Cash-crunched apartment owners that may have skimped on essential repairs, such as paint and carpentry or parking lot and railing repairs, over the past couple of years now have a new opponent to contend with. In addition to complaining residents, banks are also asking owners to step up and fix on-site problems.
“What’s happening in the industry for us right now is everyone is doing a facelift or asset preservation on the exteriors,” says one renovator who preferred to not be identified for this story. “Frankly, the lenders are driving that.”
Others agree. “We are clearly seeing the lenders asking for deferred maintenance items to be fixed,” says Daniel Trebil, senior vice president and senior director of Minneapolis-based NorthMarq Capital's Minneapolis office.
Some lenders, like Pittsburg-based PNC and Cleveland-based KeyBank, declined to comment for this story. Others, including San Francisco-based Wells Fargo and Charlotte, S.C.-based Bank of America, did not return calls.
Despite the quiet front, industry observers see these forced rehabs occurring. What caused this newfound focus on deferred maintenance? Some contend that banks have taken back properties in much worse shape than they had anticipated. “Some operators haven’t invested in their properties like their lenders wanted them to,” Trebil says.
That’s focused lenders much harder on their annual inspection of properties—something that some observers contend that they had become complacent with. “Now that money got tight and things changed, they’re coming out and seeing some of these properties that they haven’t seen in a while and they’re going ‘Wow, we’ve got some deferred maintenance and our loan-to-value doesn’t match,’ says the anonymous renovator. "Now they’re saying, ‘Look, you’re going to have to clean and fix this up. You have some deficiencies here and some carpentry and paint and a little bit of rust and some stair issues.”
Owners who are going to HUD to refinance their properties are seeing much of the same things. The agency’s loan program is based on 75 percent of the remaining economic life of a property. In the past, most appraisers automatically provided 50 years to give a property a 35-year loan term.
“What we’re finding now is that HUD is not only looking at what is the remaining economic life, but how functionally obsolete the property is,” says Denise Troeschel, Love Funding’s multifamily housing deputy chief underwriter. “They’re going to look much harder at projects that are older. They want to see that they have gone through a substantial rehab. They’re not going to do a refi for 35 years on a project that was built in the '70s and still has the same windows that it had when it was built.”
If the borrower won’t replace the windows, for instance, the deal often dies. Or the borrower can ask for a shorter loan term, like 30, 25, or even 20 years. “With the rates as low as they are, it’s still saving the borrowers a tremendous amount of debt service even though we’re using a lower amortization,” Troeschel says.