Over the last few years, finding well-priced debt for acquisition-rehabilitation deals has been difficult.

Many balance-sheet lenders shied away from providing debt for transitional assets, and the transaction market for acq-rehab deals wasn’t strong enough to justify such an appetite anyway. But all of that’s beginning to change.

Several multifamily lenders—including Wells Fargo, Berkadia, BB&T Real Estate Funding, Red Capital Partners, FundCore Finance Group and NXT Capital—are ramping up their non-recourse bridge loan programs for acquisition-rehabilitation plays. And as acquisition activity continues to increase, more balance-sheet lenders are expected to jump into the acq-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 market growth starts to occur, and transaction activity increases, the money will start to follow suit.”

At the end of May, BBTREF doubled its portfolio capacity to $800 million in anticipation of growing demand. The company only put out $100 million last year, but expects to originate between $300 million and $400 million in bridge loans in 2011.

Berkadia also made some recent moves in the bridge loan space, introducing two bridge programs—a shorter-term “bridge to GSEs” execution, and a longer-dated bridge program more in line with acq-rehab deals.

“This is a true floating rate loan for reposition assets,” says John Cannon, executive vice president with Horsham, Pa.-based Berkadia Commercial Mortgage. “It’s mostly for modest repositioning—a prototypical deal would be some new kitchens, maybe new roofs—taking it from a B to an A or a B-minus to a B-plus.”

BBTREF has more of an appetite for heavy rehabs. For instance, it recently closed on a deal in Durham, N.C. where the buyers paid about $10,000 a unit, and planned to pump in another $35,000 a unit in rehab costs, taking it from a C to a B class asset. Another recent transaction was an $18 million bridge loan for a busted condo deal in Houston, a planned two-building complex with only one completed building, acquired out of bankruptcy court.

“We’ll do everything from very light rehabs, like curing deferred maintenance, to a vacant condemned multifamily deal,” says Booher. “We won’t do a C-class asset without improvements—for us, the end game has to be at least a solid B quality.”

Rates & Terms
BBTREF’s program is non-recourse, provides up to 75 percent loan-to-cost (LTC), and offers two- to three-year terms with extension options that could expand the loan out to five years. The company looks for deals in the $5 million to $25 million range. But its biggest advantage is in its pricing, with spreads typically between 350 to 400 basis points (bps) over the benchmark LIBOR rate—at least 50 bps inside what many other commercial finance companies offer.

BBTREF is a proprietary lending unit of Grandbridge Real Estate Capital, and wholly-owned by BB&T Bank. With a large regional bank as its parent, BBTREF enjoys a cost of capital that many private funds can’t compete with.

Berkadia’s program features a two-year term with a one-year extension option. The program is non-recourse, and will go up to 75 percent LTC. Loans as low as $5 million and as high as $50 million can qualify, though the company’s sweet spot is in the $10 million to $25 million range.

Berkadia’s pricing generally ranges from 450 to 550 bps over LIBOR, and there’s a minimum 1 percent fee at closing. The program also requires a 1 percent exit fee, but Berkadia will waive it if the company also provides the refinancing.

Competitive Landscape
Most regional and local banks will also provide bridge loans, but outside of the strongest metros, like New York, recourse is required. And many life insurance companies can provide some very well priced five-year money, but the prepayment flexibility is often lacking.

Once upon a time—just a few years ago—Fannie Mae and Freddie Mac had some very active acquisition-rehab programs for market-rate developers. But that focus is clearly gone at the government-sponsored enterprises (GSEs) as they continue to prioritize stabilized assets.

“There aren’t that many lenders that have this capability, this longer-dated balance sheet product,” says Cannon. “The GSEs have acq-rehab programs on the shelves, but there’s a lot of dust on those products.”