Just two years ago, it was hard to find money if you wanted to buy and rehab an apartment building. But as rents have recovered, the opportunity for rehab has opened up. That's brought money back in the game. “There was a time period when rehab really didn’t make sense financially,” says Kevin Smith, a director at New York–based Centerline Capital Group, which opened an Alternative Capital Markets division to source nonagency money for its clients. “That’s changed dramatically since last year.”

Rising rents plus the availability of capital and the need to fix deferred-maintenance issues have helped drive the return of rehab. “There are opportunities to go in and do a minor rehab or a major rehab and see a decent return on your investment,” Smith says.

Smith says bridge loans that will carry a value-add buyer until they can get long-term debt on an asset are becoming more prevalent, with lenders offering increasingly more competitive terms. Both banks and debt funds are offering these options, and Smith says pricing has “come in dramatically.”

Gary Mozer, principal and managing director at Los Angeles–based George Smith Partners, sees borrowers using short bridge loans with rates in the 3 percent to 4 percent range for 10 years. That reduces their long-term risk.

“The bridge funds tend to be more aggressive, and there’s more and more of these funds coming out of the woodwork,” Smith says.

Right now, Smith says terms are anywhere from three to five years on loans with extension options that cover the cost of rehab through a draw schedule. After the work is completed, a borrower refinances through agencies or another long-term vehicle.

Mozer is also seeing people eschewing the bridge lender and going directly to Fannie for debt if they have cash flow from day one. “You have to look at your blended cost of capital,” he says.

Bobby Lee, president of the investment division of Los Angeles–based JRK Property Holdings, says the agencies are most competitive for value-add borrowers locking in long-term debt with spreads from the low 200s to the high 100s on 70 percent to 80 percent leverage.

“We're seeing it become very competitive,” Lee says. “CMBS is starting to kick around spreads that are probably in the 230 range when you load in the costs of swaps. It's not quite as competitive as agency, but we’re seeing it getting pretty close. The insurance companies have been competitive for a while if you're looking for the cheapest interest rate. You'll do 50 or 60 percent loan-to-value.”