So my multifamily shop is exploring setting up a revolving loan facility for our next fund. My question is, if any of you work at shops with loan facilities, are there any drawbacks to them? Is the facility one of the Fannie/Freddie options or is it through another lender? Finally, how flexible were they on negotiating terms (prepay, rates, I/O, etc) and structure? Any other comments or feedback would be awesome.
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Some things to consider...
If you secure them against real property be sure to understand the tax implications in your state/city. i.e mortgage recording tax. In NYC a revolver secured by real property is not economical because a loan greater than $3 million pays the MRT (2.8%) on all advances and re-advances. There are ways of getting around this by securing a portion of the facility to real property and leaving the rest unsecured (last dollar clause makes this doable), however you'll need PGs to do this making it less attractive to some.
You can also set up a revolver secured by partnership interests [of your fund]. However, this gives the lender easy ability to claim assets held by said partnership in the event of default.
If your shop is okay with signing PGs then the process is a lot less complicated.
No prepayment penalty on a revolver, that would defeat the purpose. Terms are usually 12-36 months. Interest only. We've got one in place at L + 150. There are unused fees usually 15-25 bps, this is negotiable much like everything else. When calculating your cost of capital be sure to take into account mortgage tax, and fees related to origination.
Not familiar with GSE revolving facilities so can't comment there.
We have a revolver setup at my fund. 3 years, L +100 at a private lender.
My fund covers the main four property types, so with MF only it would be simpler, but we negotiated a streamlined origination/closing procedure on ours. We didn't want to be held up on closing because we didn't have estoppels/SNDAs for 75% of the NRA signed or something like that when we all knew it was coming off the revolver in 3 months to a permanent lender anyways.
Also, by having legal docs pre-negotiated, it helps keep the costs down if you are flipping properties in and out constantly. Otherwise, you are playing legal bills twice-once to close it on the revolver and once to close the permanent.
We don't see any disadvantages except that obviously you are paying to have the cash available to you at a moments notice.
A private lender is willing to give you funds at will anytime over 3 years for 1.5 percent interest?
Core plus/value add fund with less than 55% leverage on a portfolio basis and backed by a top life insurance company. We aren't exactly a huge credit risk.
"Revolving Loan Facilities" are fairly common within real estate. Other terms used in practice are "Line of Credit" or "a Credit Facility". REPE funds, or shops that have access to discretionary sources of institutional capital, can set up a line of credit with [insert bank here] and have access to a revolving line of capital. This allows these said shops to close "all cash" on a deal, or finance the borrower's working capital.
The Line of Credit typically: 1. will be a short term agreement (36 months) with extension options 2. will have really low costs of funds (can even achieve 100bps over LIBOR as stated above) 3.will have certain upfront fees & annual fees (e.g. 0.35% closing fee, 0.25% fee on unused capital, & 0.25% "fronting fee") 4. given #3 above, the effective cost of capital could be burdened by an additional 100-150bps, so your "effective cost of capital" could go from L +100bps to L + 250(or more)bps
Different shops and different capital partners will require different provisions (e.g. a maximum amount for 1 deal, or x number of months outstanding for x deal, etc.).
Thanks for the replies guys. I confess that the debt space isn't my area of expertise (for some reason they put me in charge of figuring this out though), butI guess where there might be some confusion here is that we already have an unsecured revolver from a major bank. We are exploring some options for what is basically a cross-collateralized pool of loans that is entity specific (so this would cover a portion of our next fund) and offers both fixed and floating rate. The two programs from the GSEs are below.
https://www.fanniemae.com/content/fact_sheet/creditfacility.pdf
http://www.freddiemac.com/multifamily/product/pdf/revolving_credit_faci…
Ahhh, I've seen these. They are basically super flexible permanent loans. You have unlimited substitution/release rights and can take more money as the property's metrics improve. They are really good for industrial portfolios and smaller/mid sized multi property pools (e.g. you don't want to do this with 3 $50million properties, more like 30 $5 million properties).
Disadvantages are that the prepayment penalties like a normal permanent, so you have to run out the term and if the metrics of your portfolio go south, then you generally have to rebalance the loan unlike a normal permanent. Also, the upkeep fees for yearly tax tracking/inspections/escrow accounts/appraisals, eat can get costly.
So the avenue we're exploring for our fund (7 year term w/ two 1 year extensions, ~$500M, 65% LTV, ~$1.4B in total buying power) is that if we're able to reduce prepay penalties through negotiation, while locking in favorable loan terms, and full or almost full term I/O that this structure could be Accretive to returns while offering flexibility on the exit. Also, the ability to buy lease-up/busted condo deals with GSE financing is pretty attractive.
Need to explore all of the fees and reporting costs associated with it, but your comments make sense. Can you elaborate on why I wouldn't own 20-30 deals with this structure?
Beyond the yearly fees and reporting requirements, depending on where your properties are located, the legal can suck.
With cross default/cross collaterallization, it is like recording a second mortgages on all of the properties, once for the actual property and then once for the cross so drawing up the initial set of docs costs more than a normal closing. Doing a release/substitution generally isn't horrible, but can become annoying if you do anything fancy (one property out, two in or are working across multiple states).
The big thing is at the end of the loan when you are recording the final releases, more properties in different locations always means higher reconveyance fees and nothing is ever fast if you are dealing with several different County Recorders/Deed Offices. If you are trying to time the payoff with a sale to a third party, title/new lender will usually allow the buyer to close as long as proof that the reconveyance documents have been filed at closing. But if they don't, or buyer is demanding clear title before closing or Fulton County is back logged 2 weeks, you might have 20 tiny little headaches on your hands.
Interesting, I've got meetings set up with the GSEs to discuss the preliminaries of this so I'll let you guys know how it goes and what it looks like. What your saying makes a ton of sense, but I also think that the setup/maintenance costs could wind up being minimal when compared to how Accretive cheaper debt and better loan terms are to returns at both the asset and fund levels. One other positive we see is the potential to exit the fund in a single transaction. Definitely have some strategizing to do before making a decision one way or the other.
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