Texas CRE Boom Calls For More Sophisticated Capital Structures

Since the Great Recession, the rebounding economy has contributed to unprecedented levels of growth in commercial real estate. In Texas, strong job growth — the Federal Reserve ranked the state as the No. 1 job market in the country this July — has fueled a development boom.

More development has attracted investment, and that means more sophisticated ways to finance new development. The state’s strong commercial and multifamily real estate performance has drawn a myriad of capital sources, including many that are new to the market. For developers seeking capital to “get out of the ground,” it is valuable to look to the long term to determine which construction and bridge financing options will pave a path to advantageous permanent financing.

Beginning With The End In Mind

KeyBank Real Estate Capital is not a Texas newcomer. Operating in the state for more than two decades, the firm has seen many market cycles, and it has built its platform here with the acquisition of DUS Lender Newport Mortgage and Federal Housing Authority loan originator Malone Mortgage in the early 2000s.

With a national platform and local leadership, Key is able to present borrowers with a full-spectrum view of financing choices for investment in existing properties, refinancing and ground-up development.

The Key development team is led by Lynn Drummond, who focuses on Austin and San Antonio, and Justin Wilbur, who focuses on Dallas and Houston. This specialized team advises clients on a multitude of options, including both construction and bridge balance sheet executions for all property types.

In a capital-rich environment, it makes sense to think beyond the shovel. Key’s development team works to not only evaluate construction and bridge financing options but also plan ahead for the long term, evaluating capital markets executions through Fannie Mae, Freddie Mac, the Federal Housing Authority, commercial mortgage-backed securities and investor placement financing. To do so, the development financing specialists work closely with their Key Mortgage partners, Amber Rao and Joe Schmidt.  

It Is About The Terms, Not The Product

Finding the right financing requires a borrower-centric approach.

“We take a product-agnostic approach to aid borrowers assessing available financing options," Drummond said. "This strategy allows our clients to find the best financing solution for their specific property.”

Perhaps the best-known option for financing development is balance sheet financing, but unlike in years past, there are now many different ways to approach it. Balance sheet lending works well for owners and operators with a portfolio of long-term hold assets seeking maximum flexibility. Borrowers can obtain floating rate construction debt, longer-term three-, five- or seven-year term debt or anything in between.  

“Many of our borrowers are long-term holders of assets who, after taking out a bridge loan to stabilize an asset, will then transition to one of Key’s permanent products,” Drummond said. “That said, balance sheet loans also work well for borrowers who are looking to interim project financing prior to sale.”

This is true for all property types, as balance sheet lending can cover a broad spectrum of acquisitions, Wilbur said.

While the Key development financing team’s primary focus is on transitional, value-add assets, it can also provide construction loans for new development.

“As cap rates continue to compress, and despite rising construction costs, many real estate investor-developer groups now see the greatest opportunity for value-add in ground-up development,” Drummond said.

Thinking Past The Project Stage

Permanent financing options have also expanded. For multifamily development of many kinds, there is an even longer list of options. Agency lenders, for example, have been instrumental in supporting liquidity available for affordable and workforce housing development as affordable housing shortages grow nationwide.

“Despite the Federal Housing Administration caps on multifamily lending for each enterprise at $35B this year, green and affordable assets that meet certain thresholds of area median income don’t fall under this cap,” Rao said.  

As a top 10 lender with both Fannie Mae and Freddie Mac, Key is a significant contributor to the robust loan growth that both agencies have experienced over the last few years, originating $7.8B in new agency debt in 2017. As of June, Fannie Mae has closed $25.8B in loans and Freddie Mac has closed $28.9B. Fannie Mae and Freddie Mac closed $67B and $73.3B, respectively, capped and uncapped, in 2017. Both agencies appear to be on pace for a strong 2018.  

Agency lending, while a core source of financing, is not the only option available to borrowers. KeyBank’s real estate capital markets group has invested in innovative financing solutions that offer options for projects that don’t qualify for agency-sourced permanent financing.  

Debt funds present additional options for long-term real estate finance. In today’s environment of compressing cap rates and rising interest rates, debt fund solutions through Key and other lenders have been instrumental in enabling clients to reposition assets while maintaining prepayment flexibility and allowing for maximum loan dollars.  

“There is an unprecedented number of lenders offering debt fund loan products today, and certainty of execution remains an important factor that clients should consider when selecting a lender,” Rao said.

Key launched a proprietary debt fund in early 2017, offering high-leverage, nonrecourse floating rate debt to clients for value-add or transitional assets for all property types.    

What About CMBS And Life Company Options? 

In addition to the traditional CMBS platform, Key created a private label equivalent to the product, where Key is the master and special servicer to alleviate capital market risk and reduce closing costs.

“Our product functions similarly to balance sheet execution, with loans between $2M and $12M,” KeyBank Real Estate Capital Senior Mortgage Banker Joe Schmidt said.  

Life insurance companies tend to be more conservative lenders, offering lower-leverage executions but unparalleled pricing advantages. Many commercial deals like Class-A office buildings in gateway markets and grocery-anchored shopping centers are done through insurance lenders, which hold $362.7B of commercial real estate loans nationwide, Commercial Observer reports. In 2017, KeyBank Real Estate Capital placed 84 loans for $2.05B.   

While life insurance companies offer less leverage than other financing options, borrowers can take advantage of highly flexible loan terms. Life insurance companies are also competitive when it comes to pricing and loan structures.

“We have good relationships with over 50 life companies, offering many options,” Voss said. “We can place anything from short-term fixed or floating rate debt to ultra-long-term 40-year amortization.”

When it comes to securing financing for an asset at any stage of the investment life cycle, no one-size-fits-all solution exists.

“We are always sitting on the same side of the table as the client, asking, ‘What is the best solution for your long-term goals and for the lifetime of the asset?’” KeyBank Real Estate Capital Senior Vice President Charles Williams said.  “Let’s start there, and then determine the best product. We are an adviser, going beyond our role as a lender.”

This feature was produced in collaboration between Bisnow Branded Content and KeyBank. Bisnow news staff was not involved in the production of this content.