Over the past decade, insurance companies have become more active on the construction side of lending in efforts to (1) earn more yield on their loan dollars and (2) provide early opportunities for permanent loan business on newly-built, high quality stabilized product. As a result, many have developed non-recourse construction and construction-to-perm lending programs. Currently, 8-10 of our insurance company relationships are active in this space, especially on deals with loan sizes greater than $25M.
With the volatility brought by the COVID pandemic, many insurance companies temporarily halted their construction or construction-to-perm lending programs in efforts to minimize risk. However, markets have since stabilized and many lenders have re-entered the scene with an appetite for opportunities with strong fundamentals. Lenders are currently pursuing construction loans for the following property types: multifamily, industrial, and office properties (with significant pre-leasing or build-to-suits).
Life companies have been successful in implementing their construction / construction-to-perm loan programs, even during the current pandemic, and have served as an attractive alternative to the traditional bank options. We’ve worked on several recent construction loans with both our key life company and banking relationships, and here’s how the two categories of lenders compare right now:
On the life company side, there are some notable exceptions to the general terms shown above:
- Some groups are quoting coupons in the 3.25%-3.75% range, specifically for multifamily and industrial with some pre-leasing activity.
- Some lenders are offering an interest only period even after the loan converts to permanent status.
- A select group of life companies has an appetite for 5-year floating rate construction loans. These are typically sized to 60% LTC, are non-recourse (with a completion guaranty) and are priced based on a spread over LIBOR.
Banks are also able to occasionally offer more attractive terms to those listed above, including:
- Some banks have been able to approve 75% LTC requests on certain deal profiles.
- Banks are able to pursue smaller deal sizes <$25M.
- Banks can offer minimal prepayment penalties to provide an investor with more flexibility during the permanent portion of the loan.
Depending on a borrower’s investment strategy, banks are a great option for higher leverage requests and shorter investment horizons. They are typically able to accommodate greater risk profiles (spec development) with the necessary structure in place and can lend on smaller balance loans that other capital sources can’t.
Alternatively, the life company route can be more
appropriate for borrowers with larger deals that are looking to build, lease up
and hold the property long term once its stabilized. This option allows for
construction financing to be obtained while taking refinancing risk off the
table and minimizing on-going covenant monitoring and reporting after
construction is complete.
Our longstanding relationships with both life companies and
local/regional banks allows Essex to create competition across multiple capital
sources to ensure the best execution for its borrowers that are pursuing
construction-to-perm loan options.