The Lender Letter 06

The Debt Issue

Hello and welcome back for another monthly Lender Letter issue.

Last month, I decided to take on a research project covering the multifamily debt landscape in the local San Diego County market. Utilizing free, public data provided from title companies and other sources, I parsed through all multifamily debt originations from Q1 2024 and have organized them in a way which readers may find valuable.

The debt landscape at this time has been dominated by the refinance business. In Q1, ~$88.3mm of sale financings occurred across 16 loans, while $157.4mm of refinances occurred across 39 loans. Not only were refinances higher in terms of total dollars and units, but also vastly higher in terms of loan per unit. Recently purchased property loans were most common in the $100-$150k/unit range, while refinances were skewed toward $250-$300k/unit.

For recently-purchased properties, an interesting phenomenon occurred. Roughly 52% were refinanced at under 50% LTV, while a surprising number of properties were financed at between 70-75% of purchase price. This is surprising given market cap rates in the mid-4’s and bank rates in the mid-6’s (negative leverage). Even more interesting is that the highest leverage on purchases, at 93% and 109% of purchase price, were originated by banks. It is not clear how much of these loans were funded at closing vs reserves, but these did not appear to be cross-collateralized based on a review of the recorded DOTs.

Banks provided the largest number of loans during the period at 27, followed by private parties, private lenders, and credit unions. Only one recorded seller financing note was originated during the period, which may be surprising given the economic backdrop.

The following table which shows lender types and how they compare across different levels of debt per unit provided. The two large spikes seen below are the result of a $41mm loan and a $78mm loan, respectively.

It seems that realistic stabilized bank debt on SD multifamily assets is likely to be around $200k-250k/unit. This is the amount of debt a unit can support at 1.20 DSCR, 30-year amortization, ~35% expense ratio, average county-wide cap rate, and average rent of ~$2,400/month.

If you would like to trade notes on the market or learn more about who’s currently active in financing multifamily real estate in San Diego County, please reach out.