Understanding Bridge Financing and How It Can Help You Invest in Small Apartments

A 25-year veteran of the financial industry, Mike Boggiano is currently Director of Multifamily Originations at Lending One, a financial technology company focused on providing creative financing to professional real estate investors. Its founders have set out to build a company that helps these investors grow their investment portfolios. It has become one of the nation’s largest and fastest growing direct private lenders, proving to date over $1 billion in real estate capital. Its projects range from small SFR properties to complex redevelopments, ground-up construction and multi-family bridge lending. LendingOne uses its own capital, an online platform and its extensive real estate experience to provide quick and reliable funding for clients. Prior to joining Lending One, Mike was VP of CRE Lending at Ready Capital Corporation.

What you’ll learn in this episode:

*Mike explains the essentials of bridge financing. It is a term that describes financing for properties that are not stabilized to receive permanent long-term financing. It is also referred to as transitional financing because it helps investors get the property from point A to point B in terms of being able to qualify for long term permanent financing.

*He adds that bridge financing can also help someone buy a property that’s underperforming so  that the investor can turn it around in a short period of time in order to list it for sale and flip back out of it. A bridge program usually lasts one to two years.

*Most of these properties are underperforming the market. They include distress properties that haven’t been well maintained or cannot be stabilized in terms of occupancy.

*Mike shares the types of property Lending One looks for. They seek commercial multi-family properties have loan amounts from $1 million to $20 million and from five up to 300 units. They also look for student housing projects and “fractured condominiums, where a borrower purchases 75-100 units of a development.

*There is a separate group in Mike’s organization that primarily focuses on the 1 to 4 unit market, and they provide financing on either a fixed flip type of transaction. If the property is already stabilized, they will offer a long-term rental financing. If a sponsor has five units, they can also offer a long-term permanent financing on a blanket portfolio program

*Mike shares what a “blanket portfolio” is. If a sponsor borrower has multiple properties, they can refinance all of them under a single loan. Under this arrangement, borrowers receive more favorable pricing compared to if they came in doing individual transactions.

*Lending One offers a 30-year fixed rate program that’s very competitive in the marketplace.

*Mike explains the meaning of “hybrid loan,” where it’s set for five, seven or ten years and can be amortized over 30 years. It’s like a single family residential loan; you finance it once and can keep that loan as long as you want.

*Mike discusses what he considers to be an ideal property situation. Lending One, he says, are looking for properties that are in urban or suburban areas. It’s harder to finance in tertiary or rural markets. They focus on the top 100-125 of the MSAs across the country. Everything is based on the occupancy drivers for the properties and the local area’s ability to support the transaction.

*Loan to value on properties is evaluated based on several factors. Mike and his team look at the front and can go up to 80 percent on the as is basis, but typically is in the range of 70-75 percent. Loan to cost is the acquisition plus the construction or renovation costs involved in the transaction. They can go up to 85 percent loan to cost and in most instances finance 100 percent of the renovation cost involved in the transaction.

*He adds that on the backside as renovated or stabilized, they prefer that the value is somewhere between 65-70 percent. That’s their loan position compared to the after repaired value. They can go up to 75, dependent upon the market because at those levels, given the amount of renovations that are necessary for each transaction, the borrower should be no more than 65-75 percent of stabilized or renovated value. It’s easier to qualify for traditional financing at those levels.

*Typically, a two-year period is sufficient for a borrower to execute their strategy on the property. Lending One allows for extension options that can go out as long as three years, provided that the borrower is making progress in terms of turning that property around and renovating it. The goal is to get it at least up to market, at which point there is a path to an exit strategy.

*Mike shares an illustrative story about a project he is entertaining now. It’s a fractured condominium. The homeowners’ association owns 135 out of 183 units and has aggregated those in three separate transactions. The latest block was 35 units, 20 of which are down, so they need to be renovated before they can be leased up and rented out. Lending One is providing a two-year bridge program, where they’ll finance the existing mortgage (close to $900,000 in capital). There’s a cap x budget for the borrower to renovate the 20 down units while also doing upgrades to the property itself to increase curb appeal.

*Mike explains some facts about the current state of multi-family apartments. Cap rates are low, and people are looking for value add opportunities. To acquire a value-add property, you need short term bridge financing to transition the property into a more stabilized property, which in turn allows you to get permanent financing. If need be you can pull out some of the cash you’ve put in the property to fund your next investment.

*Borrowers should be seasoned in terms of owning and managing multi-family properties. It’s important that they have an understanding of what it takes to reposition a property. There are also financial requirements related to net worth/liquidity, and those falling short in that are allowed to bring in partners.

*Mike explains just what people eager to present a new potential project to Lending One would be required to present. It starts with them having already come close to getting a property under contract understanding the financial requirements for the acquisition, and due diligence to identify what the capital expense budget is going to be in terms of renovating the interior units or doing cosmetic repairs to the exterior.

*He adds that it’s also important on a transition property to understand when it will become stabilized. He and his team would also like to see a defined timeline or pro forma budget that shows the individual units being leased. They look for a pro forma that shows how the borrower is going to get from point A to point B and stabilize the property.

*There are a lot of investors currently looking for distressed properties. Some are even buying industrial buildings in urban areas and converting them into multi-family housing.

*The ideal interest rate a prospective investor should aim for is 5 percent, though Mike has seen up to 15 percent depending on the project. The borrower should identify which lenders they want to be doing business with, so that initially that lender will be able to give them a tighter range.

*Mike says that you can build an interest reserve into the transaction independent of it. If it’s a refinance, the lenders might be able to finance that and utilize the existing equity in the property to establish an interest reserve to carry that property until it’s stabilized.

*Mikes discusses the range of Lending One’s services, from financing one to four properties and multi-family buildings. On the residential side they can finance the fix and flip rentals. They also do portfolio loans and ground up construction on transactions up to $15 million. On the multi-family side, they will do graph construction up to $20 million. They prefer that the plans and improvements are to the property, which allows them to finance up to 70 percent loan to cost for the developers.

Resources:

www.lendingone.com

mboggiano@lendingone.com

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