As interest rates on permanent loans continue to inch upwards, prices on mezz financing are slowly inching down.
In general, mezzanine debt is being priced in the 11 percent to 14 percent range, about 150 basis points (bps) lower than this time last year, and about 350 bps lower than in early 2009. Most stabilized assets will find rates around 12 percent, while transitional properties are more likely to see rates closer to 14 percent.
“What’s driving the lower rates is the desire to deploy capital, the lack of transactions, and the fact that senior mortgage interest rates are very low,” says Dave Valger, managing director for New York-based mezzanine and bridge loan provider RCG Longview.
Meanwhile, RCG Longview expects to see increased demand for mezz this year. The company provides the mezzanine financing for Fannie Mae’s DUS Plus program, which was re-introduced last year. Fannie's mezz program has been tweaked from its previous incarnation and now maxes out at an 80 percent loan-to-value ratio. The program also offers a combined 1.10x combined debt service coverage ratio (DSCR).
RCG's new platform, on the other hand, targets stabilized, cash-flowing assets, and for multifamily deals, RCG is willing to go into secondary and tertiary areas. The new program offers a combined minimum 1.15x DSCR, with all-in rates in the low- to mid-6 percent range as of mid-February. The maximum LTV is around 80 percent.
While demand in the Fannie Mae program has been lukewarm thus far, RCG is looking to drive mezzanine production in other ways. Toward the end of 2010, the company started originating whole loans for the purposes of securitizing the permanent debt and retaining the mezz piece on its balance sheet.
The company’s entrance into the securitization market has already netted a few multifamily deals, including a $23.6 million loan on four properties in Ohio, and a $17.2 million deal on a 260-unit property in Novi, Mich.
“We knew there were many properties that needed more leverage than CMBS could provide, and there was a very significant amount of lenders originating both pieces separately,” says Chris LaBianca, president of RCG Longview Debt Fund IV. “That process is quite often more cumbersome, and more expensive, for the borrower."
Freddie Mac also expects to see more demand this year on its mezzanine financing program, for which it partners with Berkshire Properties, Carmel Partners, Essex Property Trust, and Waterton Capital Solutions. The company recently closed its first loan under the program.
Last year’s historically low interest rates tempered the need for mezz, but as all-in rates continue to climb, it’s much more difficult for borrowers to maximize proceeds on the perm loan. “The higher rates start cutting back first mortgage proceeds, and then when people have a need to pay off existing debt, and they don’t have other options, they’re looking for mezz,” says Mike McRoberts, vice president of multifamily production and sales for McLean, Va.-based Freddie Mac.
Valger also sees a growing need for defensive refinancings given the higher rates and the continued wave of loan maturities this year. About $155 billion in commercial real estate loans will mature this year—and that’s only counting “non-bank” lenders such as the Fannie and Freddie and the life insurance companies, according to the Mortgage Bankers Association.
“In 2011 and 2012 is when you see the bigger stuff coming due, and there has to be a lot of equity around to re-equify that stuff,” Valger says. “We anticipate that this is going to be a much better year for originating the kind of loans we’re looking for.”
