I think the rehab play worked until it didnt.

Rent growth has been slowing, financing costs way up, opex way up with insurance etc., and doubt anyone is coming near pro-formas.

I know there are exceptions to any rule, but anyone on bridge debt for a rehab project circa 2021/2022 has to be experiencing a level of pain.

Cyp0111 said:

---

I think the rehab play worked until it didnt.

Rent growth has been slowing, financing costs way up, opex way up with insurance etc., and doubt anyone is coming near pro-formas.

I know there are exceptions to any rule, but anyone on bridge debt for a rehab project circa 2021/2022 has to be experiencing a level of pain.

---

100%. That business model was incredible while it lasted. INCREDIBLE. The real juice was probably in the 2010-2015 range. Money was made after that, but there are only so many older mf properties in need of renovation allowing for huge rental bumps.

I would back the 2021/2022 up to anything bought after 2020. There is going to be a lot of pain in that space. For an example google Tides Equities.

Circling the wagons on this Georgetown property along with multi-family in general (just sharing my experience).

* This Georgetown new development is currently being leased up and did a cash neutral refi to lower debt service payments (got out of construction loan). They did issue some notes at 12% pref return to finance some small shortfalls. They sit higher up in the stack - I participated as I believe there is low risk of them not getting paid. This investment is now pro forma is around 1.5x CoC which is lower than original.

* All bridge loan deals that I'm in have been hurt by debt service raises (they all had caps, but still had large initial increases) and new rate cap purchases. Additionally a few have had issues with delinquency and time in which it took to evict (upwards of 6-9 months in some instances). These deals have now released capital raises of approx 30% of initial investment. The "new money" will be higher in the stack versus original equity. Revised pro forma is 1.3-1.4x if you participate in the capital call and approx 1.1x if you don't participate.

* Fixed rate (without significant delinquency) is doing "just fine" when compared to above bridge loans. All mine are still paying distributions from 3-6%.

* Questions:
- Are you now seeing deals with positive leverage? I'm starting to see a few.
- Are you seeing people buy down the rate to get even/positive leverage? I'm starting to see a few.
- I feel like the multifamily market won't crumple, but rather this is a bump in the road so I've been "dollar cost averaging" on a few deals in 2023. 2024 will be a grind and hopefully a good business model will survive. Any thoughts here are appreciated.

HoustonAg_2009 said:

---

Circling the wagons on this Georgetown property along with multi-family in general (just sharing my experience).

* This Georgetown new development is currently being leased up and did a cash neutral refi to lower debt service payments (got out of construction loan). They did issue some notes at 12% pref return to finance some small shortfalls. They sit higher up in the stack - I participated as I believe there is low risk of them not getting paid. This investment is now pro forma is around 1.5x CoC which is lower than original.

* All bridge loan deals that I'm in have been hurt by debt service raises (they all had caps, but still had large initial increases) and new rate cap purchases. Additionally a few have had issues with delinquency and time in which it took to evict (upwards of 6-9 months in some instances). These deals have now released capital raises of approx 30% of initial investment. The "new money" will be higher in the stack versus original equity. Revised pro forma is 1.3-1.4x if you participate in the capital call and approx 1.1x if you don't participate.

* Fixed rate (without significant delinquency) is doing "just fine" when compared to above bridge loans. All mine are still paying distributions from 3-6%.

* Questions:
- Are you now seeing deals with positive leverage? I'm starting to see a few.
- Are you seeing people buy down the rate to get even/positive leverage? I'm starting to see a few.
- I feel like the multifamily market won't crumple, but rather this is a bump in the road so I've been "dollar cost averaging" on a few deals in 2023. 2024 will be a grind and hopefully a good business model will survive. Any thoughts here are appreciated.

---

Definitely a lot more cash neutral refi's out there. The drop in treasury has saved a lot of deals in the last 4-5 months. Hopefully your cash neutral refi deal was into a 5/7YR fixed and not another floater?

How is lease up going? Austin has a 5.2% decrease in asking rents and 40,000 units of supply coming to market in the construction pipeline with a lot of it for North Austin.

With some of these developers, they are having to become proper asset managers and it's tough for them. Management companies will make or break you. Had seen one where they hired a new company who said they would drop rents and take away concessions. It's not helpful seeing GPR in free fall, concessions at 5-8% AND then bad debt on top of it at 3.5%. Hard to make a deal pencil with 16-20% economic vacancy, just get some asses in chairs and paying rent.

Very few deals with positive leverage but most that are out there have been higher cap rate, class C type product.

Almost everyone is buying down rates these days but you need to make sure if you are buying down, it's being done from 100% of par and not at 100.5% or 101%. Some seedy bankers out there trying to take advantage….

Multifamily is in a tough spot regardless for 2024. The common theme is survive to 2025 and even more bearish is "stay in the mix until 2026".

Insurance costs are really destroying some people and are likely to keep getting worse. Some experienced portfolios are seeing their renewals come in at 40% higher than existing policy. Which really hurts at a time when rents aren't rising or you can't push them as much to offset. Liquidity is key IMO.

3.5 year construction and only 55% leased is alarming honestly as I'm assuming it's not a concrete deal in Georgetown. Their debt payments, taxes, and insurance are all probably double proforma. I would be excited to get your money back if they ever sell it.

We built a 200-unit garden deal in Round Rock that broke ground in December 2020 and was sold fully-stabilized in August 22.

The refi was a floater with interest rate cap - Mid 6% max interest rate for 2 yrs and then ability to have 2 more yrs of cap extensions. About 75% of apartment is now leased up and there seems to be good momentum -- Rent is still around pro forma.

Can you explain a bit more about your comment -- 100% to par and not at 100.5% or 101%? I have one deal that bought down the rate so I would like to confirm what they did.

Thank you for your other comments -- They are helpful!

Hey BR -- Yes 3.5 yrs was ridiculous. As stated above its now approx 75% leased.

What do you mean "concrete deal"?

Oh that's good. I just meant 3.5 years isn't crazy for a tower or a concrete structure - but since it's in Georgetown, I figured it was wood construction, which is much cheaper and faster to build.

HoustonAg_2009 said:

---

The refi was a floater with interest rate cap - Mid 6% max interest rate for 2 yrs and then ability to have 2 more yrs of cap extensions. About 75% of apartment is now leased up and there seems to be good momentum -- Rent is still around pro forma.

Can you explain a bit more about your comment -- 100% to par and not at 100.5% or 101%? I have one deal that bought down the rate so I would like to confirm what they did.

Thank you for your other comments -- They are helpful!

---

Was meant with respect to premium taking and it can get rather complicated. Generally 100% of par means 100% of the loan amount. So if you are getting a loan for $10M and it is being secured vs MBS worth $10M, that is 100% of par. If the loan trades at 100.5% of par, it means the MBS investor is paying a 0.50% premium and the final MBS repayment is $10,050,000. They do this because they get a slightly higher rate of return on a monthly basis and will pay $50K upfront for this. So you as the mortgagee will get your $10M loan and the $50K will go to the lender/broker, with all you seeing is a slightly higher rate than you could have been charged.

So someone tells you to buy the rate down ~0.40%, it will cost 1.5% or 2.0% (I am pulling this as just an example). When in reality, the 1.5% or 2% buydown should get you 0.50% of reduction in the rate. This means that the 0.10% difference (0.40% vs 0.50%) is being collected by the lender.

Premium taking in the deal typically happens in loans that flow into mortgage backed securities and is extra outside of the origination fee and such. Like I said, it can get rather complicated and sometimes is needed (i.e brokers needing to pay required minimum origination fees, guarantees,etc.) but can also be easily exploitable with more nefarious lenders.

Gotcha -- Yes its an A/A+ wood built complex. While this investment has been behind schedule and ran into higher rates I still think it will yield a return. However lower than original pro forma.

Thanks for the detailed explanation....I'll need to dig into the load details.

Red -- Have you encountered any capital calls in your deals? If so are you funding them? I've mostly read/heard that if you see a decent chance of the property "weathering the storm" and has a solid plan to positive NOI then you should invest as you don't want to get diluted.

Found this thread this morning and wanted to chime in from a little different angle. I am in the multi-family realm as well but on the insurance side. Our firm deals almost exclusively in multi-family and writes around 400,000-500,000 units across the US. As y'all have noted, insurance has become insane. If anyone wants me to look at the current set up or quote their portfolio, I am happy to take a look and will shoot you straight. Feel free to PM me or email me at username at gmail.

Red Pear Luke (BCS) said:

---

HoustonAg_2009 said:

---

Circling the wagons on this Georgetown property along with multi-family in general (just sharing my experience).

* This Georgetown new development is currently being leased up and did a cash neutral refi to lower debt service payments (got out of construction loan). They did issue some notes at 12% pref return to finance some small shortfalls. They sit higher up in the stack - I participated as I believe there is low risk of them not getting paid. This investment is now pro forma is around 1.5x CoC which is lower than original.

* All bridge loan deals that I'm in have been hurt by debt service raises (they all had caps, but still had large initial increases) and new rate cap purchases. Additionally a few have had issues with delinquency and time in which it took to evict (upwards of 6-9 months in some instances). These deals have now released capital raises of approx 30% of initial investment. The "new money" will be higher in the stack versus original equity. Revised pro forma is 1.3-1.4x if you participate in the capital call and approx 1.1x if you don't participate.

* Fixed rate (without significant delinquency) is doing "just fine" when compared to above bridge loans. All mine are still paying distributions from 3-6%.

* Questions:
- Are you now seeing deals with positive leverage? I'm starting to see a few.
- Are you seeing people buy down the rate to get even/positive leverage? I'm starting to see a few.
- I feel like the multifamily market won't crumple, but rather this is a bump in the road so I've been "dollar cost averaging" on a few deals in 2023. 2024 will be a grind and hopefully a good business model will survive. Any thoughts here are appreciated.

---

Definitely a lot more cash neutral refi's out there. The drop in treasury has saved a lot of deals in the last 4-5 months. Hopefully your cash neutral refi deal was into a 5/7YR fixed and not another floater?

How is lease up going? Austin has a 5.2% decrease in asking rents and 40,000 units of supply coming to market in the construction pipeline with a lot of it for North Austin.

With some of these developers, they are having to become proper asset managers and it's tough for them. Management companies will make or break you. Had seen one where they hired a new company who said they would drop rents and take away concessions. It's not helpful seeing GPR in free fall, concessions at 5-8% AND then bad debt on top of it at 3.5%. Hard to make a deal pencil with 16-20% economic vacancy, just get some asses in chairs and paying rent.

Very few deals with positive leverage but most that are out there have been higher cap rate, class C type product.

Almost everyone is buying down rates these days but you need to make sure if you are buying down, it's being done from 100% of par and not at 100.5% or 101%. Some seedy bankers out there trying to take advantage….

Multifamily is in a tough spot regardless for 2024. The common theme is survive to 2025 and even more bearish is "stay in the mix until 2026".

Insurance costs are really destroying some people and are likely to keep getting worse. Some experienced portfolios are seeing their renewals come in at 40% higher than existing policy. Which really hurts at a time when rents aren't rising or you can't push them as much to offset. Liquidity is key IMO.

---

40%? That's the low end and it's in non-coastal areas, with quality construction built after 1990, without significant risk of wind/hail/tornado/poor demographics.

I wouldn't say LOW end, but it is in the statistical mean for sure. Even nice locations are seeing 25%+ increases, and 1960-1980's C class garden style are easily 30-50% increases on the conservative side. Coastal is definitely worse. We are seeing a conglomeration of events.

- First, every year for the last 5 years or so, insurance claims have exceeded the previous year. Even if your properties are claim free, the rest of the country/world have had billions in claims, and that translates to increased rates.
- Second, insurable values are increasing. 10 years ago I could insure a property at $55/sq. ft. for building values. Then it increased to $60/sq. ft. Then $75/sq. ft. Then $90/sq. ft. Now, if I can get something written for less than $120/sq. ft, that is a win. That is due to increased cost of construction (both labor and materials) and lenders getting more stringent on their limits requirements. Property premium is directly correlated to your insurable value. If a few years ago you went from $75/sq. ft. to $100/sq. ft., that is an immediate 33% increase BEFORE the rate increase. Luckily, this seems to have stabilized some. In reality, it was a necessary adjustment as carriers were underinsuring properties for a number of years.
- Third, carrier appetite. There are fewer and fewer carriers who are willing to write multi-family, especially the older stuff. 10 years ago if I had a 1970's garden style 250 unit location in Dallas, I had a number of carriers who were willing to write that an compete. Now, there might be 3-4 carriers, if that. The lack of competition means the ones who will write it will charge you for it because they know they can. A lot of underwriters want post 2000 construction, fully sprinklered locations, which ironically bit them in the ass with Winter Storm Uri when all those sprinkler systems burst in the freeze. It legitimately caused a handful of carriers to go under.

It's the hardest market I have seen since I have been in the industry. I have seen a number of smaller mom and pop operations or inexperienced syndications go under or have to sell to the big boys simply because insurance and property taxes pushed them out.

Every single point you made is correct.