While life insurance companies make up just a fraction of the multifamily financing arena, they’re a contender and they’re ready to fight.
Life companies have been battling the government-sponsored enterprises (GSEs) for prime projects and are increasingly snatching up deals by offering terms and executions Fannie Mae and Freddie Mac can’t match.
As the deadline approached for Walker & Dunlop’s Senior Vice President Jim Cope to finance a multimillion dollar loan at the end of last year, his clients weren’t willing to sit on a good interest rate and hope for the best.
“The main reason (they chose a life company) is they were looking for a longer term fully amortizing loan and the life company was willing to offer it at pricing that was better than the alternatives and the agencies,” Cope said. “Then they offered the speed."
The ability to hold an interest rate until closing is one of the most appealing aspects of choosing a life company. GSE financing can take weeks to process leaving rates open for change.
The project scored $30 million in financing for two Class A senior-living properties in Wisconsin. The Lincoln National Life Insurance Company wooed the borrowers with a 20-year term and 20-year amortization period.
Class A projects tend to be the deals of choice for life companies.And they’re capturing a lot of long-term business these days by offering financing the GSEs can't: both construction loans and joint venture equity.
Construction-to-permanent loans are also being offered by some life companies, giving borrowers the chance to lock a rate for the long-haul.
“Construction-to-perm loans are attractive to life companies since they get access to permanent loans on new apartment projects, and typically get a little better yield to compensate for construction risk and the staged drawdown of the loan,” says Mark Wilsmann, head of real estate equity strategies at MetLife.
Life companies are also a little more lenient on underwriting than the GSEs, an outgrowth of their respective business models. The GSEs are more programmatic, with a set credit box within which all deals must fit. But life companies assess deals in a more case-by-case basis.
Brokers such as those at HFF advise clients to explore the market before deciding which way to go.
“The market changes quickly, and lenders are more or less aggressive at different times driven by factors such as alternative investments, and product and geographic concentrations,” said Kevin MacKenzie, a senior managing director at HFF.
Another reason a developer may seek out a life company is because of questions about the agencies’ future, said Michael McRoberts, who led Freddie Mac's multifamily agency before becoming a managing director with Prudential last year.
McRoberts has seen the GSEs occasionally miss out as the industry buzzes about how the government can influence decisions for GSEs. The feds could tell them to slow down on how much money they’re lending or raise their rates as they see fit, McRoberts said. “Now that the federal government has control and can make those decisions, there’s a lot of uncertainty,” he said. “The borrowers want to make sure they have got some place else to go.”
However, one of the most important reasons life companies are gobbling up high-end multifamily development deals is because there’s history there.
“They have been lending on those kinds of assets for a long period of time,” McRoberts said. “They understand those risks very well.”
At the end of the third quarter 2012, life companies held about $51 billion, or 6.2%, of all multifamily mortgages, after an increase of $441 million in the second quarter, according to the Mortgage Brokers Association.