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How the Commercial Real Estate Lending Environment Might Differ in a Post-COVID-19 World

How the Commercial Real Estate Lending Environment Might Differ in a Post-COVID-19 World

It goes without saying that the global toll of the COVID-19 pandemic has been substantial. Like many other industries, the real estate lending sector has also been impacted. However, the market is still functioning, and investors still have access to financing. But how that funding is accessed, as well as the terms and structures of loan packages, have changed slightly to reflect the new environment. In this article, we’ll explain what investors should be aware of and how construction lending can evolve as the nation recovers from the pandemic.

hard money lending

Americans on the move: How some multifamily and single-family markets have changed

The pandemic has allowed many residents living in high tax and cost-of-living areas to move to locations that are less-densely populated and have cheaper costs of living. John Burns Real Estate Consulting found in a recent survey that 59 percent of new single-family rental tenants are relocating from urban locations, with 41 percent of new tenants moving from other suburban locations. Only 32 percent of new single-family tenants moved from apartments, meaning single-family homes are not enticing apartment renters to transition to detached houses or townhomes in large numbers. Instead, renters are benefiting from what they likely perceive to be more livable locations.

The 2020 U.S. Moving Migration Patterns Report from North American Moving Services shows Illinois, New York, California, New Jersey, and Maryland to be the top five states that people left. The most popular states for in-migration were Idaho, Arizona, South Carolina, Tennessee, and North Carolina.

Idaho led with inbound movers in 2020, as 70 percent of its population was moving in and 30 percent moving out, followed by Arizona with 64 percent inbound and 36 percent outbound. Tennessee and South Carolina both had 63 percent moving in and 37 percent moving out, while North Carolina had 61 percent inbound and 39 percent outbound.

Rounding out the top eight states for inbound movers were Florida, Texas, and Utah. Phoenix, Houston, Dallas, Atlanta, and Denver were the cities with the most inbound movers.

Suburban locations will play vital roles in the success of single-family rentals moving forward, including build-for-rent (BFR) communities, which are typically groups of single-family homes that benefit from the professional management and amenities of a full community. BFR communities are usually located near hospitals, military bases, and job centers with great walkability.

How private money lenders have navigated the lending market

Private money lenders have approached the recovering market in new and different ways. Some pressed pause on transactions initially to focus on their current portfolios, while others continued to fund new projects. Those that continued to lend may have made adjustments to their loan guidelines. These changes could have included:

  • Reduced loan-to-value (LTV) ratios; the industry average LTV ratio was around 70% before the pandemic and has now dropped to approximately 65%
  • Removal of at-risk property types from deal pipelines, such as retail and hospitality
  • Addition of more resilient property types to deal pipelines, such as residential and multifamily
  • Requiring or increasing interest reserves
  • Working with more experienced borrowers with higher levels of liquidity

There is also a group of lenders that are choosing not to make any adjustments to how they structure their financing packages. They’ve continued with business as usual, enduring the delays and adjusting for possible new market risks.

How traditional lenders navigated the lending market

Mortgage financing availability was firmly tightened at the onset of the pandemic and at one point reached its lowest level since December 2014. This tightening was driven by most lenders removing their products’ availability to borrowers with low credit scores and high LTV ratios. In addition to the adjustments to LTVs, maximum loan amounts have decreased across the industry.

Lenders like government-sponsored enterprises Fannie Mae and Freddie Mac have cut their lending volumes and made their underwriting more conservative. Importantly, they have instituted reserve requirements that require borrowers to put money in escrow for 9 to 12 months to cover future payments. In the past, they have financed up to 80 percent of a purchase price without reserves. This generally allowed real estate investors to acquire an asset with as little as 20 percent down.

Conclusion

Unlike traditional lenders who have strict regulations, private money lenders are nimble and can quickly pivot to meet changing market demands and unique circumstances. This has been more apparent throughout the pandemic, an event that has forced many lenders to adjust to an unexpected environment and which may result in some mitigation measures continuing into the near future.

With the speed and guidance of experienced and trusted lenders, commercial real estate developers and investors can continue to move forward and succeed, even in the midst of a market downturn.

 

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation, or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one of our lending experts today.

Broadmark Realty Capital lends in Denver, Florida, Georgia, Idaho, Maryland, North Carolina, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Virginia, Washington, Washington D.C., and Wyoming.

A Glossary of Hard Money Lending Terms

After rehab value (ARV): The market value that the investment property is expected to have after it has been improved or renovated.

Appraisal: A professional estimate of how much the property is currently valued or will be worth after updates.

As-is value: The property value as it exists, as of the appraisal date.

Bridge loan: A short-term loan used to bridge the gap between one obligation and the next. Bridge loans are a great way to move from one investment to another.

Capitalization rate: A real estate valuation measure used to compare different real estate investments. It represents the ratio between the net operating income produced by an asset and the original capital cost or its current market value.

Commercial use: A property with no residential component that is only used for a business.

Cross-collateralize: A lending technique in which collateral for one loan is also used as collateral for another loan.

Default: The failure, for longer than 30 days, to meet the legal obligations of a loan.

Distressed properties: Properties that are in poor condition or near foreclosure.

Draw schedule: A detailed payment plan for construction projects. This schedule helps hard money lenders determine when they need to provide funding to borrowers based on the work completed.

Escrow account: An account run by a third party that disburses payments based on the loan agreement. The money is typically used to cover property taxes and homeowner’s insurance.

Exit strategy: A real estate exit strategy is how the borrower plans to pay off the loan and reduce liability. It is a plan for how to exit one situation for a better one. Tip: have three exit strategies in mind – a best-case scenario, back-up, and “last-ditch” plans. Here are four common exit strategies.

Foreclosure: The process through which the lender legally takes control of the property due to the borrower missing loan payments.

Guarantor: The person who promises to pay a borrower’s debt if the borrower defaults on their loan.

Hard costs: Direct costs relating to the construction or improvement of a building or structure.

Hard money loan: Also called a private equity loan or a private money loan, a hard money loan is a specific type of asset-based loan financing through which a borrower receives funds secured by real estate property.

Holdback: The portion of a hard money loan that is not paid until the project reaches a certain stage, such as completion of the framing.

Holding costs:  Costs associated with owning a property for a period. This includes insurance, taxes, and utilities.

HUD-1: A form that lists all the transaction cash flows between the property’s buyer, seller, and lender.

Interest Rate: A percentage of the principal loan amount charged by the lender for use of money.

Lien: A legal form filed by a lender showing possession of property belonging to a borrower until the debt is paid off.

Liquidity: How quickly an individual or firm can purchase or sell a property due to having cash on-hand.

Loan broker: See: real estate broker below.

Loan officer: Person who evaluates, authorizes, or recommends the approval of loan applications.

Loan points: An origination fee. One point is equal to one percent of the loan’s principal amount. Two points on a $100,000 loan would be $2,000. Most private money/hard money loans fall between 2 and 5 points.

Loan to Cost (LTC) Ratio: Compares the financing amount of a commercial real estate project to its costs. It is calculated by taking the loan amount and dividing it by the construction cost.

Loan to Value (LTV) Ratio: Compares the proposed loan amount to the appraised value of the completed project.  (Loan amount divided by appraised value)

Maturity: The date the final payment of a loan is due.

Private lenders: Individuals or companies that lend to real estate investors and developers. Finding the right private lender can be tough – here are five qualities to look for in a private lender.

Proof of funds: A document or bank statement proving that a person has the financial ability to perform a transaction.

Real estate broker: Someone who acts as an intermediary to facilitate real estate transactions. In the case of a hard money loan transaction, they gather important information from the borrower such as income, employment documentation, and credit reports to assess how much the borrower can afford.

Real estate investor: Someone who purchases properties with the goal of making a profit, either through renting or reselling.

Refinance: Replacing an old loan with a new one. Typically, people refinance to take advantage of a lower interest rate, but can also refinance when an old loan becomes due.

Scope of Work: An outline of all the renovations scheduled to be completed before the property is sold, including their estimated costs.

Short Sale: A situation when a seller is selling their property for less than they owe on their loan. A bank or lender must approve the sale at the lower price.

Soft costs: Non-construction costs such as legal, financing, architects, etc. required for the project.

Title: Proof of ownership on a real estate investment property.

Turnaround time: The amount of time from when an investment property is purchased to when it is sold.

Underwriting: The assessment of how much risk a lender will take on for an investment property. Underwriters will verify the borrower’s income, assets, debt, and property details before approving a loan. Hard money and private money underwriters are typically more concerned with the property’s value than the borrower’s credit history.

Multifamily Guide: How to attract Generation Z renters

Each generation has its own quirks. Gen Z is no different and appears to be more practical than others. While we’ve seen that some generations are happy to rent forever, Generation Z sees it as a stepping stone. In fact, 97 percent of them want to buy a home someday. Now, most of them won’t leave their parents’ home and immediately buy a house. This means you still have a chance to reach them. With this in mind, let’s cover how multifamily operators can reach Gen Z where they are spending most of their time – online.

Social media marketing

Gen Z is more reluctant to use traditional social media channels such as Facebook. Instead, try reaching out to them via a partnership with influencers and creating a strong presence on channels like Instagram, Snapchat, YouTube, and TikTok. Influencer marketing is a useful way to spread the word to younger renters. Consider setting up a referral program to your residents in exchange for promoting your community.

Online video content

It’s official. Gen Z spends the least amount of time watching TV. They spend most of their time watching online videos, so consider sharing video tours of your property. To help keep their attention, be sure the content is concise, engaging, digestible, and shareable.

Mobile-friendly website

Generation Z spends an average of 26 hours per week on their mobile phones and uses laptops rather than desktops. They also grew up with Google and Siri in their back pockets, so they expect fast and easy interactions. Forget about emailing or calling, they want to ask a question and have an immediate answer. Multifamily websites are no exception, property managers will want to make sure that their website is optimized for mobile and accessible on the go, from any device.

You might ask yourself; how do I fill this need of instant gratification? Try adding chatbots. Chatbots are programmed to interact with users. They get to know a user by asking a series of questions and are then able to provide the user with answers. For example, a chatbot could ask a user where they want to live, how much they want to spend, and what amenities they want. Then based on those preferences, respond with information. Chatbots could also help with managing maintenance requests. A renter can interact with the chatbot making them aware of a broken A/C unit and schedule the maintenance. Allow Gen Z renters and other potential renters to interact in the way they want.

How to appeal to Gen Z renters

Keep it simple, mobile, and digital. Make everything accessible online– basic communication, rental applications, community news, virtual tours – all these can and should be managed online.

Create a highly rated online reputation

Be authentic. This generation is keeping up with what you’re posting to social media and what is said about your community online. Stay consistent and realistic with all your posts and responses to online reviews. If you receive a bad review, it’s not the end of the world, just be sure to respond immediately. For Gen Z, seeing the negative reviews might provide balance and will allow you to show how you deal with conflict in your community.

Pricing

As natural researchers, Gen Zers know where to look for the best deal and answers. Property managers must keep units priced appropriately to capture this group. If you have your apartments listed above market value, they won’t be attracted to your community.

Gen Z is a largely untapped market waiting to be recognized. If your real estate business is proactively seeking to tap into this market and improve resident engagement, implementing the technologies and content strategies that appeal to this generation should be a large part of your strategy. If companies manage to incorporate lively video posts and conversation-starting events into their marketing routines, they will increase their odds of winning over this generation.

 

Related article:  The growing impact of Gen Z on the Multifamily Housing Industry

 

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one our lending experts today.

The growing impact of Gen Z on the Multifamily Housing Industry

What Gen Z renters are looking for in their community and from property managers

 

Watch out, there’s a new generation defining the future of the multifamily industry. While millennials make up 56 percent of the rental market, Gen Z comprises 74 million people, making it equal in size to millennials and baby boomers. Even though they may be young, they have money to spend. They contribute $44 billion to the U.S. economy and it’s only a matter of time before they head into the rental market.

If you rent to college students, you might already be familiar with the preferences of Gen Z renters. If not, you may ask yourself how different are their preferences from those of the millennials? The primary difference is their relationship to technology. Gen Z relies on social media and the internet to make purchasing and lifestyle decisions more than millennials. They understand how to leverage technology to benefit them and find the information they need.

Personalization

Gen Z is used to having everything personalized just to their liking. From their playlist to their newsfeeds, their world is designed to their tastes and interests. Look further and you’ll see that this generation is the most connected to brands through which they can build experiences. For commercial real estate, this means cultivating individualized tenant experiences.

Affordability

Finances are often front and center for most generations, but even more so for Gen Z. They would rather put their money into their businesses and savings accounts than into rent. Rental prices that allow them to do this while not feeling house poor are ideal. Longer term leases, 18 to 24 months, are more attractive to this group than 12 months. They appreciate the stability and they want to know what their rent will be over a year from signing to avoid worrying about what their next step is.

Human interaction

Gen zers having a game night in apartment complex

Community. Gen Z craves community, one that helps build a creative network. Incorporate resident events and other activities such as movie night, pool parties, and game nights. If your apartment community hosts property-wide events and spaces, make sure you promote them. This will help attract Gen Z renters and help build your commercial real estate community.

Positive messaging

88 percent of Gen Zers invest in companies that share their values. Have you sponsored a charity event or local sports team? To attract these renters, use social media to share your apartment community’s involvement in the neighborhood.

Authenticity

As mentioned before, this generation craves a company they can connect with and trust. Figure out your community’s brand and core values, then start building an authentic marketing campaign around it. Share residents’ stories, educate renters and provide them the opportunity to build relationships.

Energy-efficient amenities

 

Again, this generation is passionate about environmental causes. In fact, the majority of them define success as having made the world a better place. So, investing in green amenities is worth the upfront costs. Whether you’re building new or updating older units, make more sustainable choices. For example, upgrading the windows to energy-efficient panes and installing eco-friendly appliances are good places to start.

Consumers drive the market, and the best businesses are the ones that meet and exceed those needs. Gen Z may be new, but they are making a large impact on the multifamily industry. So get social and start reeling in new residents!

Broadmark Realty Capital Inc. (NYSE: BRMK) is an internally managed real estate investment trust (“REIT”) offering short-term, first deed of trust loans secured by real estate to fund the acquisition, renovation, rehabilitation or development of residential or commercial properties. The company has originated over $2.2 billion in loans since its formation through a rigorous and responsive underwriting process. Have questions? Contact one our lending experts today.

Which hard money loan is right for your project?

Which hard money loan is right for your project?

Not all projects are the same, and therefore not all projects need the same type of funding. When it comes to financing your real estate project it’s important to find the right loan solution for your needs–and it’s always helpful to know a bit about various loan types when you first talk to your lender.

Land Development Loans

A land development loan is probably the best option for you if you have raw or undeveloped land that needs to be made construction-ready. A land development loan can finance entitlement of the bare land, so sewer, electricity, gas lines, and roads can be added. A land development loan may also fund soft costs, such as hiring architects, engineers or other consultants, and can fund the costs for subdividing land that will be sold as separate lots for commercial or residential use

Construction Loans

Generally, construction loans are short-term loans used for real estate projects such as multi-family housing and commercial and industrial buildings, though you can also use construction loans to buy land or build or renovate existing structures. As you reach milestones for your project, you or the builder can request draw payments for completed work. Once an inspector has verified that the work is done, you would receive a disbursement. To retire the loan, you obtain a final appraisal and inspection on the property and refinance to a more fitting loan, such as a mortgage, or pay off the construction loan.

Bridge Financing Loans

Bridge financing loans are temporary loans, typically ranging from 6 to 12 months, that provide funding until a longer-term source can be arranged. Bridge loans are used in commercial real estate for many reasons, including expanding a product line, buying out a partner, or bridging the gap between when a construction project is completed, and the project is refinanced or sold.

Heavy Rehab / Redevelopment Loans

Redevelopment loans fund major renovations such as tenant improvements, remodels, expansions or redevelopment on an existing building. A redevelopment loan is usually valid for 6 – 18 months. You wouldn’t use a redevelopment loan to purchase land or build new construction.

Acquisition and Development Loans

An acquisition and development loan (A&D) is appropriate if your raw land is ready to be developed, or is already developed but needs improvements to the infrastructure or existing buildings. Most of the time, an A&D loan covers both the purchase of land and cost of improvement needed before the development can be completed.

As you may have noticed, there is some overlap between loan types and many other factors. Therefore, it’s a good idea to work with an experienced lender who knows your market, is willing to take the time to fully explain things, and offers good terms.

Broadmark Realty Capital specializes in hard money loans designed for real estate investors and developers who require quick closings, outside-the-box thinking, and the utmost professional service. All our real estate loans are backed by careful, in-house underwriting, strong knowledge of the local market, fair pricing, and the idea that construction loans are very much a partnership: we are your advocate from day one through the completion of your project. Need a loan? Contact one of our lending experts today!