We recently received a request to finance a 100-unit multifamily property located 12 miles outside a major southeastern city on a heavily traveled interstate. The immediate area is heavily populated with large commercial and industrial facilities, and the area is well known to have a growing manufacturing presence. The property was built in 1995, is 92% occupied and in good condition.
The buyer and seller entered into an $8-million purchase contract and the buyer was all set to utilize agency financing through Fannie Mae or Freddie Mac for $6 million. The property was not located in an area of market concern for Fannie/Freddie (sometimes referred to as pre-review markets). A no-brainer, thought the buyer.
But the loan was turned down by the agencies for the requested loan amount. Why? Well the commercial and industrial nature of the market generated demand for medium-term furnished apartment rentals. In particular, the subject property had 42 furnished (sometimes referred to as “corporate”) units in which the units were leased fully furnished with all utilities and cable provided at the cost of the landlord. Because the units are furnished and utilities paid by the landlord, the monthly rent is much higher than an unfurnished apartment unit. Fannie Mae and Freddie Mac marked down the rental rates on the furnished units to the level charged for unfurnished units and the resulting cash flow did not meet the minimum required debt-service coverage for a $6-million loan.
The buyer then turned to the CMBS market. The key to the transaction is that the seller was able to show five years of occupancy greater than 90% despite the potential volatility from the move-in/move-outs of the shorter term furnished units. We were able to achieve the full $6 million in proceeds and utilize the actual in-place furnished unit rents and a 90% occupancy rate. Icing on the cake? The interest rate was a mere 10 basis points higher than the agency rates.