Diversifying Debt Sources to Achieve Successful Financing Solutions

March 23, 2022

Diversifying Debt Sources to Achieve Successful Financing Solutions

March 23, 2022

2021 saw an explosion of debt sources in the multifamily market, as the appetite for the relative safety and stability of multifamily and housing fueled a historic influx of investor interest across the spectrum, from institutional to private to family office. With the agencies facing smaller caps in 2021 versus 2020 and an increasing focus on mission-driven business, debt funds, banks and life companies stepped in to fill the gap and provide liquidity for the most active multifamily market we’ve seen in recent history.

Amidst this boom, we found ourselves working with more and more borrowers looking beyond traditional debt sources to identify outcomes that offered the rates, terms and flexibility required to generate long-term value in today’s market. In 2021 alone, Berkadia worked with more than 262 different third-party capital sources, representing nearly half of our $40 billion in loan production.

So, what’s the secret to helping a borrower find the right debt source in a complex and competitive market? We have a few key steps.

  • Understand goals Listening intently to a borrower’s objectives, understanding key priorities and working with the goal of performing on what is most important to the borrower. We recently worked with a client seeking a lending solution that would maximize cash flow on a sustainable and continuous basis for their limited partners. In this case, by taking the time to identify that ongoing cash flow was their top goal, we were able to source a fixed-rate, interest-only, non-recourse refinance, with cash-out, through a life insurance company headquartered in Germany, even in the midst of rising mortgage spreads (the loan closed on March 1, 2022, at 2.78 percent).
  • Diversify debt options 2021 was in many ways the year of the debt fund, but in truth, we saw, and sourced, a wide spectrum of capital (agencies, life companies, debt funds, banks) for our debt engagements. With the GSEs’ commitment to mission-driven financing only continuing to grow in importance, it is oftentimes crucial that borrowers work with partners (like Berkadia) who can help them cultivate long-term relationships with a wide range of lending partners in order to ensure they’re finding the right solution to accommodate their needs.
  • Optimize timing When we consider debt options for our clients, flexibility on the timing of the lock is an important factor. With one rate increase under our belts and the Fed indicating several more to come this year, as well as the day-to-day increased volatility in longer-term treasuries, timing financing is more important than ever.
  • Manage the process Ensuring the right solution for a debt assignment is more than just finding the right debt partner. The loan process (appraisal, survey, third parties, insurance, legal) must be actively managed in order to meet the requirements and timing, as outlined in any application, so that execution is smooth, seamless and satisfactory. Particularly when borrowers are working with a new lending partner, it is vital to make sure we’re walking them through the process to ensure all i’s are dotted and t’s are crossed for long-term success.

We’re continuing to see a tremendous appetite for multifamily debt into 2022, with debt funds playing an increasingly significant role and more competition from life companies that are diversifying where they want to be on the leverage spectrum. In a changing rate environment, and with the economy reacting to worldwide externalities, it will remain beneficial this year for borrowers continue to work with a broad spectrum of lending partners.

-Ed Zimbler, Senior Managing Director, Head of California Originations