Your Christmas Present: More Leverage
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Leverage is ticking up from perm lenders, says LMI Capital managing director Brandon Brown. Houston’s still a pre-review market, but now (unlike the first half of the year) GSEs and CMBS alike are regularly going up to 75 to 80% leverage. That’s not a sign of overambitious underwriting, Brandon says—it’s stayed fairly conservative. Rather, lenders are upping the leverage and adding more interest-only money to compete for deals. LMI just wrapped up some larger acquisition financings, both of which earned 80% leverage. One nabbed an impressive five years interest-only because of the quality of the sponsor and location of the asset.
Non-recourse bridge lenders aren’t changing their leverage (they're holding steady at 75 to 80% loan to cost), but Brandon does see them dropping their pricing some, from 5% a few months ago to 4.5% and lower now. Brandon predicts we’ll see more mezz lending in 2015, with good properties getting 85% (strong properties and sponsors can reach 90%) LTV between perm and mezz loans. He says high leverage hasn’t impacted DSCR much because cash flow has been so high (he’s been seeing 1.6 on high-leverage deals, which is pretty good).