New York-based alternative lender Bravo Capital is seeing more sponsors express interest in and execute loans insured by the Department of Housing and Urban Development this year due to rising interest rates and a volatile lending market.
HUD loans are gaining traction in part because they offer some of the lowest interest rates in the market today and, as fixed-rate loans, also eliminate interest rate volatility, noted Bravo founder Aaron Krawitz.
“We are in a time when certainty of execution and reliability is everything,” Krawitz told Real Estate Capital USA. “We’re the most certain [execution], and sponsors can count on us and we will always be there at the closing table.“
The firm offers several commercial real estate loan products, including bridge-to-HUD loans, HUD/FHA financings, preferred equity and mezzanine debt. Within HUD, the firm offers a variety of different types of loans, Krawitz said.
Historically, HUD loans were used to refinance maturing loans on a long-term basis. The pitch today, however, has changed, Krawitz noted. Bravo Capital is now finding that more sponsors are using HUD for ground-up development projects.
Another factor drawing sponsors toward HUD loans is the ability to have a relatively lower debt-service coverage ratio. “I think the critical piece that most people miss is that with many agency financings you are [entering] into a 1.25 DSCR over a 30-year term. With HUD, the DSCR is 1.176, over a 35-year term – which inherently makes it better,” he explained.
While the spread differential between a HUD loan and a non-HUD loan varies by property type and asset class, they typically offer significant loan proceeds and cash out financing options. The savings this can present for the borrower can be 50 to 75 bps. “These very significant proceeds are differential for sponsors,” said Krawitz.
New approach
In today’s environment, real estate debt market players are searching for two things: new relationships and more creativity.
“Today, the market climate is [creating a situation where a firm] has a lender, who has been there for [them] for 10 years, and they’re not there anymore. So they need a new lender,” said Krawitz.
Lenders and borrowers are also trying to find out who has capital, who is reliable, where are the best new lending relationships, and groups that have recently raised funds. Having a lender that is not only a direct lender, but who can also assist from an advisory perspective is increasingly critical, he noted.
“The landscape is so volatile – it’s almost like the video game is on a hard mode right now for developers who are used to playing on the easy level, and just to understand certain features, whether it’s of their HUD product or their general lending product from an advisory perspective.”
Firms have to be especially thoughtful when it comes to concepts like early rate lock; customizing a prepayment penalty; and more optionality.
“A [business] might not know what their long-term game plan is in this type of market so they might need more flexibility to pivot.”
Other considerations include customizing a bridge loan to avoid a minimum hold period; or taking out a high yielding construction loan earlier without needing to meet a DSCR requirement.
“[Market participants are] in need of more creativity, somebody who is not just a direct lender, but a good listener who can figure out what the lender and its investors need to be protected and to be properly collateralized.”
Bravo Capital sees few lenders with the institutional type of pedigree capable to execute this in-house financing with their own funds that can also manage and execute with a regulated HUD lender on permanent financings.
“Think of it as a triple play,” said Krawtz. “We are able to finance with our bridge vehicle and on the same property add a mezzanine piece to go higher leverage, and on the same property then execute a HUD financing.”
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