Hard Money Bridge Loan Buys Developer Time
August 15, 2010
When a client engaged Brent Kenefick to help refinance the overdue construction debt secured by a struggling new apartment development, it didn't take the veteran mortgage banker long to realize he was in for quite a tough gig.
After all, since the client secured construction financing for the Riverside, Cal. project in the more liquid days of 2006:
- The Inland Empire region's apartment market suffered a devastating downturn;
- Construction costs came in significantly higher than initially projected;
- Occupancy still stood below 50 percent when the construction facility matured;
- Ownership of the debt changed institutional hands not once but twice between origination and maturity; and
- Confusion reigned over whether the note-holder would extend or foreclose.
Then after Kenefick took on the assignment, the vice president with Johnson Capital's "Express" small-balance lending group in Irvine, Cal., faced another daunting challenge. As he was negotiating a potential 10-year mortgage with Fannie Mae as well as a discounted payoff, the note-holder effectively nixed the Fannie deal by initiating foreclosure.
With many apartment lenders essentially red-lining the Inland Empire marketplace, Kenefick's just-closed temporary solution allows the client to hold on to the property and (hopefully) improve its performance for another 18 or 24 months.
But the bridge-type debt didn't come cheap. Arctus Capital, the hard-money lender willing to front $2.3 million against the 29-unit development, charged a 6-point origination fee - with an 18-month interest-only loan fixed at 10.5 percent. The new debt factors to 72 percent of the current presumed value of approximately $3.2 million.
The project's history is a classic case of near ruin. The developer initially secured a construction financing facility from the former Commercial Capital Bank - which was shortly thereafter acquired by Washington Mutual, which upon its failure was in turn absorbed into JPMorgan Chase & Co.
Commercial Capital had ultimately provided $2.7 million in construction financing for the Class B apartment community along a public transit route, and adjacent to plentiful retail services, not far from University of California - Riverside.
But when the contracted maturity date passed last summer, occupancy was still below 50 percent in a highly competitive marketplace struggling through recession-weakened resident demand.
The developer was predictably having a tough time securing take-out financing, given that he couldn't demonstrate any useful operating history - and only owns one other apartment property in the region. Nor did it help that many banks and other portfolio lenders were shunning most new deals in the Inland Empire.
Enter Kenefick, who began working with Fannie Mae on a prospective take-out mortgage at 65 percent loan-to-value, with a likely 10-year term, 1-point fee and coupon rate perhaps below 6 percent. He was simultaneously negotiating with Chase asset managers over a potential discounted pay-off; and indeed the bank was ultimately willing to reduce the balance owed by some $600,000.
Unbeknownst to Kenefick, however, Chase had just recorded a notice of default - which disqualified the property from securing the Fannie funding.
"So our only option at that point was hard money," Kenefick relates. "And a lot of hard money lenders won't even consider a deal in the Inland Empire - regardless of the NOD."
Kenefick realizes he may well still encounter a tough challenge refinancing the bridge loan as it approaches maturity. Factoring in a typical period from application to firm commitment, the term length doesn't give the client a lot of time to establish an operating and payment history upon which lenders would underwrite a refi.