The economic impacts of COVID-19 have reverberated throughout the economy and created questions around the related effect on commercial real estate – specifically multifamily – valuations. We are sharing a series of three posts covering common questions we have been asked since the onset of the pandemic covering our current thinking and strategies around: short term risks, long term risks, and capital market changes.
How has the debt capital market changed due to COVID-19?
The agencies (Fannie and Freddie) have increased spreads, added an index floor, and are now requiring a 6-to-12-month Debt Service Reserve (DSR) depending on the tier of your loan. Fannie’s DSR is 12-months, and includes principal, interest, property taxes, and insurance (PITI). Freddie’s DSR ranges from 6-to-12-months and includes just principal and interest on the loan. The DSR is refunded to the borrower after a minimum of one quarter of stable operations after the “emergency order has been lifted.” Fannie and Freddie are not offering cash-out supplemental loans as of 2Q 2020.
How is CEP addressing these changes to the debt capital market in their underwriting?
We have added a Debt Service Reserve Impound at closing equal to the amount required by the tier of our loan; the majority of the DSR is then refunded at the end of year 1 in our pro forma. Regarding interest rate, our loans are being sized on the greater of the 10-year Treasury Yield or Agency Rate Floor (70bps to 90bps) plus the high-end of the agency’s stated spread range, plus a cushion of an additional 20bps. CEP has never underwritten supplemental loans, so our model has not changed in this regard. If you would like to ask us additional questions on our underwriting during this time, please Contact Us.
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