Micro Units
This is sort of a hail mary but I haven't had much luck with my network so... Anyone have any experience working with these from a financing perspective?
We have a client who has a couple of these properties he's finishing developments on. First one is finished and ready for permanent financing, but none of our capital sources can produce a LOI due to the size of the units. My understanding is Fannie used to do them but isn't currently as they just turned this deal away. Really strong financials, they just don't like the square footage on half the units since they're small studios
This is helpful commentary, but unfortunately can't provide any color. Any idea on the square footage?
Studios are 250-300 and 1brs are 325-400. I believe they're only considering the studios 'micro' units.
I've never financed a property with this small of units but it's fully leased and operational. The guy took it down to the studs and did everything including some green building features. DSC is 1.40x even with conservative underwriting so I'm just trying to figure out where the issue is. He's even leaving his equity in the deal... Seems strange that Fannie would turn it away considering some of the projects I've seen them throw insane terms at
Thank you for the detail! Must be their internal view of asymmetric risk/reward to not even lob a quote. Pure conjecture, but in a post COVID world, I don't believe it to be out of the realm of possibilities that conservative lenders may take a pessimistic view against densification -- even in the form of multifamily/residential -- as lease up is likely more nuanced. Assume this is widely recognized, but micro unit deals make relative sense within major cities where land is constrained and labor/materials are at a significant premium -- as mentioned, density is the name of the game. With major metro diaspora, those garden style deals at a significantly lower basis in tertiary markets likely pencil to a more favorable stabilized spread over in-place today. Just a thought!
If you're looking for stabilized debt then I don't know, but we (debt fund) look at microunit development or non-stabilized bridge loans all the time. Your client could take a senior loan up to like 50% or 55% to make it easier to source, and get mezz up to 75 or 80% as a bridge to stabilization. DM me if you want to talk.
Also every time we turn away microunits its usually because we think its the wrong product for its location... ex. microunits in family-heavy or suburban submarkets, etc... the product requires a pretty specific set of circumstances to be desirable to renters imo.
im currently putting together an OM/narrative for my shops micro unit deal were about to break ground on. Id love to know more about the criteria your fund leans on when evaluating these micro unit opportunities. Please feel free to DM!
Fannie Mae programmatically won't lend on units below a certain size. I can't recall exactly what it is but its in the 300s range. You may be able to do the deal pre-review if its a good deal in a good market.
Probably would have been a good idea to socialize the perm before doing the project since the units are so irregular and I'm somewhat surprised that the construction lender (if there was one) didn't make the sponsor produce more DD on the takeout since it's such a huge risk to them. It's possible that they might be interested in doing perm on the project or know of other sources of capital that are. Would need to know more about the specifics of the deal to comment but my guess is there is more to the story that lenders don't like as I would imagine that under normal circumstances you could get lifeco, bank, credit union, debt fund, etc. to at least produce a term sheet.
Teeny-verse
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