In February 2018, Jon Krebbs and Paul Yazbeck launched The Multifamily Group, which focuses on the sale of Class B and Class C apartments throughout Texas and contiguous states. Krebbs, who will be a moderator at Connect Media’s upcoming Connect Texas Multifamily conference on Aug. 23, answered questions about financing issues pertaining to multifamily investments.
Q. What types of deals does The Multifamily Group handle? Has it been difficult to find capital for these deals?
A. In the second quarter of this year, The Multifamily Group handled transactions ranging from 511 units in Albuquerque, to 224 units in Fort Worth, to 57 units in Grand Prairie. Currently, we have deals in escrow or on the market in Dallas/Fort Worth, San Antonio, Killeen, Waco, Norman and Oklahoma City. Some buyers are expanding their search into tertiary markets because of compressing cap rates in the major Texas markets. In DFW, where pricing is as at an all-time high, buyers have had to bring more equity to the table or use bridge financing to win deals where 75%-80% leverage doesn’t meet Fannie and Freddie’s debt service coverage requirements. Lenders have made concessions by reducing their spreads to offset rising interest rates, lowering the debt service coverage ratio in Dallas County (Freddie SBL), and offering longer interest-only periods on lower leverage deals (Fannie).
Q. Are you finding that financing is more geographically or product based?
A. Texas is fortunate to have debt and equity capital from all over the world available for multifamily investments. Sellers are taking advantage. Over the last 12 months, DFW has had the highest sales volume of any market in the country, and Houston is in the top 10. As I mentioned, capital is also flowing into tertiary Texas markets, especially for newer assets. The Multifamily Group recently awarded an “A” class, 216-unit property in Waco that was built in 2001. Our whisper price was aggressive because rents are below market and the property has been maintained by the original developer for the last 17 years. We had eight offers, and all of them included non-refundable earnest money day one. The underwritten cap rate is similar to what we see for comparable properties in DFW.
Q. What advice would you give to buyers and sellers of multifamily when it comes to financing their transactions?
A. We see new partnerships forming all the time, and a few of these groups have picked up several properties in a relatively short amount of time. Green programs are very popular, and there are always conversations with buyers and sellers about green financing and what efficiency improvements (if any) have already been implemented. When advising a seller, we will get a debt quote, check for affordability discounts, and bring in a water consultant to audit the property and tell us if the water-saving will allow for green financing. Lenders put a great deal of emphasis on their own underwritten expenses, so we tell our clients not worry about cutting costs during the marketing process. Instead, we encourage our clients to focus on occupancy and rent collections throughout the sales process. This helps maximize the debt proceeds and ensure funding of the loan. Having strong relationships with lenders and understanding available financing programs is paramount, because the debt terms drive so much of a property’s value.