Hunt Mortgage’s Besharaty: Small-balance lending reaches underserved markets
Q & A
Mark Besharaty, Director, Small Balance CRE Lending Group at Hunt Mortgage Group
Mark Besharaty is director of the small balance CRE lending group at Hunt Mortgage Group, a wholly-owned subsidiary of Hunt Companies. Besharaty leads a team of originators and analysts in the Western region of the United States that is responsible for the origination of small-balance loans for commercial real estate and multifamily housing.
Small-balance loans play an important role in the multifamily market, facilitating the purchase of non-luxury apartment buildings that primarily serve rural or underserved markets. Mark Besharaty, director of Hunt Mortgage Group’s small balance commercial real estate lending group, says small-balance loans are typically between $1 million and $10 million, although different agencies have different parameters. Fannie Mae, for example, considers loans up to $3 million ($5 million in some cases) to be small balance, while Freddie Mac sets the ceiling for small-balance loans at $7.5 million.
We spoke with Besharaty about the state of the small-balance lending industry, and the importance of the programs offered by Fannie Mae and Freddie Mac to help provide small-balance loans in underserved areas.
What are the characteristics of small-balance loans?
The main characteristics of the small-balance deal versus a larger transaction — like a $50 million or $100 million deal — is that they are supposed to be a more cookie-cutter type of loan; they’re supposed to be a little bit easier to get done. The loan documents are, in general, standardized and not customizable, versus the larger transactions where people can change a paragraph … [here and there], and every deal has different parameters. Small-balance loans are supposed to be more streamlined. For example, the appraisal requirements and the reporting requirements are less onerous than they are for larger transactions. There’s still a lot that goes into it, but not as much as what goes into larger-balance transactions.
What do borrowers need to apply for a small-balance loan?
Let’s say somebody owns an apartment building. They would need to give us what’s called a rent roll (a detailed list of tenants on a property, outlining the square footage and area leased, amount paid in rent, lease terms, etc.), and they would give us the last two years of their profit-and-loss statements for the property. They would also need to give us a personal financial statement and a schedule of real estate owned, so we can see what kind of strength they have financially and what kind of experience they have owning an apartment building or multifamily property.
In addition, somebody who’s buying a property would also need to give us what’s called the offering memorandum, or the listing of the property from the real estate agent, along with a purchase contract. There’s a lot more documentation needed, but those are the items you need to really tell a lender that you’re ready to get going.
What role does small-balance lending play in the multifamily market?
The multifamily lending market across the U.S. is very fragmented. By that, I mean that every region has its own smaller banks that are doing small-balance loans, and some of the larger regions — places like Los Angeles, San Francisco and New York — have a lot of banks doing this, both small and large, because they’re big metropolises.
But there’s no standardization across the entire country other than the Fannie Mae and Freddie Mac programs. Fannie Mae and Freddie Mac have a mandate from Congress to provide affordable housing across the United States. They’re going into communities where maybe the larger banks can’t lend. So, Fannie and Freddie are truly nationwide lenders that cover the entire gamut, and they will go into some rural communities, smaller communities, and other communities where banks — regardless of the great strength of the property or the borrower — just cannot lend or will not lend. So that’s why this program by Fannie Mae and Freddie Mac has been so well received on the small-balance end of the multifamily lending spectrum.
What’s ahead for small-balance lending in the coming year?
You don’t have to be a Nostradamus to know that the [interest] rates are going up. When the rates go up, everything gets affected. On the multifamily loan side, your payments are higher so you qualify for less loans, which means you’re reducing the loan amount. It will put pressure on the sales price and the way appraisers value the properties.
It’s based on a capitalization rate; as the rates go up, those cap rates go up, which means the value of the properties comes down. So rising interest rates will put pressure on both values and loan amounts across the spectrum for multifamily lending. Rising interest rates create problems for asset prices, and those prices will come down.
Additionally, the multifamily sector has been a darling of the commercial real estate industry forever. It’s been the No. 1 category every year. However, going forward there’s been a lot of building going on, especially in the major markets where there’s been a lack of housing, such as in San Francisco, LA, Seattle, New York, Miami … All these places have had a lot of construction going on, so what happens is there’s a lot of product coming online and you have to ask, is there enough supply to satisfy all this huge demand that’s coming on?
That’s a factor that will especially affect what we call the Class A market. Now, small balance is typically not Class A. Small balance is more smaller apartments, not these big, gorgeous, brand-new high-rises with fitness centers and all that. They’re just small apartment buildings with maybe 10-50 units, with a pool or a club house, maybe. That’s considered a B or C asset quality. The developers are building on the A side, so that’s the side of the multifamily [market] that I think will be affected.
Will multifamily continue to be the “darling” of commercial real estate?
The asset class that’s going to probably … overtake multifamily and become the darling, if it’s not already, is industrial. Industrial was not doing that great for a long time, but ever since the advent of Amazon, of ordering online, all these things are happening where people are not necessarily going to malls, they’re shopping from the comfort of their homes. These companies have to warehouse their goods, and developers are going to cater to the industrial market more and more, and those values are going up. There’s substantial demand that’s going to continue building with online purchasing and online retail transactions as opposed to brick and mortar. Not that that’s necessarily going to affect multifamily, but I think some money from multifamily will be diverted into industrial.