Lenders and Borrowers Emphasize Creativity in Multifamily Financing

​Based in Wilmette, IL, John Hofmann guides the Commercial Mortgage Group at KeyBank Real Estate Capital in Chicago. Over his career, John Hofmann has become well-versed in multifamily borrowing and capital markets.

In the wake of the Global Financial Crisis, multifamily lending became a centerpiece in the commercial real estate market with its perceived smaller risks. However, it still has vulnerabilities. The higher cost of securing bridge loans became evident in the shift upward since March 2022. The secured overnight financing rate (SOFR) stood at 0.5 percent, with spreads between 150 and 250 basis points and an all-in rate of about three percent. By September 2023, SOFR had jumped above five percent. With spreads ranging from 150 to 250 basis points, the overall interest rate stood at nine percent.

As bridge debt matures, borrowers confront combinations of higher price-rate caps and larger monthly debt service payments. Lenders sought to mitigate the situation by requiring that borrowers hedge against interest rate fluctuations by taking out rate caps on loans. However, the cap is linked with the benchmark federal funds rate, which has elevated costs.

Lenders often have new rate cap requirements that borrowers must meet when exercising extension options, forcing them to secure additional capital. Lower property values, down 15-20 percent from the peak, and higher interest rates mean refinancing requires new capital. Strategies for addressing the conundrum include working with equity investors to obtain preferred equity, structured as its own high-interest loan, and engaging with lenders in loan workouts and restructuring. The latter helps avoid sale or disposition and temporarily reduces interest rates, extends maturities, and modifies loan terms.

John Hofmann, Wilmette

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