Multifamily Pref Deals
Are investors able to get pref equity for multifamily deals? If so, who are some players providing the financing and what do rates/terms look like? It seems like volume is low making data even more scarce than normal.
Pref’s been vastly available from what i’ve seen. I’d underwrite at the mid teens interest rate for a 2 year note.
I've heard there are significantly more players trying to provide pref than there are players willing to accept it
Seconding this specifically for garden construction deals. Seeing rates in the 12% to 15% range. Maxing out at 80%.
It’s weird to see pref out there at 12% at 80% LTC. Was maybe 11% when rates were zero.
Almost every conversation I’ve had this year ends with we can’t do this for LP but can do pref. Also haven’t seen anything real above 80%.
Have seen more than a handful at 55% senior going to 80% with pref right around 13%. I was seeing 90% a year ago.
How are sponsors even able to underwrite a deal to the point where it can stomach these pref returns on top of now low-leverage, high-cost senior loans? I haven't seen pricing really come down that much on multifamily (especially not enough to make up for higher cost of debt) so crazy to me that a multifamily Sponsor can make a deal work without using insane assumptions on their underwriting
They can’t, and pricing is sometimes higher than ^^ dude posted by a couple hundo more points. Typically quotes having been comin in around 17-18% for half hard/half soft (PIK at whatever cashflow can support/accrue the rest) on smaller check sizes.
The issue is on the refi, especially on construction to perm. It simply does not pencil. The refi would require so much cash in since LTVs have tightened and cash flows are so DSCR constrained, that it doesn’t work. And the current rates are so high compared to NOI (basically flat or worse in most cities the last year or so), you can’t layer pref/mezz on the refi either. So you either have a shit load of cash or you aren’t building for a few years when rents hopefully catch up.. in LA you need transfer tax to go away as well, otherwise nothing will pencil for a non cash buyer/builder for a mighty long time…
I’ve got 3 deals starting in the next 6 months with a committed capital stack. None are with pref, it’s just not worth it. Garden apartments in the southeast with 6.75% untrended YOC. We are vertically integrated with GC.
Curious what you’re seeing on a cost per unit basis? Assuming the garden product is three/four story, no elevators, wood framed with surface parking.
let’s play price is right:
It’s not me you’re asking but I want to take a guess for fun: it’s $275k-$300k per door for 3 story walk up, $325-350 for elevator 4 floor…
“Price is wrong bitch” probably …
I’m seeing ~$175k - $200k/unit for the product I described (includes vertical and site work) but curious if that individual who’s vertically integrated with the GC can cut a lot of that fat out. Unless rents are $2.00/SF +, good luck getting to an untrended YOC over 6%.
You’re just talking HC alone I’m assuming? I’m talking total stack… you can’t do a uROC calc with only con numbers…. If you’ll get to $200k all in for everything and land, you are special my friend… I wouldn’t be on WSO tellin my numbers haha.
Haha I feel you..excluding land, but with hard costs what they are right now that’s only becoming less of a driver/smaller piece of the pie. A lot of JVs we enter have the partner contributing the land at a pre-determined value as an equity slug, but those conversations are only getting more difficult too. Including land, your numbers might not be too far off depending on the market.
$300k is a solid berometer for most sunbelt cities with 3 story garden and 4 story elevator, to be honest: vegas, Phoenix, Texas (plus or minus a couple bucks), atlanta, Charlotte, and Nashville.
but to your point, it always depends on a friendly seller, and a land contribution JV is about as friendly as it gets. The issue is that land doesn’t equate remotely enough to the total equity piece required, and if they aren’t extremely well healed landlords who can contribute the equity gap in cash, the GP/Sponsor will then have to bring in additional LP capital. Typically, the land contribution and the LP will get similar promote structures, etc, but their landlords capital account/value of land is the most elastic piece of this. The only number in the stack that is moving greatly today is land, since rents are literally all over the place and can’t be projected in any of those market with an ounce of confidence.. brutal, brutal times to be a land developer today..
I can get to $220/unit all in for 3-story garden product in texas, add in $5-10 a unit if we are talking Austin. 4-story Elevator probably 230-240. Assuming $8-$10/ft land.
This is where I get confused. Sounds like there is pref being inserted into those infamous value-add/debt fund/bridge debt deals that aren't currently able to cover debt service even before the pref. How are they planning to also pay ~15% on the pref piece on top of the debt that they already can't cover?
How does cash pay interest work during construction? It needs to be sourced from the sponsor right? I had discussions where the sponsor said the cash pay comes from the pref investor and I could not wrap my head around how that’s possible.
I gotchu bro my pops, grant cardone, gave me a trust fund
Stabilized MF pref is priced around 12% is what I've heard. Widely available
The number of people who started these funds in the last 2-3 years is laughable, so now there is way too much capacity and not nearly enough demand.
People see others getting rich with some strategy they spent years working on and a platform they spent years developing and then jump in thinking it'll work out the same for them: it never does. If you want to get truly wealthy in real estate you need to either innovate and take risk in that sense, or take financial risk. Very few people make it big, and especially not when they're 30 and have no balance sheet, by doing what everyone else is doing
You mean the number of pref funds that have opened in 2-3 years?
I think that if your goal is to find high yielding RE investments, have a strong understanding of how equity works (ie. what investors want, how they price risk vs alternatives, goals of cash flow vs appreciation, etc) it is natural to move into pref and credit.
There is very little if any value in common equity of real estate at today's market prices.
If you were a RE investor 3 years ago, you probably thought there was very little value in debt and credit vs common equity because the benchmark was so low, while growth was still possible.
There is plenty of value on the equity side. What you meant to say was "there is no value in doing the same shitty business plan that everyone else does these days." You shouldn't expect to find value if you don't actually have an idea of what it means to have a plan and execute on it. The same logic applies to everything; there are pref providers and bridge lenders and all sorts of pots of money out there who will do well. The joke is on all the people who move into that space trying to imitate the established players, which was my entire point. There are a ton of people who don't really know what they're doing, and will simply ape whatever the flavor of the month is, and those folks are going to get crushed, because they don't provide any value. The same way that Tides or Rise48 are getting crushed because they don't know how to operate real estate either, they just know how to pass the bag to someone else.
It's got nothing to do with the specific niche of the market you're in and everything to do with expectations. Most people in real estate don't seem to understand that it's exceedingly difficult to be super successful by replicating what everyone else is doing.
Worth noting that for agency deals, pref can only come from a short list of agency-approved lenders.
Pref right now prices anywhere from 12-18% with around a 50/50 split between current and accrued pay. Very tough to get with small balance agency. Expect to pay 2-3 pts for it. Institutional LP and JV Equity are tough to come by now…most are deploying Pref and very selective. A bit of what we do is in this space.
Does anyone know of firms that are actively investing pref into single family build to rent developments?
For a fee I do
Fundrise / RSE Capital Partners has a $300M line from Goldman to do exactly this.
We can work something out, sent you a DM.
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