Assets, Sponsors, and Babies – Oh My!
As financiers of multifamily properties, it would be easy to think of our buildings as only bricks and mortar, but to the tenants, they’re home, and to the borrowers/sponsors, they’re the realization of a dream. The subject property in any deal is more than a “subject” or a “property” – it’s truly an “asset.” It’s an asset that will ensure that sponsors can provide a life for their kids that is better than what they experienced. It’s an asset to the community, which in many cases is home to our sponsor. Almost all Freddie Mac Small Balance Loans (SBL) sponsors live within 100 miles of their asset. There is an unmistakable connection between an individual sponsor and the SBL properties they acquire. The following story illustrates this point.
I was recently in Bridgeport, Connecticut with Mark, a repeat sponsor for SBL. The two of us were meeting with several of his associates on a group of apartment buildings he was under contract to acquire through Freddie Mac SBL financing. As the sponsor, Mark is intimately involved in the details of the underwriting – including the inspection.
As a little bit of background, the SBL world focuses on multifamily property loans between one and six million dollars, and 99.37 percent of our deals have an individual, or a “warm body,” signing the guaranty — Mark in this case. Although the rest of the industry seems to have large entities as guarantors as real estate companies continue to consolidate and get larger, SBL still attracts individual and small firm borrowers. And that, oddly enough, can sometimes equate to less risk. The historical CMBS cumulative default rate for loans with collateral secured by properties with less than 50 units is lower than properties with more than 50 units1,2. That could be because sponsors of properties with less than 50 units stick with their assets longer when times get tough. As such, Freddie Mac’s SBL Program has a default ratio of .04 percent or 1 loan out over 4,000 funded loans.
Back in Bridgeport, we were inspecting our third property of the morning when Mark received a phone call. As a usually even-tempered individual, it was obvious that something was a little off-tilt when he hung up the phone. “Everything okay?” I asked. Mark paused and said, “Well, my wife is in labor.” After I congratulated him on the great news, I expected Mark to cut things short and head straight to the hospital. Instead, Mark proposed that we finish touring units at the current property and that we squeeze in one more nearby inspection before he left.
Mark was thrilled about the new addition to his family, but he was also clear that adding these buildings to his portfolio was part of how he was securing the future for his growing family. We did inspect that one additional asset, but before he left, Mark made me swear I would never tell his wife. I am sure Mark’s secret is safe with you as well.
The key to SBL is people and assets, and sponsors who treat both like part of their family — sometimes to their wife’s objection.
1(Scott D. Anthony, March 2016)
2(Chris van Heerden, May 5, 2016)
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