As fundamentals continue to improve across the nation, more multifamily developers are looking to break ground. Yet, many banks remain conservative in their approach to construction lending, and the Federal Housing Administration (FHA) remains completely blocked up.
So, some life insurance companies are now rolling out construction-to-perm programs to meet that demand and, in the process, capture some long-term multifamily business.
“There are quite a few life companies that are active in the construction-to-perm market now,” says William Ross, an executive vice president at Minneapolis-based Northmarq Capital. “A lot of developers are trying to get things done, but the banks are looking real hard at each deal, so it’s taking much longer to get a deal done.”
When Magellan Development broke ground in June on The Coast at Lakeshore East, a 499-unit high-rise in Chicago, it did so armed with a $99 million construction-to-perm loan from Northwestern Mutual Life.
Pacific Life Insurance Co. and Prudential are also offering construction-to-perm executions, while MetLife is mulling whether to take its program off the shelf. At the beginning of the year, MetLife was poised to start offering that program again, but the company now finds itself processing permanent loans hand over fist.
“We’ve been busy financing stabilized properties—in fact, through the first half of 2011, we have more than doubled our volume for all of 2010,” says Mark Wilsmann, managing director of New York–based MetLife. “But we have not done any construction-perm loans.”
Life Companies vs. FHA
The other major provider of construction-to-perm loans is the FHA, through its Sec. 221(d)(4) program. And the FHA offers more beneficial terms than what most life companies are willing to provide. The (d)(4) program is nonrecourse, offers up to 83.3 percent loan-to-cost (LTC), and features a 35-year amortization. By comparison, most life companies would max out at 80 percent LTC and ask for a completion-of-construction guaranty and repayment guaranty.
Life companies also suffer in comparison with the FHA in terms of interest rates. A Sec. 221(d)(4) loan rate locking today would do so at 4.5 percent, while most life companies are offering 12- to 13-year construction-to-perms in the 5.75 percent to 6 percent range.
But the question is, do you have a couple of years to kill? Because if you’re going with a (d)(4), you’re going to need some patience. If you were just beginning the process, the deal would be underwritten at a 5 percent rate, but your actual rate would be subject to where market spreads are a year and a half from now.
“That’s an 18-month to two-year process; you would have to own the land so there’s not a ticker in terms of having to close,” says Ross. “But two years later, there could be four other projects around you.”
Like the FHA, life companies offer a blended fixed rate in their construction-to-perm programs, which has some pros and cons. On the negative side, the fixed-rate construction-period loan will be more expensive than a standard floating-rate loan that a bank would do, given today’s rock-bottom LIBOR rates.
But that’s a short-term consideration. On the plus side, you’re locking in today’s low rates for an additional 10 years (beyond your construction period). And given the end of the Federal Reserve’s Quantitative Easing program, many industry veterans are forecasting rising interest rates for the second half of the year.
So, by going with a life company construction-to-perm as opposed to a standard bank construction loan, you’re paying a higher rate for those first two years. But you’ll likely make up for it by mitigating the longer-term permanent interest-rate risk, and saving some money on processing costs.
“You’re picking up 10 years at a below-market rate, and that’s probably an advantage,” Ross says. “And it’s one close, so you save some money on title and fees and all that.”