, not projecting rents for when the market is growing can provide serious issues. “[Trending rents] gave you a higher net income,” Chappelear says. “Using a market cap rate allowed you to get a higher value and higher loan dollars. But higher cap rates based on their analysis of risk and the lack of any trending makes it harder to get loan-to-value ratios.”

Kasparek of Lynd has seen Freddie and Fannie take this trend even further. They would pull the last 20 leases in a deal to examine actual rents. If the market is going up, that can be a benefit. “You're basically creating a proforma off the best rents,” he says. “They liked to see the last 20 to 30 leases to see how deals were doing in absolute recent terms.”

CASH IS KING Equity requirements also have become more stringent. Even when a firm is doing well, Freddie and Fannie are likely to increase their coverage ratios. A year ago, Kasparek could get the two agencies to look at deals with 1.05 to 1.10 coverage ratios. Now they're starting every deal out at 1.20 (though he says he can occasionally get a waiver to 1.15 or 1.10). “They're starting at higher coverages,” Kasparek says. “When you push your coverage up, you've got to put more equity in the deal.”

A year ago, an apartment owner could underwrite an existing property between 90 percent to 100 percent loan-to-value, although mezzanine financing often filled this gap, Campo says. Now, it's 70 percent to 75 percent. On new development deals, it's fallen from 75 percent to 85 percent down to 60 percent or 65 percent. “Today's market is different,” Campo says. “From a pure financing standpoint on existing properties, cash is king.”