by Dan Rafter
The multi-family market remains a strong one in the Midwest, with new projects rising in markets from Minneapolis to Chicago to St. Louis. But what do developers need to do today to receive funding for their new apartment projects?
Midwest Real Estate News recently spoke to Mike Jehle, vice president at Arbor Commercial Mortgage, about the steps lenders need to take to qualify for financing for their new apartment projects today. Jehle understands the Midwest market, originating Fannie Mae, FHA, CMBS, bridge, mezzanine and preferred equity transactions in the Michigan, Illinois and Indiana areas.
Midwest Real Estate News: There are plenty of developers today looking for financing for multi-family projects. What do they need to show you to qualify for that financing?
Mike Jehle: Certainty we take a close look at the experience of the borrower. We look at the borrower’s apartment-management experience. That requires that we look at some of his other properties to see how they are performing. Next on the list, is the liquidity of the borrower, the borrower’s staying power. We look at the borrower’s ability to write us a check if the property does not perform as we anticipated for any number of reasons that we can’t foresee now.
MREN: What other factors do you consider?
Jehle: We also have to look at the character of the borrower. What kind of individual are we dealing with? Has he been someone who has paid his bills on time? Has he made his mortgage payments with other lenders throughout the years? We look at the credit scores and credit references, too. We will look at a borrower’s net worth. That gives us an idea about the borrower’s ability to pay if something unforeseen happens. Lastly we look at the collateral, the actual real estate we are lending on. We look at is location in the market, its condition, its clientele or its tenant base. We look at its historical operations.
MREN: How has this process changes in recent years? Or has it?
Jehle: The thing that has changed more than anything is that our properties seem to be performing much better than they were 24 months ago. If anything it is probably a little easier to borrow money today than it was two or three years ago. Because of that, we have much more competition. Rates are falling. Competitors are tripping over themselves to get loans. Because markets are so strong in the apartment field, we can usually find a way to make the loan. That is a significant change.
MREN: Is the multi-family market in the Midwest still strong?
Jehle: The market remains strong: Buyers all over the country are looking at the Midwest. That is forcing the compression of cap rates. It’s to the point that we are in the 7-percent range in the Midwest. In some markets cap rates are even less than 7 percent. If you are in Chicago and Ann Arbor, you will see less than 7 percent in cap rate. There is a lot of money that is trying to buy apartments right now. I think if anything, a lender has to be cautious of these cap rates being too low and values getting too high. For the most part, we base our decision to lend on the value of a property and its cash flow. Through historical analysis we can confirm whether the cash flow is there to support the debt we are providing.
MREN: Are there any markets in the Midwest that are particularly strong when it comes to multi-family activity?
Jehle: There are some very active markets. Kansas City is strong and active. Minneapolis, Chicago and Columbus are strong, too. To a lesser degree, we are seeing more activity in Detroit and Indianapolis,. The tertiary markets throughout Wisconsin are strong, too. Milwaukee is strong. We have not had a lot of building in the Midwest during the last six to seven years. The existing stock has been pretty well filled. We are now seeing strong rent increases. Rents are getting too high. It’s becoming a problem. Renters who want to live in downtown areas can’t because the rents are too high. This is a real problem. Four or five years ago, no one would have foreseen this. They wouldn’t have believed it.