The only constant is change, mused Greek philosopher Heraclitus, and multifamily borrowers are now saying, “Vive la différence."

This year, the debt landscape is constantly changing for the better, rapidly evolving, nearly on a daily basis, to a more perfect union between borrower and capital. Don't blink, or you might miss the latest entrant to the race.

Sure, the government-sponsored enterprises (GSEs) are still dominant, but they are now forced to make adjustments on the fly, tweaking their underwriting to keep pace with an increasingly improving market. Life insurance companies are beating the GSEs on the upper end of the class spectrum, while banks are off ering aggressive five-year money for the middle market. And conduits, no longer content to pick off deals on the periphery of the agencies' interest, are growing increasingly competitive.

As the footsteps behind the GSEs grow louder—and start to surpass them—their underwriting grows more tolerant every day.

The following five case studies illustrate how much the debt market has improved this year. A year ago, the winner of all the stabilized deals would've been Fannie Mae, Freddie Mac, or the Federal Housing Administration (FHA). But that's no longer true. For the first time in years, the agencies are just another quote to consider. And for value-add deals, a market has developed far beyond the interests of the GSEs.

“Last year, Fannie, Freddie, and the FHA had so much of the market to themselves,” says David Repka, principal of St. Petersburg, Fla.–based brokerage firm Bison Financial. “But the reality is, there's liquidity on Main Street again right now."


THE ASSET: Class A acquisition


THE TERMS: $25 million-plus, 7-year term, 65 percent LTV 

WHAT TO CONSIDER: You'll have quite a few options.

Freddie Mac and Fannie Mae will eagerly throw their hats into the ring, and each is very competitive. Freddie Mac once had an advantage on larger deals with larger borrowers, as the company's prior review model allowed more creative structuring.

Fannie Mae's delegated model— with its set pricing and underwriting grid—didn't work as well for the biggest of the big.

Yet, since Fannie Mae's reorganization last year—which created a “borrower channel"

focused on winning over the most well-heeled borrowers—the company has gone toe-to-toe more eff ectively with Freddie Mac on trophy deals. “We've seen Fannie Mae provide some very signifi- cant waivers to compete and win that business,” says Ken Bowen, president of Columbus, Ohio– based DUS lender Red Mortgage Capital. “They've had some wins, but they did have to drop pricing in order to get [them]."

But a funny thing happened on the way to 2011—life insurance companies grew extremely aggressive, and trophy acquisitions happen to be their specialty.

There are some important trade-off s to consider. Life companies are off ering the best pricing on a 65 percent loan-tovalue (LTV) loan, especially for five- and seven-year paper. On average, life company rates were about 20 bps or more inside of the GSEs' as of mid-July. “But on trophy deals, if they really want it, they can crush the agencies on pricing,” says Don King, who leads GSE production at Bostonbased CWCapital. “And if it's a short-term deal and leverage isn't an issue, they can blow Fannie and Freddie out of the water."

Life companies can also lock a rate more quickly. A life company can rate lock at application, while the GSEs must do some preliminary underwriting, which means you'll wait at least 10 days.

In a falling rate environment soon to see the end of the Federal Reserve's Quantitative Easing program, the ability to quickly rate lock is magnified.

Another advantage is the fact that life companies are portfolio lenders—loans stay on their books, as opposed to being securitized and sold off to investors.

So if there's an issue with your loan, it's a lot easier to make adjustments on the back end.

And life companies have lessrigid underwriting requirements than the GSEs. For instance, the GSEs require 90 percent occupancy for 90 days, but for a strong asset with a good lease-up story, the life companies are all ears. You might be able to get the GSEs to go a little below 90, but not down to 80 percent, and not if it's still in lease-up.

“There are more than a handful of life companies that will look at the operator and market and make a bet on that,” says William Ross, EVP with Minneapolis- based Northmarq Capital. “If you've got a good lease-up story, they'll make a bet that by the time they fund that loan, they're hoping it's at 90 percent—but they're not going to require it."

Still, there are some cons. The way a life company figures out value diff ers from the GSE approach. Life companies use set cap rates, which are always higher than the cap rates occurring in real time in any given market. So, a 65 percent LTV from a life insurance company is more equivalent to a 60 percent LTV from the GSEs.

THE CLEAR WINNER: For a 65 percent LTV loan, the clear winner—on pricing, rate lock, and underwriting flexibility—is life insurance companies.


THE ASSET: Class B refinancing

THE MARKET: Secondary, pre-review

THE TERMS: $10 million, 10-year term, 70 percent LTV 


Being in a good market that happens to be located in a weak state, for example, can be a real disadvantage.

Take Michigan. There are pockets, such as Farmington Hills, that continue to perform well, yet the entire state resides on Fannie Mae's pre-review list. When an area falls on that list, it means that the terms off ered by Fannie Mae are reduced. So getting 70 percent LTV, or a 1.25x debt service coverage ratio (DSCR), out of Fannie in Michigan— or Indiana or Ohio, for that matter—probably isn't going to happen.

“If you look at the amount of multifamily loans written in Michigan over the past few years, I suspect Fannie would've done very few,” says Mike Kavanau, senior managing director in the Chicago office of Holliday Fenoglio Fowler. “And Freddie probably wrote some very good loans there."

National, regional, and community banks can off er aggressive pricing, but mostly on shorter-term loans. There aren't many banks willing to go out 10 years on their balance sheet, though some, such as Capital- One and Chase, have an appetite for longer terms.

Freddie Mac prefers larger deals, so if your loan is under $5 million, Fannie Mae and the FHA may be your best bets. You'll get more leverage from the FHA's Sec. 223(f ) program—up to 83.3 percent. And it's nearly impossible to beat the FHA's interest rates—as of mid-July, some 10-year FHA loans were quoting in the mid–4 percent range. But a Fannie loan can be had in 60 days, while an FHA reficould take closer to six months.

Meanwhile, Freddie off ers both speed and certainty. And Freddie's deal-centric approach means that it doesn't really matter what state you're in, as long as you've got a good deal.

“Freddie looks at each and every deal and gets into all the strengths and weaknesses and forgets about what the broader market may be doing,"

says King. “Fannie tends to paint whole markets with a broad brush: It's a little more difficult to prove out a deal with Fannie if it's in an area they're not comfortable with."

Fannie Mae's small-loan program—and the overall efficiencies of a delegated model—means that smaller deals in out-of-the-way places can be done efficiently, more so than under Freddie's model. “But in a Fannie pre-review market, you've got an uphill battle to start with,” says Bill Hughes, managing director of Encino, Calif.–based Marcus & Millichap Capital Corp. “If it's a $10 million loan in Michigan, and you can prove the stability and income stream, Freddie is going to do the deal."

THE CLEAR WINNER: For a 70 percent LTV loan in a Fannie Mae pre-review market, Freddie is the clear winner.


THE ASSET: Student housing, takeout of construction loan

THE MARKET: Secondary (8,000 student population)

THE TERMS: $15 million, 10-year term, 75 percent LTV 

WHAT TO CONSIDER: For much of the first half of the year, it seemed every multifamily deal won by the conduits was a student housing deal.

At first blush, that's surprising, given the strength of the student housing programs at Fannie and Freddie. But the GSEs set their sights on the top assets by the top firms, and not everyone fits inside their prescribed credit box.

“They're very picky and really only want the best stuff . If it's more than 2 miles from campus, they don't like it,” says Vic Clark, an SVP at Bethesda, Md.–based Walker & Dunlop. “Any kind of niche that Fannie and Freddie start to get heartburn on, like students, CMBS is coming in and taking that stuff down."

Freddie Mac has focused more energy on the student housing space over the past few years. In fact, it was one of the few areas of modest growth last year, up $25 million to $800 million. That success appeared to come at Fannie Mae's expense, as its volume plunged to just $194 million.

The discrepancy is staggering but illustrates the popularity of Freddie's more flexible approach. The main diff erence is in the size of universities that each will serve: Freddie will do deals near colleges of just 8,000 students, while in the past, Fannie Mae set the bar at 20,000 students. But with its market share in serious decline, Fannie Mae announced to its lender network in the second quarter that it will now consider going down to student populations of 10,000.

There are other considerations that could kick a deal out of the GSE universe. They take a conservative approach to newly built deals and often want to see a second round of leasing before they're comfortable. But other capital providers aren't quite so limiting.

“With CMBS, you don't have these absolutes, this idea that everything's either black or white, that there's no gray area,” Repka says.

THE CLEAR WINNER: Given the size of the student population in this case study, as well as its pre-stabilized nature, CMBS wins the deal.


THE ASSET: Seniors housing (mix of assisted living, skilled nursing) refinancing

THE MARKET: Tertiary

THE TERMS: $12 million, 10-year term, 80 percent LTV 

WHAT TO CONSIDER: The GSEs have seen big declines in their seniors housing volume over the past two years. Fannie's volume fell 36 percent last year, to $640 million, while Freddie's dropped about 27 percent, to $661 million.

Those figures point to a larger trend in the seniors housing world. The largest consumers of debt in this space—the REITs— are now able to access the unsecured financing market and don't need the GSEs.

And the big keep getting bigger. There's been a wave of consolidation in the seniors housing world as operating giants such as Ventas and HCP have closed multibillion-dollar mergers and acquisitions over the past year.

The problem is, the GSEs only want the most experienced owner/ operators—you need to own five other similar assets to qualify. And that “five” is an absolute line in the sand.

But as other capital sources grow competitive, the GSEs are now rethinking their definition of “experienced.” Five is an arbitrary milestone, after all—the quality of your experience, not the quantity of your portfolio, should be more of a deciding factor.

For instance, CWCapital had a client that owned one seniors asset, which it built 30 years ago. It was a nice property with a strong, long track record. Yet when CWCapital was searching for a low-leverage loan on the property, both GSEs just said no.

“The box in the Fannie and Freddie seniors world is in the process of changing,” King says.

“If Fannie and Freddie want volume in that space, they're going to have to increase the size of the box."

On the other side of the government engine is the FHA, which looms large in the seniors housing world. The agency is able to off er lower rates than the GSEs.

But the FHA has its own quirks.

For instance, the agency has some restrictions around cash-out refi- nancings that wouldn't be found in the private sector.

When Bison Financial was looking for a cash-out refinancing on an independent-living asset, its search ran afoul of these restrictions.

The small, St. Petersburg, Fla.–based brokerage couldn't go to Fannie Mae and Freddie Mac, since the borrower only owned three similar facilities. The FHA didn't want the deal because of the borrower's desire to cash out. Bison turned, instead, to the conduit market, scoring a 10-year loan at 5.5 percent, nonrecourse, with a 25-year amortization.

Fannie and Freddie can do a mix of independent living and assisted living, but for properties with need-based housing, there are limitations. The companies will consider continuing-care retirement communities and properties with skilled nursing, but it's more of an exception to the rule.

The FHA, on the other hand, doesn't have the same “five property"

requirement—it has an underwriting philosophy that caters to a broader array of products, such as need-based housing. And the FHA isn't afraid of tertiary markets.

THE CLEAR WINNER: The FHA would win this deal, though the time line of the deal closing would likely be delayed. The agency is so backed up right now that many FHA lenders, such as Red Capital, are using a bridgeloan program to fund a deal until the FHA is ready to go.

“We can act quickly and structure the deal so that it makes a lot of sense if it's toward the permanent FHA financing,” Bowen says. “We can waive the exit fee and use some of the efficiencies from our original underwriting and legal work."


THE ASSET: Acquisition-rehabilitation

THE MARKET: Secondary

THE TERMS: $15 million, 3-year term, 75 percent LTC 

WHAT TO CONSIDER: A year ago, finding debt for a repositioning deal was no easy task. “Value-add” became a dirty word during the downturn as the prospect of robust rent growth was still off in the distance.

“But the market for value-add has come a long way in the last six months,” Hughes says.

“There are a whole bunch of players in the marketplace— they're going to look at every little detail, but there are guys entering the market all the time."

Indeed, many nonrecourse bridge-loan providers have re-engaged the market this year, including Mesa West, Wells Fargo, BB&T Real Estate Funding, FundCore, NXT Capital, Prime Finance, and Starwood.

The early returns are focused on moderate rehabs—taking an asset from a B-minus to a B-plus, for instance. But the appetite for higher per-unit rehab amounts is evolving as more investors consider repositioning deals. Cap rates for stabilized higher-quality properties remain so low that it's forcing many investors to seek yield in riskier plays.

“The cap rates on the As and high-Bs are pushing the entrepreneurial investors out, so you're going to see a lot more of that value-add come back,” Ross says. “The yields are going to dictate that you go there."

And as acquisition activity continues to increase, more balance-sheet lenders are expected to jump into the rehab debt space.

“Over the next two years, you're definitely going to see a number of new players enter the space,” says Kirk Booher, a senior vice president who leads Chicago-based bridge-loan provider BB&T Real Estate Funding (BBTREF).

“As the market growth starts to occur, and transaction activity increases, the money will start to follow suit."

BBTREF just expanded its capacity from $400 million to $800 million in anticipation.

Its program provides up to 75 percent loan-tocost and off ers two- to three-year terms with extension options that could expand the loan out to five years. But its biggest advantage is in its pricing, with spreads typically between 350 to 400 bps over the benchmark LIBOR rate—at least 50 bps inside of what many other commercial finance companies off er.

It's not just dedicated bridge lenders—most regional and local banks will also provide bridge loans. But outside of the strongest metros, like New York City, recourse is almost always required.

“There's a pretty full market for acq-rehab now,” Kavanau says. “And if it was a great story, you could convince a life company to do a deal that had significant moving pieces to it.” For instance, life insurance company Cornerstone has a fund that targets higher-risk deals.

THE CLEAR WINNER: You'll find the lowest rates and competitive underwriting with a bridge lender associated with a bank, such as Wells Fargo or BB&T, since their cost of capital is lower—sometimes by 100 bps or more—than an independent bridge provider's.