Reflecting on the multifamily finance environment for 2019 — it’s been fairly smooth sailing. Earlier this year, 10 year full-leverage multifamily interest rates were heading annoyingly close to 4.50% with capitalization rates in strong markets dipping below debt constants. Later in the year, as there was some indication of U.S. economic weakness, the Treasury yield curve inverted, reducing long-term Treasury yields. As we reached the 4th quarter, Fannie Mae and Freddie Mac loan originations earmarked for 2020 were no longer competing with 2019 volume cap constraints, and multifamily agency spreads dropped, bringing 10 year fixed rates back below 4.00%.
As you navigate your multifamily business into 2020, we invite you to think about three financing considerations: Necessity, Expectancy, and Opportunity.
Naturally, Necessity is bred by a maturity date. Many borrowers who have loans maturing in 2020 may have already refinanced or jumped on the refinance bandwagon. Some borrowers may be waiting until their agency yield maintenance periods expire and the prepayment penalty transitions to 1% or 0%, prior to loan maturity. Regardless, any multifamily debt refinance should be commenced at least 6 months prior to loan maturity, and don’t forget to provide your lender with at least 60 days written payoff notice if possible, even though the existing note may require only 30 days advance notification. And if you’re retiring a HUD multifamily loan, make certain your lender files the HUD form 9807 on a timely basis before your closing date.
The Necessity factor also suggests speaking with your accountant and attorney if you need to reposition your multifamily ownership positions for estate planning purposes. Now is the time to be checking on maturing loans as far out as 2023 to create near term Opportunities out of future Necessities. One other Necessity of note may be those properties that are generating the dreaded taxable income. If a property is deep into principal amortization, it may be time to reset the debt to re-create a taxable loss.
Expectancy is the crystal ball ingredient. If you have any certainty for 2020 as to who is going to win the presidential election, if the Fed is going to raise or lower interest rates, and whether Fannie Mae and Freddie Mac are going to privatize, then please give us a friendly shout out. When economic and political environments are changing rapidly, what occurs is that favorable borrowing environments can appear and disappear rapidly, which means that your capacity to manage your multifamily assets and liabilities may depend on how quickly you plan for and execute your investment strategies.
When Treasury yields and spreads begin bouncing around, waiting on a lender to lock an interest rate, waiting for a buyer to waive off on contingencies, and waiting for a city council to approve a zoning variance, can seem like an eternity, and add unexpected costs to transactions. And if your multifamily loan is debt-service constrained, which is often the case in a low cap rate environment, a move as small as 25 basis points in Treasury yields or spreads can pummel your equity yields.
So what is the best way to manage Expectancy into 2020? Consult with your partners, property management and business advisors, and initiate action on asset and liability management that makes sense going into next year.
Opportunities for repositioning your multifamily portfolio in 2020 can range from equity distributions obtained from refinances or supplement loans, entering or exiting chosen markets, 1031 exchanges, refinancing to generate a war chest for acquisitions, and examining yield maintenance loans in your portfolio to see if the penalty amounts are amortizing more quickly due to a flat or inverted yield curve. Also, what if Fannie Mae and Freddie Mac begin to hit a volume cap ceiling for market rate properties in 2020? Will financing options and flexibility remain the same throughout the entire year?
As we enter the holiday season, JS MultiCapital would like to thank all of our clients, friends, advisors and families, who have supported us for almost 28 years. Our Necessity, Expectancy, and Opportunity for 2020 are to always focus on improving our knowledge, skills, and performance.