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 Contents MAY/JUNE 2010

DEPARTMENTS
EDITOR’S LETTER 4

GUEST COMMENTARY
› High Gen Y unemployment rates
threaten to delay the apartment
market recovery. 6

UPFRONT
› Multifamily financiers struggle to
define value; MBA ranks top lenders
of 2009; REITs are poised to break
ground; and other industry news. 9

CAPITAL MARKETS
› Fannie Mae, Freddie Mac, and others
re-introduce mezz loan programs
aimed at containing delinquencies. 13
› Life insurance companies return to
the multifamily financing scene, giving
the GSEs a run for their money. 16

BOTTOM LINE
› REITs pursue sustainable initiatives
despite recessionary pressures and
18 limited guarantees on ROI. 31

REGIONAL MARKETS
FEATURES › Both job losses and wage freezes
conspired to make 2009 a tough year

Stuck in Limbo
Since entering conservatorship, Fannie Mae and Freddie Mac have
18 for the Twin Cities’ apartment market,
but the numbers are slowly ticking
upward. 34
been operating in a sort of purgatory. Now, the firms await their fate, › A lack of supply coupled with
On the cover and here: Richard Clark

as their future slowly comes into focus. By Jerry Ascierto positive job growth leaves St. Louis
poised to see increases in both
Partnering for Profits 26
With debt markets still tight, savvy players form joint ventures to
effective rents and occupancies. 36

PARTING SHOTS
improve access to capital. Here are three partnerships that are changing › In the nick of time, Shea Properties
the way multifamily investors do business. By Brad Berton refinances a San Jose, Calif., project
with a $138.9 million loan under
Freddie Mac’s Capital Markets
Execution (CME) program. 40

APARTMENT FINANCE TODAY • MAY/JUNE 2010 1

News
Industry Sees
FHA Slowdown
JEFF GRAY THOUGHT his project was a home run. He wanted to
build a workforce deal amid luxury apartments in the shadows of
a Houston employment engine—the Texas Medical Center. And he
had a REIT, Houston-based Camden Property Trust, as a sponsor.
But when the market turned in 2007, he put on the brakes. Then,
seeing great demand potential for 2012 and beyond, Gray revisited
doing the deal under the FHA 221(d)(4) program in 2009.
“We thought why don’t we try (d)(4) at a much more modest le-
verage than it calls for,” says Gray, founder and president of Hous-
ton-based Gracyco. “We were going to do a much more conventional
loan—25 percent of the total cost of capital and a 1.3x debt service
coverage ratio.”
So, last fall, with what Gray characterized as encouragement
from the FHA, he submitted his application. And, mid-April, he
received an answer. No.
“It basically said that in spite of the fact that my sponsorship
was outstanding with Camden, and I was at a leverage point that
they never see, I was denied,” he says. “It tripped a signal to me that
although the program might still be alive on paper, in any practical
application, it was dead.”
While HUD disagrees with Gray’s assertion that the program
is dead, it has become much harder to secure an FHA construc-
tion loan. In fact, the fatality rate on new 221(d)(4) applications
is around 43 percent. The agency is giving much more scrutiny
to market studies to determine whether it has an appetite for a
project, according to FHA lenders.
The increased scrutiny, combined with an overworked, under-
staffed agency, has conspired to slow things down considerably.
“HUD has always had a great financing product and a terrible
delivery system,” says Tom Booher, who leads the multifamily plat-
form for Pittsburgh-based PNC Real Estate, which originated
$639 million in FHA debt last year. “Unfortunately, its delivery
process is even more problematic at the moment given that their
product is so attractive.”
KWA Construction, a builder out of Addison, Texas, has used
the (d)(4) program in the past, starting a project in Ft. Worth,
Texas, last December. KWA is also working with another owner on
getting a tax credit deal in South Dallas through the program. Both
of those deals took longer than expected. And one deal, a senior
housing development in Plano, Texas, is still in limbo.
Likewise, Birmingham, Ala.-based Doster Construction Co. will
submit one application in May and is working on seven additional
deals with other lenders and developers who are waiting on invita-
tions. John Rooney, business development manager at Doster,
attributes the backlog to “too many developers chasing the same
markets, or markets that are overbuilt and have no room for added
capacity in the near term.”—Jerry Ascierto, Les Shaver
2 APARTMENT FINANCE TODAY • MAY/JUNE 2010
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Editor’s Letter
Which Way Out?
When you lose your sense of direction, your hardest job suddenly becomes
finding your way back.
their conservatorship and
emerge on the other side of
the Great Recession seem as
though they were concocted
by a few men smoking
cigars in some dark bar in
the throws of Capitol Hill
who have no insight into
the day-to-day operations
of these giants. Even though
the agencies themselves
are relatively stable finan-
cially, their futures are murky
because none of the plans
put forth by Congress have
an architecture for guiding
these behemoth institutions
from point A to point B.
There are those out there
who believe that the GSEs
should be fully privatized—
after all, it was their compet-
ing loyalties to the private
I
’m a bit of a nomad these days, wandering the country, suit- and public sectors that was
case in hand, ready for any adventure. partially responsible for pre-
Why? Because I recently began the process of transition- cipitating their government
ing to our San Francisco office. Just don’t ask me where takeover. And there are just
I’m living or how I’m liking it. Because I don’t really know yet. I as many folks who believe
moved out of my Washington, D.C., apartment and headed West a public affordable housing
to get settled there about, oh, five months ago. Since then, I have focus should be the limit
spent fewer than 30 days in the Bay Area because of my hectic of their reach. Rep. Barney
travel schedule. Luckily, I have a sister who lives out there and has Frank (D-Mass.) recently
been kind enough to let me claim a corner of her couch. stirred up even more uncer-
The trouble is, it’s a bit like I’m in limbo—living out of boxes, tainty when he proclaimed
with my things in storage across the country, and feeling unsure
about which way to turn. In that, I’m much like Fannie Mae and
Freddie Mac, which seem even more clueless about where they
will land (and when) than I am. So naturally, I was immediately
drawn to reading this month’s feature about the future of the
government-sponsored entities (GSEs) with great interest. (See
“Stuck in Limbo” by Jerry Ascierto on page 18.) Shabnam Mogharabi, Editor
If you ask me, the GSEs seem even more clueless about where smogharabi@hanleywood.com
they will land (and when) than I am. The number of solutions
being tossed about to help Fannie Mae and Freddie Mac survive
4 APARTMENT FINANCE TODAY • MAY/JUNE 2010
that Fannie and Freddie in
their current forms should
be abolished altogether. Not
that that’s necessarily the
wrong move—after all, having
80 percent of multifamily
essentially backed by only two
financial institutions (now
so closely related) is a little
frightening.
It seems to me that no
one knows what to do next.
Which is why our coverage
this month focuses on the
few things we do seem to
know about the future of
the GSEs: that there will be
more than two entities and
that the future entities must
find a way to avoid politi-
cal influence (if that’s even
possible).
But beyond that, clar-
ity seems to be overrated
when it comes to the future
of Fannie Mae and Fred-
die Mac. Outcomes are
unknown. The path forward
will likely be rocky and
difficult to navigate and full
of unforeseen roadbumps.
Hmm … sounds kind of like
the hassles of a cross-
country move. ■
Forrest MacCormack
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Guest Commentary
Waiting on Gen Y
Will high youth unemployment rates delay the apartment recovery?
By Mark Obrinsky
THINGS ARE LOOKING UP. Despite
today’s large excess inventory of apart-
ments, the upcoming wave of Gen Y rent-
ers, coupled with the dearth of new con-
struction in recent years, is expected to
shift the balance over the next few years
enough to get effective rent growth back
to the plus column. Perhaps strongly so.
But the recovery could be delayed by
the fact that this “Great Recession”—the
longest-lived recession since the 1930s—
has been disproportionately tougher on
younger workers. Apartment demand
is based on a foundation of jobs, and
continued high unemployment rates for
younger people, who are the most likely to
rent, could temper the strong demograph-
ics the industry is counting on. After all,
younger workers are generally hit harder
by recessions than older workers, and that
has been the case even more so in the cur-
rent downturn.
The Employment Picture
The overall national unemployment
rate rose to a high of 10.1 percent in
October 2009, a full 5.1 percentage points
higher than December 2007. Though
6 APARTMENT FINANCE TODAY • MAY/JUNE 2010
this is not the postwar high unemploy-
ment figure—that would be 10.8 percent
reached during the 1981-82 recession—it
is the greatest increase in the unemploy-
ment rate since World War II.
The employment picture for the
16- to 24-year-old demographic is uni-
formly worse. Their unemployment rate
increased by 7.4 percentage points from
December 2007, reaching 19.2 percent in
October 2009—a postwar record. This
demographic has lost 2.8 million jobs
since December 2007. A telling statistic:
They account for one-third of the total job
loss even though young workers made up
less than one-seventh of those with jobs at
the peak. This dramatic 14.1 percent drop
in youth employment [since December
2007] is more than double the economy’s
overall employment decline of 5.7 percent.
“[The Gen Y] unemployment rate increased by
7.4 percentage points from December 2007, reaching
19.2 percent in October 2009—a postwar record.”
Furthermore, young workers are
more likely to have been unemployed
for a longer amount of time. Almost one
in five workers who has been unem-
ployed more than 26 weeks is between
the ages of 16 and 24—a disproportion-
ately large share.
The Shape of the Recovery
In the past, steep job losses have often
been followed by rapid job growth when
the economy rebounds—the so-called
“V-shaped” recovery in which the econ-
omy rebounds as quickly as it dropped.
This time, however, a much slower, more
gradual “U-shaped” recovery seems more
likely. (Let’s hope we avoid the dreaded
“W-shaped” recovery, such as followed
the Great Depression.) Why? For one
thing, that has been the pattern in the two
most recent recessions, and it’s not obvious
that anything important has changed.
Beyond that, there is considerable evi-
dence that recoveries following serious
financial crises are slower and weaker
than recoveries from more typical cycli-
cal downturns of the business cycle.
Since the size and scope of the current
downturn resulted from a global finan-
cial crisis rather than a cyclical contrac-
tion, a slow, weak recovery would seem
to be the most likely path ahead. Yet, the
experience of the previous two economic
recoveries would suggest modest reason
for optimism. The 16- to 24-year-old
bracket got jobs at a rate slightly faster
than the average.
The bottom line: It’s anyone’s guess as
to how quickly Gen Yers will find jobs. In
an “employers’ market,” it is possible that
younger, less experienced applicants will
be at a disadvantage because they’ll be
competing with more experienced employ-
ees. Alternatively, the fact that younger
workers tend to cost employers less in
wages and, especially, in benefits may give
them the edge when employers look to
expand their payrolls again.
If the job market can just do its part,
today’s excess inventory could be worked
off quickly. Economic recovery, demo-
graphic trends, and the lack of new supply
should reverse the current supply-demand
imbalance. Even if the recovery turns out
to be slow, that would only postpone—not
cancel—the positive demographic forces. ■
MARK OBRINSKY is vice president of
research and chief economist for the National
Multi Housing Council in Washington, D.C.
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 Upfront N EWS, TRENDS, & PEOPLE

NEWS HITS & MISSES

Struggling to Define Value MBA Ranks Top

MULTIFAMILY FINANCIERS continue
to struggle to define value and get a handle
on the strength of local markets.
Often, today’s cap rates can’t be taken
at face value, said panelists at the 2010
Apartment Finance Today Conference.
“I’ve seen a lot of secondary and
tertiary market activity where an institu-
tional investor takes over and sells
the property with seller financ-
ing, with terms much lower
than you’d find anywhere else
and higher leverage,” said
Dave Valger, director for New
York-based RCG Longview. “So the
cap rates adjust. At the end of the day,
it’s not really appropriate to just look
at cap rates.”
But a more inscrutable issue is
the shadow market of single-family
rentals. Reliable data on this segment
Survey Says: More Multifamily
is difficult to come by, yet lenders often
require a shadow market analysis before
they get comfortable with a deal.
RCG Longview has come up with a
strategy when trying to underwrite condo
deals: identifying the top six brokers in a
market, collecting the brokers’ projected
inventories, and then using third-party re-
search to keep trends in check.
This wrangling over
value has given an edge
to local investors. “It
probably creates the
most opportunity for
those looking locally, who
know the product, know
the fundamentals, and know
the market really well,” said
David Rifkind, a principal with
Los Angeles-based George Smith
Partners. —Jerry Ascierto
Lenders of 2009
Wells Fargo, PNC Real
Estate, and Deutsche Bank
were the top three multifamily
lenders in 2009, according to
the New York-based Mortgage
Bankers Association’s annual
rankings.
The rankings are colored by
consolidation and the reces-
sion. For instance, Wells Fargo
was the fourth-largest lender
in 2008, with $6.1 billion in
multifamily originations, while
Wachovia was the second-larg-
est at $6.8 billion. The combi-
nation of the two firms under
the Wells Fargo name vaulted
the company to the top spot in
2009, at $7.5 billion, knocking
PNC down to second.
Capmark, which went
bankrupt and was sold last year,
was knocked down from third
place in 2008 to sixth in 2009.
But Capmark’s new incarnation,
Berkadia Commercial Mortgage,
came in at No. 21, originating

Firms Outsource IT $308 million in just a handful of

weeks at the end of the year.
PNC retained the top spot
SPENDING ON OUTSOURCING nearly doubled last year, among Fannie Mae lenders,
comprising 23.6 percent of apartment IT budgets, compared originating more than $3 billion
to only 12.6 percent in 2008, according to a recent report from last year, followed by Deutsche
the Washington, D.C.-based National Multi Housing Council Bank at $2.2 billion, and Wells
(NMHC). Fargo at $2 billion. On the
According to the study, Information Technology Invest- Freddie Mac side, Capmark fell
ment Benchmarking Survey: A 2008-2009 Comparison, from first in 2008 to fourth in
the move to outsource tech functions was most prominent 2009, replaced by CBRE Capi-
among smaller multifamily firms (those with less than 200 tal Markets, which originated
employees), which spend an average of 42.4 percent of their $2.6 billion in Freddie loans
technology budgets on third-party IT outsourcing, compared last year. Wells Fargo was the
to less than 1 percent spent by firms with more than 1,000 second-largest Freddie lender
employees. at $2.3 billion, followed by
According to NMHC director of technology Lauren Dwyer, firms participating in the Deutsche Bank at $2.2 billion.
survey were generally looking to outsource internal, employee-facing systems rather than Capmark also lost its top
customer-centric software and services. spot among FHA lenders last
“Outsourcing leaned more towards day-to-day IT operations such as help desk sup- year; that spot was claimed by
port and other internal operations rather than software development,” Dwyer says. Other Prudential’s $1.2 billion in origi-
traditionally internal functions, such as call centers and lead management activities, are also nations. Wells Fargo landed the
increasingly being moved to a third-party provider. second spot with $816 million
iStock

Additionally, the survey finds that IT spending as a percentage of gross revenue increased 250 in FHA loans, while PNC came
basis points last year to 0.95 percent of gross revenue, up from 0.7 percent in 2008. —Chris Wood in third at $639 million. —J.A.

APARTMENT FINANCE TODAY • MAY/JUNE 2010 9

Upfront
NEWS
REITs Begin to Break Ground
PUBLIC REITS ARE POISED to break
ground on as much as $1 billion in new
development this year in another sign of
industry confidence that fundamentals
are improving.
Last year, public REITs started just
$100 million in new apartment construc-
tion, a steep fall from the average of $1.5
billion seen annually between 2000 and
2008.
Special Ops Units to the Rescue
DAVID LYND DOESN’T THINK multi-
disciplinary, stand-out industry performers
are necessarily new to multifamily—and
definitely not new to The Lynd Co.
“As my brother and I were growing up
in the business, my father was working us
on site since we were 14 years old,” says
the COO of the San Antonio, Texas-based
apartment operator. “We picked up trash;
we mowed the lawns; we hung sheet rock;
we made units ready—you name it, we did
it. What we gained was priceless: a 360-de-
gree view of the multifamily business.”
Lynd is seeking to distill the same insti-
tutional IQ into future company executives
with the formal establishment of the Lynd
Special Ops training program: intense, el-
evated training for high-aptitude personnel
who are drilled in every facet of the apart-
ment business and trained hands-on from
groundskeepers up to asset managers.
10 APARTMENT FINANCE TODAY • MAY/JUNE 2010
N EWS, TRENDS, & PEOPLE
But multifamily REITs are
growing aggressive, issuing
guidance that they will collec-
tively begin between $600 mil-
lion and $700 million in new
projects this year. The bulk of
that figure—$400 million—
comes from Alexandria, Va.-
based AvalonBay Communities,
which plans to break ground on
seven communities this year.
Meanwhile, Chicago-based
Equity Residential, Houston-
based Camden Property Trust,
Highlands Ranch, Colo.-based
UDR, and San Francisco-based BRE
Properties may also commit to more new
development as the year goes on, which
would bring the total figure up to a whop-
ping $1 billion.
“Most REITs spent the past 12 to 18
months solidifying their balance sheets,
and they also feel more confident in
the eventual recovery,” says Andrew
“As part of the curriculum, we find a
property that needs extreme lease-up, and
we pair them off into teams at different
sites and have a competition to see who
can get the property stabilized the fastest
within a designated time frame,” Lynd says.
That exercise has been paying off. “We
recently deployed a team to a struggling
property in Atlanta and to a property acqui-
sition in Jacksonville, Fla.,” Lynd says. “In
Atlanta, we got 78 leases in one month on
one property, and in Jacksonville, we moved
a property from 53 percent occupancy to
70 percent leased in just two months.”
The Lynd Co. isn’t alone in its use of
crack leasing and maintenance outfits
for short-term tactical deployment. The
Greenwood Village, Colo.-based Laramar
Group has been finding similar success in
the use of the company’s star team, which
was recently called into duty to help stabi-
McCulloch, a senior analyst at market
research firm Newport Beach, Calif.-
based Green Street Advisors. “For any
REITs that were on the fence with certain
projects, we expect them to put the shovel
in the ground later in the year because
fundamentals in the first part of this year
have surprised people—rental demand is
firming up quicker than people expected.”
Yet, what AvalonBay is planning still
speaks to a cautious, scaled-down ap-
proach. “A lot of what AvalonBay’s doing
is mostly suburban, garden developments
in markets they’re already in, such as in
the Northeast,” McCulloch says. “It’s a
very specific product type with lower-risk
characteristics.”
One of the main attractions to building
now is the fact that developers will be
delivering units in a supply-constrained
and not-too-distant future. “They want
to be delivering when fundamentals are
really getting hot—in the 2012 period,”
McCulloch says. —J.A.
lize the Lembi portfolio of San Francisco
apartments that Laramar is managing
through special servicing.
“The star team consists of property
managers, maintenance supervisors, main-
tenance technicians, and leasing manag-
ers,” says Laramar CEO Dave Woodward.
“We have full-time floaters that take on
assignments between two weeks and
two months, and we also have star team
members who have regular full-time jobs
at a property that can be called up on short
notice for assignments.”
Woodward says establishment of the star
team has been an invaluable recruiting and
internal motivation tool. Since members can
only be attached to prestige assignments if
their current property is performing at peak
levels, members are incentivized to main-
iStock
tain high occupancy and rent rolls relative
to the Laramar portfolio. —C.W.
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 Capital Markets
TRANSACTION TRENDS
Money Talks: The
recently stabilized Villa
Siena rental community
in Fresno, Calif., received
a nearly $5 million Fannie
Mae loan from Arbor
Commercial Funding in
mid-April.
Defensive Stance
Fannie Mae, Freddie Mac, and Prudential re-introduce
loan programs aimed at containing delinquencies.
By Jerry Ascierto
MEET THE NEW MEZZ, not the same as
the old mezz.
In early 2008, when the credit crisis
was in full bloom, several capital sources
shelved their bridge and mezzanine loan
programs. And who could blame them for
that flight to safety? Stabilized assets could
find well-priced debt, sure, but transitional
assets were another story. After all, the idea
of doing a value-added rehab and raising
rents was—and remains—a hard sell.
Arbor Commercial Funding
But some capital sources are now re-
introducing these executions for different
purposes. Instead of offensive plays—help-
ing developers to build—these lenders are
positioning their programs for defensive
refis. With values down up to 40 percent
from their 2007 peak, an “equity gap” con-
REFINANCING
tinues to dog owners seeking to refinance.
In April, Fannie Mae and Freddie Mac
re-introduced their mezz loan programs,
aimed at plugging the gap in the capital
stack of overleveraged borrowers. Mean-
while, Prudential Mortgage Capital Co.
(PMCC) decided to dust off its variable-
rate bridge loan program to help newly
constructed assets achieve stabilization.
“When the credit market tightened in
late 2008, the viability of these programs,
particularly with respect to rehabilita-
tion loans, became strained,” says Manny
Menendez, vice president of product
development at Washington, D.C.-based
Fannie Mae. “For all intents and purposes,
we stopped doing mezzanine financing.
But now we see an opportunity.”
APARTMENT FINANCE TODAY • MAY/JUNE 2010 13
Fannie, Freddie Bring Mezz Back
In the space of a week in early April,
both government-sponsored enterprises
(GSEs) Fannie Mae and Freddie Mac
re-introduced their mezz programs. (Al-
though as of late April, Freddie’s program
was delayed “due to unforeseen circum-
stances,” according to the company.)
While the programs are similar, there
are some key differences. Freddie’s initia-
tive will marry a senior loan with a mez-
zanine piece provided by a third-party to
allow up to 90 percent combined loan-to-
value (LTV). Fannie’s program, meanwhile,
only goes up to 80 percent LTV. That
10 percent difference is significant, espe-
cially given that leverage is the defining
factor behind these programs. Still, most
Freddie lenders believe the average lever-
age level will be closer to 80 percent than
90 percent this year.
Another major difference is the GSEs’
partners in crime. The mezz providers
working with Freddie Mac are all large
multifamily owners, operators, or inves-
tors, enabling lenders to get multiple
quotes, fueling competition, and ultimately
driving down the interest rate on the mezz
piece. Fannie Mae, meanwhile, is partner-
ing with the original mezz provider for
its programs, RCG Longview—one of the
industry’s most prolific mezz lenders with
more than $500 million left in a $600 mil-
lion debt fund closed last year.
For Freddie, the choice of mezz
partners speaks to the most important
difference between this program and the
company’s previous High Leverage pro-
gram, which focused on acquisition/rehab
deals. Today’s mezz program is aimed at
borrowers who are in danger of losing their
properties. So by partnering with large
players, the GSE has the comfort of know-
ing that, should the borrower go under, the
mezz provider could stand in as owner.
The mezz initiative is aimed at refis
from within or outside of Freddie’s port-
folio, take-outs of existing construction
loans, and acquisitions. A minimum of
10 percent cash equity in the property is
required, and the mezz portion is backed
by that borrower’s equity. The blended
debt service coverage ratio (DSCR) is 1.05x,
though the Freddie first mortgage will not
go below 1.25x. The Freddie loan can be
either a Capital Markets Execution (CME)
Capital Markets
or portfolio execution, and the mezz piece
can be either fixed- or floating-rate.
For its part, Fannie Mae revived its DUS
Plus and CI Mezz-Mod Rehab programs,
which combine a standard mortgage with
mezz financing to achieve up to 80 percent
leverage. The GSE has updated the pro-
grams’ terms so they align with today’s DUS
underwriting parameters. Before the credit
crisis, DUS Plus provided a maximum
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14 APARTMENT FINANCE TODAY • MAY/JUNE 2010
REFINANCING
85 percent LTV, and the CI Mezz-Mod
Rehab program maxed out at 95 percent
LTV. Now, 80 percent LTV is the max for
both programs. The minimum DSCR is
1.10x combined, though Fannie said it may
go down to 1.05x in some cases.
While Fannie hadn’t closed such a
loan as of early May, it is starting to build a
pipeline of deals. “There are a lot of situa-
tions where borrowers essentially need to
northmarq.com
re-margin the loan,” says Tom Eberhardt,
director of credit risk management for
mezzanine debt at Fannie Mae. “So the
borrower is putting in fresh equity and
looking for mezz to help bridge the gap.
Those are the kind of deals we’re seeking.”
But both GSEs believe that defensive
refis are only one part of the rationale
behind the re-introduction. “We’re not just
re-introducing this because of defensive
opportunities; that’s just one potential
use,” Menendez says. “We have to keep the
options that we offer current so that when
markets shift, we have the right products
and parameters to take advantage.”
Bridging the Gap
Fresh on the heels of the GSEs’ an-
nouncements, PMCC re-started its
floating-rate bridge loan program, targeting
deals in the $5 million to $25 million range.
Dubbed the “Agency Gateway” pro-
gram, the loan works as a sort of “feeder”
for the company’s Fannie Mae, Freddie
Mac, and FHA platforms, helping to buy
some time for transitional assets until they
are eligible for an agency permanent loan.
“This is purely for that newly construct-
ed property that’s at 80 percent occupancy
and needs to get up to 92 percent,” says
David Durning, senior managing direc-
tor of Newark, N.J.-based PMCC. “If the
borrower really wants an agency loan, then
we’d use this program, which is targeted
toward that kind of an exit.”
Durning believes the timing is per-
fect for such a program, given the slower
absorption rates in many markets. But
another dynamic is at play. “Banks are
starting to force outcomes with regards
to their portfolios,” Durning says. “As the
banks move some of their paper, people
buying it will need financing.”
That jibes with what bridge lender
BRT Realty Trust has seen so far this
year. The company provides short-term,
first-position loans, offering LTVs between
75 percent and 80 percent and generally
charging around 12 percent rates.
“We are seeing an awful lot of stabi-
lized properties that are overleveraged
and have the opportunity to pay off their
loans at substantial discounts,” says Mitch
Gould, executive vice president of Great
Neck, N.Y.-based BRT. “And we’ve closed
two loans this year for people who have
purchased third-party notes.” ■
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Capital Markets
Jumping Back In
Life insurance companies step off the sidelines to put Fannie and Freddie on notice.
By Jerry Ascierto
Back in the Game: Large, non-
standard transactions—such as the
$130 million, three-year floating-
rate loan that MetLife provided for
the 492-unit Ocean in Manhattan—
are one area where life companies
have an advantage over the GSEs.
FANNIE MAE AND FREDDIE MAC are
no longer the only games in town.
Life insurance companies have stepped
back into the multifamily arena in a real
way, closing the pricing gap with the
government-sponsored enterprises (GSEs).
For much of 2009, life insurance compa-
nies were reduced to spectators, watching
the GSEs win deal after deal. But by the first
quarter of 2010, firms such as Prudential,
MetLife, and Northwestern Mutual were
back in stride. And apartment brokers say
that other life insurance companies—in-
cluding Cornerstone, Aetna, Guardian, and
Cigna—are showing signs of activity as well.
As 2010 progresses, the GSEs are ex-
pected to again dominate the multifamily
market, though borrowers will likely see an
increasing list of options. In fact, in early
March, Freddie Mac lost a deal to a large
life insurance company for the first time in
16 APARTMENT FINANCE TODAY • MAY/JUNE 2010
LI FE COMPANI ES
18 months, which was bittersweet news.
“I was upset about losing it, but happy
to see that we’ve got some players back
in the market,” says Mike McRoberts,
national head of multifamily underwriting
and credit at McLean, Va.-based Freddie
Mac. “It’s a really good sign for the market-
place today.”
Rate Race
The reason for the resurgence is all in
the price tag. Life insurance companies now
offer rates in the 5.75 percent to 6 percent
range on 10-year loans, basically on par with
the GSEs. That’s a big turnaround from
October of 2009, when such deals were
being quoted nearly 100 basis points above
that level. And the lower the leverage, the
better the rate: For deals with leverage levels
below 60 percent, life companies are offer-
ing loans in the low-5 percent range.
“Our ability to be more competitive
with the agencies on pricing right now
is better than it’s typically been,” says
Mark Wilsmann, managing director of the
commercial real estate operations of New
York-based MetLife. “If it fits the agencies’
box cleanly, it’s still very hard for the life
companies to compete. But as that box
gets smaller, the life companies will be a
better alternative.”
MetLife sees some opportunity this
year lending for assets that don’t fit the
GSEs’ increasingly shrinking credit box,
such as new properties still in lease-up or
good properties in “pre-review” markets
where the GSEs are less inclined to lend.
For those life insurance companies that
also offer GSE debt, the quotes from each
side of the house are closer than they’ve
been in years. For instance, Prudential has
licenses with the GSEs and the Federal
Housing Administration, and also offers
portfolio loans through its general account.
When a borrower comes calling, the firm
runs the numbers through all of its plat-
forms to come up with competitive quotes.
“For a number of years, that was just
a pro-forma exercise because our general
account was not going to be the most com-
petitive source,” says David Durning, senior
managing director at Newark, N.J.-based
Prudential Mortgage Capital Co. “The dif-
ference today is we are seeing and winning
business, and the life company pricing is in
the mix now.”
And the longer the terms, the better the
pricing that life insurance companies can
offer. “When you get to 10 years and longer,
the life companies are right on top of—or
can sometimes even be inside of—where
the agencies are today,” Durning says.
Leverage Shortfall
Pricing is one thing; proceeds are an-
other. Life insurance companies are notori-
MetLife
ously conservative in their underwriting,
with the majority of deals at 65 percent
as MetLife and Prudential, will stretch up
to 75 percent for cream-of-the-crop assets,
but those are exceptions that prove the rule.
Life companies have other strengths
to make up for this leverage shortfall,
often competing more on flexibility. Since
they take a case-by-case view of deals, as
opposed to the GSEs’ more formulaic ap-
proach, life companies have more latitude
in structuring deals.
“If a transaction involves the need for
a different kind of structure or flexibility,
nonstandard terms or speed of execution,
the life companies still have an edge over
the agencies today,” Durning says.
Another key feature of portfolio lend-
ers is the fact that their debt is not secu-
ritized, which makes it much easier for a
borrower to communicate with its lender.
One of the biggest pitfalls of securitized
debt is the inability of a borrower to rene-
gotiate after closing—their debt is owned
by various third-party investors with no
interest in working with the borrower.
Portfolio lenders, though, often
feature one direct point of contact. “The
person you do the loan with is the person
you’re going to be talking to if anything
comes up during the life of the loan,”
Wilsmann says. “You always know where
to find them.” ■

Ripe for Rehab

Life companies look to take
advantage of rehab deals.
BEFORE FANNIE MAE and Freddie Mac
began their multifamily divisions, life
insurance companies were one of, if not
the largest debt source for the multi-
family industry. While nobody expects
them to regain that mantle in 2010,
many life companies are hungry to
make multifamily loans and see an op-
portunity through flexible underwriting.
“The life companies have always
wanted to do multifamily, and they’re
ready at a moment’s notice to ex-
ploit a hole in the capital stack if they
can,” says Amos Smith, a senior vice
president at Irvine, Calif.-based Johnson
Capital. “They are, by nature, very
conservative, but they have much more
flexibility in their underwriting.”
One such area ripe for exploitation,
and an example of the sector’s flexibil-
ity, is in rehab deals, which the govern-
ment-sponsored enterprises (GSEs)
have all but abandoned. The GSEs have
grown more conservative regarding
transitional deals, as the idea of raising
rents in today’s market is a hard sell.
“The market has certainly shifted
away from rehab loans,” says Tom
Eberhardt, Fannie Mae’s director of
credit risk management for mezzanine
debt. “You really have to prove out your
assumptions in this market.”.
While life insurance companies
overwhelmingly favor stabilized assets,
rehab loans can still be had for the right
customers. “For the highest quality
borrowers, you’ll see the largest life
companies carve out a bucket of money
for deals that need some rehabilitation,”
Smith says. “It’s all very structured, all
very transaction-specific financing.”

APARTMENT FINANCE TODAY • MAY/JUNE 2010 17

C O V E R
STORY
Stuck
in Limbo
The future of our nation’s housing finance system is slowly coming into focus, as Fannie
Mae and Freddie Mac await life beyond purgatory. Here’s a look at what the industry can
expect when Congress finally moves to fix housing finance. BY JERRY ASCIERTO
T
“THIS COMMITTEE WILL be recom-
mending abolishing Fannie Mae and Fred-
die Mac in their current form and coming
up with a whole new system of housing
finance,” said Rep. Barney Frank (D-Mass.),
chairman of the House Financial Services
Committee at a Jan. 22, 2010, meeting.
Tossed out as an aside during a discus-
sion on executive compensation, the state-
ment was particularly shocking coming
from Frank, who was once the most ardent
supporter of the government-sponsored
enterprises (GSEs). And the quote was an
opening salvo in a brewing political battle,
as Congress geared up to debate the fates
of Fannie and Freddie.
Seventeen miles away at Freddie Mac’s
headquarters in McLean, Va., employees
were working weekends in an effort to
comply with new financial accounting reg-
ulations. The rules required the company
to take all of its off balance-sheet securities
18 APARTMENT FINANCE TODAY • MAY/JUNE 2010
The Future of the GSEs
and put them on the books, processing
more than 12 million individual transac-
tions. The grueling effort cost around
$50 million, and Freddie Mac was finally in
sight of the finish line.
“But after the ‘abolish’ comment, people
called in and said, ‘Should I even bother
coming in?’” says Freddie Mac’s CEO Ed
Haldeman. “It raised the level of insecurity
and uncertainty.”
Though Frank backed off of those
comments 10 days later—sending a letter
of support that was circulated to Freddie’s
employees—the episode reflects what life
in limbo is like at the GSEs these days. One
word is all it takes to upset the apple cart.
Haldeman has inhabited limbo before.
He was named president and CEO of
scandal-plagued Putnam Investments in
2003 during an SEC investigation that cost
the Boston-based firm $193 million in fines.
“At my worst days at Putnam, when it
looked like the whole company was going
to collapse, I at least could paint a picture
for our employees of what could happen if
we got through that,” Haldeman says. “But
one can’t really do that right now at a GSE.”
Indeed, the GSEs have been operating
in a sort of purgatory, a state of temporary
banishment awaiting purification, since
being seized by the government. But even
before the conservatorship, the entities
inhabited a particular middle space in the
American economy—a private company
with a public mission, chartered and regu-
lated by Acts of Congress.
Many say it was precisely this model—
where profits were privatized and losses
were ultimately socialized—that led to
their downfall. “The political [pressure] on
the companies was constant, yet they had
Richard Clark
shareholders that were expecting returns,”
says Doug Bibby, president of the Wash-
ington, D.C.-based National Multi Housing
The Future of the GSEs
Council (NMHC) and a former 16-year vet-
eran of Fannie Mae. “When I left in 1998, I
said, ‘As a business model, it just can’t keep
going this way. At some point it’s going to
blow up.’”
And blow up it did, in spectacular fash-
ion. Now Congress will start from scratch,
sifting through the ashes to figure out where
it all went wrong. And as Barney Frank
indicated, all options are on the table.
Indeed, trade organizations and think
tanks from across the ideological divide are
proposing their own frameworks for the
future at ongoing Congressional hearings.
Many of the plans look and sound similar
in the broad strokes, but the devil is in the
details. And the future is, at best, unclear.
Despite this, here are six things that seem
to be certain when it comes to what fate
holds in store for Fannie and Freddie.
1
No one really knows for sure
what will happen.
The whole housing finance system
is up for review, says Sheila Crowley,
president of the Washington, D.C.-based
National Low-Income Housing Coalition.
“I don’t think anything is immune from
being re-engineered.”
The lack of clarity stems from a lack of
consensus on Capitol Hill. Will the next
generation of housing finance entities be
existing companies with a private mission?
Brand-new organizations with a public
mission? Or a mix of both? How many enti-
ties will there be? Will they all do the same
thing? Will they be regional or national?
The right wing in Congress wants a fully
private market, making affordable hous-
ing efforts the FHA’s domain. Meanwhile,
the left wing wants the next generation of
government-chartered entities to concen-
trate only on affordable housing and remain
largely under the government’s control.
But a hybrid system incorporating
elements of both is much more likely.
“The biggest question mark is the tran-
sition from here to there,” says Shekar
Narasimhan, one of the affordable housing
industry’s brightest luminaries and cur-
rently a managing partner of McLean, Va.-
based Beekman Advisors. “Once we agree
on the form, how long does it take to go
from what exists today—Fannie, Freddie,
FHA, and the Home Loan Banks—to that
new form? And are all of them somehow
20 APARTMENT FINANCE TODAY • MAY/JUNE 2010
“At my worst days at
Putnam, when it looked
like the whole company
was going to collapse,
I at least could paint a
picture for our
employees of what
could happen if we
got through that. But
one can’t really do that
right now at a GSE.”
—ED HALDEMAN, CEO,
FREDDIE MAC
in the mix, or is it just Fannie and Freddie
we’re talking about?”
In analyzing the diverse proposals—
from the right-wing Cato Institute; the
left-wing Center for American Progress;
the pro-business Mortgage Bankers As-
sociation; and the apartment industry’s
trade groups, the NMHC and the National
Apartment Association—a way forward is
beginning to emerge.
2
There will be a place for
multifamily.
For most of their history, the
single-family market has been the GSEs’
raison d’etre. Fannie Mae was created by
Congress during the Great Depression to
focus on providing liquidity for the single-
family sector, and Freddie followed more
than 30 years later with the same charter.
Multifamily didn’t even enter their busi-
ness models until the 1980s.
As a result, the multifamily divisions of
Fannie and Freddie only make up about
5 percent to 6 percent of their overall busi-
nesses. Yet the GSEs now back about
80 percent of the overall multifamily
market. So many in the industry fear that
multifamily will get lost amidst all of the
debate—even as the industry’s fate hangs in
the balance.
The good news? Multifamily is the GSEs’
last surviving success story. It’s profitable; it
ensures liquidity in down times; it consti-
tutes 30 percent of the GSEs’ affordable
housing goals; and the delinquency rates are
so low—0.24 percent at Freddie, 0.69 per-
cent at Fannie, as of mid-May—you’d never
know they were part of a failing company.
In fact, the guarantees collected by the
multifamily divisions would have covered
all multifamily losses, and then some. But
the reserves were drained to cover single-
family losses instead.
Translation: Multifamily may be the tail,
but it’s a gorgeous tail on an extremely ugly
dog. “There is more consciousness about
multifamily today than I’ve ever seen, both
within the GSEs and on Capitol Hill,” says
Michael Berman, chairman-elect of the
Washington, D.C.-based Mortgage Bankers
Association (MBA) and CEO of Needham,
Mass.-based agency lender CWCapital.
“It’s the first time in the last 20 years of
my visits to Capitol Hill where I’ve heard
people talking about a balanced housing
policy and the importance of multifamily.”
But the idea of having multifamily-spe-
cific government-chartered entities in the
future is unlikely. “Capital markets like the
brand comfort of the much larger market
that is single-family,” says Sarah Rosen
Wartell, executive vice president for the
Washington, D.C.-based Center for Ameri-
can Progress. “So, if you take the rental mar-
ket and put it in separate institutions, you
actually may increase the cost of capital.”
3
Common ground is emerging
on a basic framework.
Amid the flurry of proposals put
forth during Congressional hearings this
year, a middle path is coming into focus.
The housing finance system of tomor-
row will likely include several government-
chartered entities built on the ruins of
the GSEs. These entities will be private
companies, capitalized with private equity.
As such, the entities can fail like any other
private company. But a regulator modeled
on the FDIC will be able to put them into
conservatorship if necessary.
These chartered mortgage issuers will
also have access to an explicit government
guarantee for the securities they issue,
much like the Ginnie Mae structure of
securitizing FHA-insured loans. And they’ll
pay for that guarantee in the form of fees or
additional basis points built into the interest
rate of each loan. Those fees will be col-
lected in a reserve to protect against losses,
and some might be diverted to support
affordable housing initiatives.
The guarantee will help these entities
provide countercyclical liquidity to serve
the market in good times and bad. When the
rest of the market is healthy, the entities will
see a reduced market share. And when the
private market craters, the entities will scale
up to pick up the slack. Importantly, the
guarantee would also ensure a lower cost of
capital in times of illiquidity.
In other words, the future housing
finance agencies will be humbled versions
of Fannie and Freddie—distant cousins
with similar features. They will have very
limited portfolio capacity, just enough to
warehouse loans pre-securitization and to
offer mortgages—such as for low-income
housing tax credit deals—that don’t have
broad investor interest. As such, there may
also be some level of government guaran-
tee on the portfolio.
To help these entities begin life with
a clean slate, the government may opt
to create a “bad bank,” a trust where the
GSEs’ most troubled loans and assets
could be liquidated. There is precedent
here: A liquidating trust was created when
government student loan provider Sallie
Mae was privatized.
This brave new world would ensure
liquidity, stability, and affordability, while
correcting the mistakes of the past. That’s
the idea anyway. Getting from here to
there, with so much still up in the air, is
another story.
4
There will be more than two—
and as many as 12—entities.
In general, there is consensus in
Congress that the country needs more than
two government-chartered entities. Having
multiple organizations protects against any
of them being “too big to fail,” or posing
a systemic risk. The hope is that it would
also foster competition and innovation.
WHOSE
INSOLVENCY?
How political expediency
and foreign policy factored
into the conservatorship.
WHEN THE FEDERAL GOVERNMENT
seized Fannie Mae and Freddie Mac, it
was a shocking conclusion to the distinct
public/private model of the govern-
ment-sponsored enterprises (GSEs).
At the time, words like “insolvency”
were splashed around the front pages
to justify the government’s comman-
deering of the GSEs. But insiders say
that perhaps the most surprising thing
about the conservatorship was that it
didn’t need to happen the way it did.
In the spring and summer of 2008,
Treasury Secretary Henry Paulson saw
the foreclosure crisis gathering on the
horizon. And he pleaded with the GSEs
to grow their portfolios and keep on
lending to ensure a continued flow of
liquidity to the housing markets, as per
their public mission.
Paulson didn’t need to remind the
GSEs that they enjoyed many govern-
ment-related benefits, most notably
the implicit government guarantee that
helped the GSEs attract investors. Now,
the Treasury Secretary was cashing in
that chip, expecting the GSEs to aban-
don their private motivations in favor of
acting in a countercyclical way.
Fannie and Freddie didn’t see things
that way. In fact, the GSEs were shoring
up their capital in anticipation of more
losses due to the single-family melt-
down and planned to sit on their newly
raised funds and ride out the storm. “Do
you think that’s what Paulson wanted us
to do? Hell no,” says one GSE executive
who spoke on the condition of anonym-
ity. “So how do you solve that? How do
you get a company that’s conserving
capital to stop hunkering down? You
take control of them.”
In short, the conservatorship was as
much a matter of political expediency
as it was of imminent GSE collapse.
And this episode illustrates the ten-
sions inherent in a public/private model.
APARTMENT FINANCE TODAY • MAY/JUNE 2010 21
The GSEs decision to conserve their
capital was driven by fiduciary con-
cerns, by shareholder interests. But that
was only one of the two masters the
GSEs served.
The GSEs weren’t exactly rolling in
profits at the time. Although OFHEO
said they were adequately capitalized
weeks before the conservatorship, the
GSEs would’ve needed a bailout, and a
big one at that. But executives at both
Freddie Mac and Fannie Mae say off the
record that their current losses wouldn’t
be as bad had they not been forced to
morph into the housing policy arm of
the federal government and refinance
so many underwater borrowers.
In the months leading up to the
conservatorship, Mark Calabria worked
as a member of the senior staff of the
U.S. Senate Committee on Banking,
Housing, and Urban Affairs. “One of the
primary drivers behind putting them into
conservatorship was an impression by
Paulson and others that they were not
acting in a countercyclical manner, that
they were acting like private companies,”
says Calabria, now a policy scholar at the
Cato Institute. “It’s like, ‘You guys made
a lot of money over the years playing off
of this, now it’s time to pay up.’”
To Calabria, the bigger issue was
that the conservatorship was driven
as much by foreign policy as domes-
tic policy. Nearly 60 percent of the
funds invested in the GSEs were from
overseas investors. And in Calabria’s
estimation, the Chinese government
would’ve lost nearly $200 billion had
the GSEs failed, since it had a lot of
unsecured funds invested in the GSEs.
“We basically did a back-door trans-
fer of $200 billion from the American
taxpayer to the Chinese Central Bank,
without any of that being debated
publicly,” he says.
So was it just the GSEs’ insolvency?
Maybe. Maybe not. This much is true:
If Fannie and Freddie held onto their
capital, and if foreign investors lost
confidence in MBS, credit for housing
would’ve been virtually impossible to
find. But when you go back and listen
to the rhetoric surrounding the conser-
vatorship, these points weren’t made
explicit, replaced instead by “insolvency.”
 The Future of the GSEs
But just how many is enough? Cato
Institute proposes a dozen such entities, a
high-water mark, while the MBA proposes
starting off with just three. Both of those
proposals offer flexibility: If the market
needs more or less entities, the regulator
can adjust the number.
“They would need to be Triple A-rated
so their cost of debt would be low, and there
are only so many of those you’re going to
have,” MBA’s Berman says. “The bottom
line is there could be three or four or five
potentially that would all compete with one
another in the multifamily space.”
Under Cato’s proposal, if the market
can’t support a dozen, the entities can shift
gears and apply for a bank charter. “But
you need to have something to start with,
and starting with just two like we have is
a mistake,” says Mark Calabria, director of
financial regulation studies at the Washing-
ton, D.C.-based Cato Institute.
Another benefit to having many players
is that it might bring more attention to
underserved parts of the market, such as
smaller properties. While Fannie Mae has a
dedicated small loan program, Freddie Mac
is less interested in small deals. Yet a large
portion of the nation’s multifamily stock
can’t support millions of dollars in debt.
“No one at the national level, neither
Fannie, Freddie, nor the FHA, has been
really able to address financing for smaller
properties,” says Buzz Roberts, a senior
vice president for policy at the New York-
based Local Initiatives Support Corp. “It’s
great if Fannie can go down to $1 million,
but we need more than just one way to go.
Competition encourages innovation and
better pricing.”
The fledgling entities will be hungry to
build up a market niche, Roberts says, and
if an entity is a fraction of the size of Fannie
Mae, small loans might look like a more
attractive business line.
5
The future finance system will
focus on securitization.
Securitization will be the domi-
nant execution and as such, the entities
will have much smaller portfolio capacity
than in the past.
In fact, many view the size of the GSEs’
portfolios as one of their tipping points.
The GSEs basically played a massive arbi-
trage game with their portfolios—raising
22 APARTMENT FINANCE TODAY • MAY/JUNE 2010
“We basically did a
back-door transfer of
$200 billion from the
American taxpayer to
the Chinese Central
Bank, without any of
that being debated
publicly.”
—MARK CALABRIA, DIRECTOR
OF FINANCIAL REGULATION
STUDIES, CATO INSTITUTE
debt that was cheaper than the loans they
put on their books—which resulted in a
nice profit. Certainly, it kept the share-
holders happy, but the extent to which
they could act in a countercyclical nature
was undermined by this profit play. [See
“Whose Insolvency?” on page 21.]
In the future, the portfolio’s primary
purpose will be to warehouse loans des-
tined for securitization. Those securitiza-
tions will likely come wrapped in a govern-
ment guarantee, much like Ginnie Mae
securities. This will be an explicit guaran-
tee on the securities, not the organizations
themselves, unlike in the past where the
lines were blurred. And in another sharp
break from the past, the guarantee will
come with a price, which will be paid for
by the entities themselves.
“Over time, the form that was created
slipped from an implicit guarantee to
basically a government backstop, and
that was not desirable,” says Narasimhan
of Beekman Advisors. “We have to cre-
ate entities now where it is more clear
where the government is, and where the
government is not.”
Beyond ensuring countercyclical liquid-
ity, the government guarantee also ensures
cyclical liquidity: The private sector just
doesn’t have the capacity to claim the mar-
ket share left by the absence of the GSEs.
Life insurance companies have limited al-
locations with which to invest in multifam-
ily; banks continue to be saddled by bloated
balance sheets; and the CMBS industry,
while beginning to revive, is a shadow of its
former boomtown self.
“It’s possible, and almost very highly
likely, that with industry support and
public policy support, some kind of govern-
ment guarantee for a preferred portion of
the market will revive,” says Wartell of the
Center for American Progress.
The GSEs have a wide range of prod-
ucts, not all of which can be securitized.
This is particularly true in the affordable
housing space, where tax-exempt bond
credit enhancements or forward com-
mitments on tax-credit properties are
still portfolio executions. “There should
be some portfolio availability for highly-
structured transactions, and specifically in
the affordable multifamily sphere,” Berman
says. “But the total portfolio now is some-
thing like $1.5 trillion, and we don’t even
need a peppercorn compared to that.”
In the meantime, a few industry observ-
ers have proposed covered bonds as a
free-market alternative to the GSEs. But
this speaks to the same problem. Covered
bonds, popular in Europe, are debt securi-
ties backed by cash flows from mort-
gages. They’re similar to mortgage-backed
securities with one big difference: covered
bond assets remain on the issuers’ books
as opposed to being passed off to inves-
tors. Given the state of most bank balance
sheets, this would seem to be a nonstarter.
6
They will need to be insulated
from politics to thrive.
The shifting political landscape
on Capitol Hill is yet another powerful
X-factor in shaping the next generation of
housing finance. The Obama administra-
tion won’t unveil a specific proposal for at
least another seven months—an eternity
in politics. “What we have today is a debate
that’s occurring in a bit of a vacuum,”
Narasimhan says.
Sen. Scott Brown’s win in Massachusetts
earlier this year points to a mid-term elec-
tion cycle where Republicans should see
significant gains in the House and Senate.
And that could spell bad news for the GSEs.
“A lot depends on the 2010 Congressional
elections,” says Alex Pollock, a fellow at
Washington, D.C.-based conservative think-
tank American Enterprise Institute and a
former president and CEO of the Federal
Home Loan Bank of Chicago. “If you have
strong Republican gains in Congress, then
you get a much less friendly result for Fan-
nie and Freddie.”
The administration’s delay is partly
driven by the fact that the housing markets
are just starting to recover and are still fully
dependent on the agencies. Any disruption
in the flow of liquidity could have huge
ramifications.
But the administration also has to line
up its ducks in a row. The financial regula-
tion legislation being debated in Congress
may fundamentally alter the CMBS
industry and has to be ironed out before
the GSEs are dealt with. After all, how can
you impose a new generation of secondary
market players into a market that is, itself,
undergoing vast changes?
But there is a broad consensus among
trade groups and think tanks that any future
government-chartered entities will need to
be insulated from politics. The GSEs’ lobby-
ing efforts were ostentatious—together, they
spent about $170 million from 1999 to 2008
on lobbying to help protect their empires
leading up to the conservatorship.
Yet the entities will be crafted by politi-
cians, many of whom either took large
sums of money from the GSEs or from
their competitors. To Narasimhan, there
are a couple of ways to shield the next
generation from politics. You could limit
the amount each could spend on lobby-
ing, or you can give their regulator more
authority and have Congress monitor the
regulator, not the entities.
In Cato’s view, breaking up the GSEs
into smaller multiple entities will protect
against history repeating itself. “There’s
nothing like a huge pot of money to attract
politicians,” Calabria says. “If several of
these entities competed with each other,
they essentially make what would be a
normal rate of return, so there’s not that
much to squeeze. You reduce the influ-
ence of politics if you reduce the excess.”
Most likely, the housing finance sys-
tem of tomorrow won’t be much different
from the borrower’s perspective. “The
world would have some entities, prob-
ably four or five, and you’d still be getting
multiple quotes on your deal,” says David
Cardwell, NMHC’s vice president of
capital markets. “And interest rates are
probably higher but not materially high-
er. More of the loans will be securitized,
and there will be some public mission
tied to it.
Yet despite all of the competing agen-
das and possible frameworks, despite all
of the political posturing and conflicts-
of-interest, some people believe the next
generation will just be a new coat of paint on
an old house.
“They’ll put a new hat on us, a smiley
face, and call us new and improved,” says
one GSE executive who spoke on the con-
dition of anonymity. “But when you peel all
of the lipstick away from the pig, you’re go-
ing to find that we’ll be pretty much what
we are now. Mark my words.” ■

LOOKING than 30 years until late in

2006, when the conduit mar-
BACK IN ket was going gangbusters.
sight in the private market.
The higher-risk, higher-profit
opportunities began in the
sive CMBS loans such as
the whopping $3 billion one
made for New York’s massive

ANGER But if you ask Ed Pinto,

Political viewpoints will
shape future proposals.
ON CAPITOL HILL, the past is
as contentious as the future.
Republicans generally believe
that Fannie Mae and Fred-
die Mac led the charge in the
booming subprime market
and were major drivers of the
housing market’s collapse. The
Democratic line of thought is
that the private MBS market
was the main force behind the
subprime explosion, and that
the GSEs were lured into it
long after it had blossomed.
On the multifamily side, the
Democrats have a point. The
GSEs didn’t go down to 1.15x
debt-service coverage ratios
and amortizations of more
Fannie Mae’s former chief
credit officer, the Federal
Housing Enterprise Safety and
Soundness Act of 1992, which
freed up the GSEs to compete
with the FHA on single-family
housing business, was the
main culprit. Within a year of
the Act, the GSEs were lend-
ing at 97 percent loan-to-val-
ue (LTV), which eventually led
to “no money down” loans.
“Leverage became the
name of the game. They were
doing 3 percent down loans,
zero-down loans, and the pri-
vate sector started following,”
Pinto says. “But what really
transpired was the politiciza-
tion of lending.”
The Center for American
Progress believes that the
problem was a lack of over-
unregulated portion of the
market and drew the regu-
lated segments, the GSEs,
into bad practices. “There
was a cultural belief that in-
tervention in the private label
securities market would make
the market less efficient and
destroy wealth,” says Sarah
Rosen Wartell, an executive
vice president at the Wash-
ington, D.C.-based Center
for American Progress and
a former deputy assistant to
President Clinton on eco-
nomic policy. “In this case, we
were creating an illusion of
wealth and actually destroyed
far more wealth by letting it
go unchecked.”
One doesn’t have to look
too hard to find examples of
an unregulated market gone
awry. The fallout of aggres-
Stuyvesant Town/Peter Coo-
per Village complex “argues
very strongly for across-
the-board regulation,” says
Buzz Roberts, a senior vice
president for policy at New
York-based Local Initiatives
Support Corp.
As such, the financial re-
form legislation currently be-
ing debated in Congress aims
to impose stricter regulations
on the private sector. And
increased regulation could be
very beneficial in the short
term. “For the next several
years, the capital markets
are going to be very nervous
about this kind of financing,”
Roberts says. “So having
strong government regulation
is going to be very helpful to
improving both access to and
cost of credit.”

APARTMENT FINANCE TODAY • MAY/JUNE 2010 23

S P E C I A L Partnership
FOCUS Opportunities

Getty
J
26 APARTMENT FINANCE TODAY • MAY/JUNE 2010
From Partners
to Profits
Faced with a growing distressed debt market, apartment owners, investors,
and developers look to spawn partnerships that pursue opportunity—as well

J
as liquidity. BY BRAD BERTON

JOINT VENTURES ARE BUSTING OUT all over multifamily land. Kennedy-Wilson’s Multifamily Manage-
With debt markets still tight, savvy multifamily executives are teaming ment Group.
up to form wide-varying ventures aimed at improving access to capital— The Los Angeles-based Urban Partners
and in many cases to distress-driven deals. team, headed by Keller and co-principal
Whether the underlying motivation is opportunity or necessity, it’s to- Matt Burton, has deep roots in large
development projects and hands-on
day’s crazy capital conditions that are spawning many “strange bedfellow” construction management. And the KW
alliances unlikely to be replicated in more liquid markets. side, with Hart and colleague Stuart
“That’s what’s driving many of these ventures we’re now seeing,” Cramer overseeing the new relationship,
observes veteran apartment investment executive Harvey Green. “The has extensive experience in opportunistic
pendulum has swung too far” into conservative lending territory after investments such as recapitalizing stalled
those bubble-building years, laments the president of Encino, Calif.-based developments, as well as in marketing
investment brokerage firm Marcus & Millichap. multi-housing properties and units.
The combined capabilities should give
As Green and others point out, parties are pairing via numerous
the group a leg up as the JV pursues mul-
multi-housing-centric strategies: acquiring distressed properties and loan tiple opportunities, with an investment
portfolios; tapping public equity markets; resolving busted condo ventures; target of $250 million for the first year,
and replacing hard-to-refi debt with hard equity. according to Hart.
Here are three such partnerships that are changing the way multifamily The synergy likewise extends to the
investors are doing business today. financial realm—another key competitive
advantage in the stingy lending environ-

1 SYNERGIZING FOR
DISTRESS
A common trait characterizing many of
the noteworthy new alliances: synergistic
combinations of partners’ core competen-
cies and capital capabilities.
Take integrated investment and ser-
vices company Kennedy-Wilson Hold-
ings (KW), which recently announced
a strategic alliance with planning and
development specialist Urban Partners
(along with a related entity headed by
Urban principal Paul Keller). Their goal?
To leverage their collective equity into
distress plays along the West Coast.
“Our thinking is that one plus one
can equal three,” stresses Bob Hart, chief
executive of Beverly Hills, Calif.-based
ment. Each partner has access to equity
sources expected to contribute to the
mostly distressed residential ventures the
partners plan to pursue jointly, Hart adds.
Illustrating parallel multi-housing joint
venturing trends, KW is likewise par-
ticipating in other partnerships pursuing
distressed-debt portfolios and failed condo
projects. [See “Pairing Up” on page 28.]

APARTMENT FINANCE TODAY • MAY/JUNE 2010 27

 Partnership
Opportunities

PAIRING UP
Kennedy-Wilson Holdings
seeks to reap profits
from its partnerships.

IN ADDITION TO its recently an-

nounced joint venture with Los
Angeles-based planning and
development firm Urban Partners,
Beverly Hills, Calif.-based Kennedy-
Wilson Holdings (KW) recently
forged alliances with two other
partners. Each partnership is aimed
at profiting from the prevailing real
estate distress by tapping KW’s
expertise in capitalizing, managing,
and marketing multi-housing and
other real estate assets.
One is a venture with New York
private equity firm Siguler Guff to
invest in distressed condominium
projects. A fund managed by
Siguler Guff has agreed to contrib-
ute $100 million toward the effort, CONDO CHAOS: When developer
with KW putting up $8 million. Casey Shroff was unable to sell
more than 45 units of his 232-unit
The typical scenario would have
Towers on the Grove condo
the KW/Siguler venture purchas-
project in North Myrtle Beach, S.C.,
ing a foreclosed condo venture he cut a deal with Wyndham
from the lender, or in some cases Vacation Ownership to sell the
acquiring the distressed debt and remaining units as vacation
pursuing the foreclosure process. properties.
The venture would subsequent-
ly prepare the property for final unit
sales through KW’s auction division,
or in some cases perhaps re-sell
entire properties to other investors,
explains Bob Hart, CEO of KW’s
Multifamily Management Group.
2 ‘RETAIL’ EQUITY REIT
Another synergy-heavy venture
unlikely to be forged during normal capital
And in what appears to be a highly un-
usual teaming of REIT sponsor and operat-
ing partner, KBS (in raising its fourth such
KW and an undisclosed new markets conditions: co-sponsorship of a vehicle) brought in apartment specialist
capital partner also just closed new non-listed apartment REIT by invest- Legacy Residential as co-sponsor. Legacy’s
their first joint acquisition of a
ment manager KBS Capital Advisors and reputation will presumably help attract
portfolio of mostly sub- and non-
performing residential, multifam-
private multifamily developer Legacy Part- investors to a program focused specifically
ily, and other bank loans, with a ners Residential. on the multifamily sector.
combined principal balance of The partnership teams a handful of KBS Legacy Partners Apartment REIT
$342 million. well-known real estate figures: Chuck is aiming for a $2 billion capital raise. Pro-
Seeking investment returns Schreiber and Peter Bren of Newport ceeds are to target properties in lease-up,
described as “opportunistic,” Beach, Calif.-based KBS; and Foster City, development, redevelopment, and reposi-
KW’s asset managers will work Calif.-based Legacy Residential’s Preston tioning stages, according to its prospectus.
Wyndham Vacation Ownership

to resolve the financial issues at
each collateral property, eventu-
ally resulting in a disposition, with
net proceeds distributed to the
partners.
KW and its capital partner plan
to pursue additional distressed
portfolios through their new in-
vestment platform.
Butcher, Dean Henry, and Guy Hays.
While debt markets continued to reel,
sponsors of non-listed REITs were able
to raise some $5.5 billion in equity from
mostly “retail” (individual) securities inves-
tors last year, according to REIT research
firm Green Street Advisors (also based in
Newport Beach).
(Sponsors declined to discuss the venture
during the share offering “quiet period.”)
With attractively priced and structured
debt still elusive, co-sponsoring a non-listed
REIT “is probably a good way for Legacy
to source capital” as its dealmakers identify
solid investment opportunities amid plenti-
ful market distress, says Michael Knott, a

28 APARTMENT FINANCE TODAY • MAY/JUNE 2010

senior analyst with Green Street. quite tight when it comes to financing
This venture likewise oozes with syn-
“You’ve got all this planned condo-to-timeshare conver-
ergy potential. Legacy brings a wealth of idled expertise at sions. And consumers seeking financing
multifamily expertise and success, while
KBS now has considerable experience
these companies, and for interval purchases have faced more
onerous terms as well, Ragatz explains.
with private REIT compliance, financial they want to keep But with thousands of viable conver-
reporting, marketing, and investor rela- growing. It’s not some- sion candidates still unsold, Ragatz envi-
tions. “Thus, a partnership was born,” sions the fee-for-service model becom-
observes Knott, who couldn’t think of any thing we’d see under ing an increasingly popular strategy. It
comparable co-sponsorship arrangement. normal conditions.” helps strapped developers (or foreclos-
Knott also stresses that publicly-traded ing lenders as the case may be) keep skin
REITs offer superior long-term total re- —DICK RAGATZ, RESORT in the game while selling off inventory in
turns compared to non-listed trusts. DEVELOPMENT CONSULTANT, a less-than-receptive condo market.
RAGATZ ASSOCIATES And it allows growth-minded time-
share operators to expand their portfolios
3 FROM CONDOS TO
TIMESHARES
Amid frighteningly large inventories of Over the past couple years, Wyndham
while construction financing is scarce, and
also earn fee income—just without the big
unsold new condominium units in destina- and other large shared-ownership outfits capital commitments they’d need to buy
tion resorts—along with the challenging had grand plans to snap up unsold inven- all the vacant units in bulk. “You’ve got all
financing environment—a just-closed ven- tories of distressed condo developments this idled expertise at these companies,
ture teaming a struggling condo developer at bargain-rate prices, notes veteran resort and they want to keep growing,” Ragatz
and a timeshare giant may be setting the development consultant Dick Ragatz at relates. “It’s not something we’d see under
pace for other such alliances. Ragatz Associates in Eugene, Ore. normal conditions.” ■
Prominent local resort specialist Casey However, those expectations haven’t BRAD BERTON is a Portland, Ore.-based freelance
Shroff had managed to sell only 45 of the come to fruition since lenders have been writer specializing in commercial real estate.
232 beachfront condos he developed at the
Towers on the Grove high-rise complex in
North Myrtle Beach, S.C. Unfortunately,
the remaining 187 units—one- to three-
bedroom condos with asking prices rang-
AT-A-GLANCE
ing from about $150,000 to $670,000—
These three partnership scenarios, albeit different in
were not selling, so Shroff cut a deal with their details, have a similar goal—to help these firms
major timeshare operator Wyndham compete in a tough economy.
Vacation Ownership (WVO).
Simply buying the unsold inventory
outright from Shroff ’s group was too COMPANY PARTNER ANNOUNCED WHAT IT IS TARGET
challenging in today’s financing climate,
so CEO Franz Hanning and other higher- Strategic
joint venture $250 million in
ups at Orlando, Fla.-based WVO opted Kennedy-Wilson Urban
February 2010 targeting year-one invest-
instead for a newfangled “fee-for-service” Holdings Partners
distressed ment activity
arrangement. WVO, which already man- properties
ages several Myrtle Beach area timeshare Co-spon-
properties, dubs it the Wyndham Asset Legacy sorship of a
KBS Capital $2 billion
Affiliation Model. (WVO has identified Partners March 2010 non-listed
Advisors capital raise
some 5,000 condos in North America that Residential apartment
REIT
potentially fit its Wyndham Asset
Affiliation Model, according to a recent Acquire and sell
company conference call.) 80% of the 232-
Establish vehi-
WVO will operate the vacant units as unit Towers on the
Wyndham cle for turning
vacation rentals while endeavoring to sell Casey Shroff/ Grove project, with
Vacation unsold condos
timeshare interests in most of them on Shroff March 2010 137 units to be sold
Ownership into vacation
Development on the developer’s
behalf of Shroff. WVO has also agreed to (WVO) rentals or
behalf and 50 units
purchase 50 of the unsold condos over timeshares
to be acquired by
three years, with the goal of subsequently
WVO
selling them into shared ownership.

APARTMENT FINANCE TODAY • MAY/JUNE 2010 29

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 Bottom Line
Walking The Green Line
Multifamily REITs remain convinced on sustainability initiatives despite recession
pressures and lack of ROI specificity. By Chris Wood
Going for Gold: BRE
Properties’ Park Viridian in
Anaheim, Calif., is Orange
County’s first LEED Gold
multifamily building.
MAJOR APARTMENT REAL ESTATE
investment trusts (REITs) open up their
balance sheet for public scrutiny every
three months, offering enough Sarbanes-
Oxley mandated granularity into opera-
tions, income, and expenses to make the
private guy (and even some of the public
guys) wince and say, “no thanks.” Among
the same-store NOI growth and occupancy
numbers and FFO and average rents,
you’d figure there’s got to be a line item
accounting for all of the money invested
into green, right? All of those consultants
and certifications and light bulbs and
showerheads have to add up to something,
and if green has such an awesome return
on investment, why wouldn’t billion dol-
BRE Properties
lar Wall Street companies be specifically
tracking it?
The answer is simple: Multifamily
sustainability initiatives and green building
SUSTAI NABLE I NI TI ATI VES
practices have become the de facto way of
doing business and therefore aren’t tracked
as separate line items.
“When we embarked on the green
process about six years ago, there was
definitely push back on the investment side
regarding added costs,” says Connie Moore,
CEO of BRE Properties, a San Francisco-
based REIT with a focus on West Coast
markets that just celebrated the opening
of Park Viridian, Anaheim’s (and Orange
County’s) first LEED Gold-certified apart-
ment building. “Being green and thinking
about sustainability as the right thing to do
[independent of incremental cost] used to
be seen as progressive and now it is already
simply the way of doing business. It is be-
coming accepted, demanded, and expected
by our residents, particularly among the
Gen Y cohort.”
And that’s true for both REITs and
APARTMENT FINANCE TODAY • MAY/JUNE 2010 31
smaller, regional players, all of whom are
pursing green projects despite recession
pressures and lack of ROI specificity.
Practice Makes Perfect
While breaking the LEED Gold barrier
with Park Viridian was no easy feat, BRE’s
green building acumen certainly eased the
process. The REIT’s previous LEED proj-
ects include 6600 Wilshire in Los Angeles
and Taylor 28 in Seattle. BRE executive
vice president and chief investment officer
Steve Dominiak says all new develop-
ment in the REIT’s pipeline will be built
to LEED standards moving forward, even
if the company isn’t recording a specific
sustainability spend in the general ledger.
“We don’t track green as an exclusive
line item on the capital budget for new
development, but we think the cost as
a percentage of total is in the low single
digits,” Dominiak explains. “On the opera-
tional side, things such as smart irrigation,
green cleaning products, and lighting
changes flow into the normal cap ex of a
project and are phased into the operating
budget. We don’t track those investments as
a line item.”
AvalonBay Communities is likewise
celebrating a recent LEED achievement:
the Alexandria, Va.-based REIT’s Mis-
sion Bay III community in San Francisco
received LEED certification in January, a
huge green building milestone, according
to company chairman and CEO Bryce Blair.
“We have made good progress and built up
an impressive amount of internal knowl-
edge in this area as a result of this LEED
process and our other efforts,” Blair says.
Beyond new development, AvalonBay
has gone as far as establishing an internal
sustainability fund for the green retrofit-
ting of its portfolio, and while the annual
budget for that fund is not declared pub-
licly—the word sustainability doesn’t even
appear in the firm’s 2009 annual report—
AvalonBay vice president of development
Bottom Line SUSTAI NABLE I NI TI ATI VE S

Scott Dale says the firm’s green buy-in is this year than we did last year.” fruit and are really being implemented on a
increasing every year in spite of economic That will mean increasing common area prioritized basis per community,” Dale says.
conditions. “The budget for the sustain- lighting retrofits (typically in garage areas) “But the projected returns on those have
ability fund has increased this year, not from 1,000 fixtures in 2009 to 1,200 fixtures been in excess of a 20 percent ROI, and we
decreased,” Dale says. “As we have better in 2010, as well as resuming a slow-but- anticipate the returns on 2010 initiatives
understood the financial opportunities that steady pace of cogeneration plant upgrades, will be in the same range.”
exist and the returns that are achievable, with two plant conversions last year. “Most
we have increased the budget in recogni- of the sustainability fund initiatives I would Payback Time
tion of that. So we will do more retrofits say fall under the category of low hanging Cost savings on energy consumption
has been the most tangible and measur-
able return on green investments, but the
bottom line impact from residents willing
to pay more in rent or extend their typical
occupancy in a green apartment prom-
ises to further extend the gains made by
sustainable investments. In fact, a survey of
1,000 apartment seekers released on Earth
Day by Santa Monica, Calif.-based Internet
Listing site Rent.com finds that 86 percent
of the rental pool would prefer to live in
a green apartment, and a full 42 percent
would pay a $100 rent premium to do so.
But whether renters will ultimately
speak with their recession-pressured dol-
lars beyond a survey remains to be seen.
“It is easy to say, ‘Oh, of course I’d pay $25
more,’ but that often changes when it comes
time to sign the lease,” explains BRE’s
Moore. “But I think where it shows up is in
increased leasing velocity and extended oc-
cupancy. Park Viridian is arguably in one of
the most challenging apartment markets in
the country where we are additionally com-
peting with AvalonBay and [Englewood,
>hndjgaZcYZghi^aaVgdjcYidXadhZi]ZYZVa4 Colo.-based] Archstone, and we leased up
six months ahead of the pro forma, and it
wasn’t like we planned a slow lease-up.”
A lender you can trust to be there and deliver customized financing solutions is a vital part A slow transaction volume among apart-
of any deal. That’s just what you can expect with M&T Realty Capital Corporation. A stable ment traders is making it difficult to gauge
the relative premium asset buyers are will-
and reliable source of funding, we’ve been specialists in multifamily real estate financing ing to pay themselves for green multifamily
for decades and have earned a reputation for closing deals according to the terms real estate, but anticipating a near future
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dure would logically push non-green assets
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by calling 1-800-737-2344. “I think time will tell,” Dale says. “If
one makes the assumption that sustain-
;6 C C > :  B 6 :   ™  ; G : 9 9 > :  B 6 8   ™   A > ; :  8 D B E6 C N  ™   ; = 6 ability is here to stay, and I think that is a
pretty safe assumption, there may well be
some separation in the market between
certified buildings and non-certified build-
ings. Based on that understanding, we’ll
continue to better position AvalonBay as a
leader in the area of sustainability. We do
think there will be some real financial op-
portunities down the road in conjunction
www.mandtrealtycapital.com ©2010 M&T Realty Capital Corporation with that focus.” ■

32 APARTMENT FINANCE TODAY • MAY/JUNE 2010

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Regional Markets
Holding Their Own
The Minneapolis/St. Paul apartment market is stabilizing as improving fundamentals
breed optimism for the future of the Twin Cities. By Tom Cooper and Harold Teasdale
About Face: Despite the Twin
Cities’ decline in transaction volume,
Kilkenny Court Apartments, a
92-unit seniors housing complex
in Forest Lake, Minn., a suburb
of St. Paul, was acquired for
$5.2 million and underwent a major
rehab that was completed in
December 2009.
Tom Cooper (left) and Harold Teasdale
are the founders of Minneapolis-based
Minnesota Brokerage Group, which
specializes in apartment sales primarily
in Minnesota.
34 APARTMENT FINANCE TODAY • MAY/JUNE 2010
AS IN MUCH OF THE NATION, the
Minneapolis/St. Paul apartment market
shifted dramatically during the past few
years. Gone are the golden days of sky-
high appraised values and inflated asset
appreciations.
But the Twin Cities area is holding its
own, even in a weak economy, posting
healthier fundamentals than many compara-
ble markets. Minneapolis is one of four cities
showing “relatively strong” fundamental
market drivers—mortgage default rates are
below the national average and the local job
market is likely to outperform the country,
according to New York-based research and
risk analysis firm Moody’s.
The health of the apartment market
compared to the country overall—and the
Midwest in particular—can be attributed to
a number of factors. A diverse economy with
a strong concentration of large employers—
MI DWEST
including 20 Fortune 500 companies—as
well as fewer new apartment units hitting
the market, factor heavily into the equation.
Slow and Steady
Job loss and wage freezes conspired to
make 2009 a tough year, but the numbers are
improving. The Twin Cities finished 2009
better than it started, with unemployment at
7.4 percent, well below the national average
of 9.7 percent. And job growth is expected
to pick up significantly next year, with a 2.6
percent increase in employment, followed by
a 3.4 percent increase in 2012, according to
New York-based market research firm Reis.
The Twin Cities’ diverse economy
continues to attract strong, steady popula-
tion growth, even during the recession. In
fact, the area’s household count is expected
to rise 1.2 percent this year, and another 1.6
percent next year, according to Reis. And
with the Echo Boomer demographic (those
between 25 and 44) poised to drive demand,
occupancies are expected to accelerate as
the economy improves.
Still, the apartment market remains chal-
lenging. The Twin Cities’ vacancy rate ended
2009 at 5.4 percent and is expected to tick
up slightly this year before declining again in
2011, according to Reis. Rents are flat, espe-
cially in urban and older, close-in suburbs, or
declining slightly in outlying areas, dropping
about 1.5 percent overall in 2009.
Average rental rates in the Twin Cities
metro area showed a slight decrease of
0.7 percent from $875 per month to $868 in
2009. Annualized rent gains were highest
in or near the cities. Rent reductions are ex-
pected to continue this year, but concessions
Minnesota Brokerage Group
are expected to be relatively modest. And
the good news is rent growth is expected to
climb 1.5 percent in 2011, plus an additional
2.2 percent in 2012, according to Reis.
Shrinking Investor Pool
Despite these positive indicators, there’s
been a significant drop-off in transaction
velocity. The Twin Cities saw only $180
million in apartment transactions in
2009 compared to a 10-year annual aver-
age of more than $400 million, according
to Los Angeles-based real estate services
firm CB Richard Ellis. In fact, there were
only 69 qualified transactions in 2009, a
59 percent decrease from 2008, reported
The Hawthorne Group, an Edina, Minn.-
based multifamily brokerage and market
research firm.
The number of active investors has
shrunk, and those still in the game are
generally long-term experienced owners
DOUBLE TAKE
The Twin Cities forecast rent
growth by the end of the year.
Year Rent Growth
2009 -1.5%
2010* 0.1%
2011* 1.5%
2012* 2.2%
2013* 3.8%
* Projected
Source: Reis
who now have the market to themselves.
But transactions are taking more time to
close these days as buyers and sellers engage
in a kind of stand-off—the first waiting for a
drop in sale prices, and the latter waiting for
the market to finally bottom out.
The lender pool is shrinking, too. Tra-
ditional sources for financing apartment
properties have mostly retreated in the
Twin Cities metro market. The banks that
are still active are applying more stringent
lending standards and requiring more
security. Tighter lender scrutiny on both
the sponsor and the asset is expected to
continue for the foreseeable future.
Community banks, for short-term
loans, and agency lenders such as Fannie
Mae, Freddie Mac, and the Federal Hous-
ing Administration are the most active in
the apartment market. And there is still
considerable funding to be tapped from
state and local agencies targeting energy-
efficient building improvements.
Metro Market Picks Up
Local observers appear cautiously
optimistic about the economic outlook
and the apartment market overall. Things units were issued for multifamily devel-
are expected to get better soon—a small opments in the Twin Cities in the fourth
breakthrough during the second half of quarter of 2009, nearly double the amount
2010 seems to be the consensus. What’s in the fourth quarter of 2008.
more, the state has started adding jobs While an influx of newly constructed
again—a total of 15,600 in January. apartments may not be ideal for owners of
Additionally, new apartment construc- existing buildings, it speaks to the grow-
tion is resurfacing in the cities—four new ing confidence among the multifamily
projects received permits in Minneapolis industry here. And that bodes well for
already this year. In fact, permits for 432 their twin futures. ■
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Kansas City 913.677.2001 • Louisville 502.589.1233 • Madison 608.827.7747 • Milwaukee 262.785.8440 • Minneapolis 612.341.7880 • Mobile 251.473.1831
Naples 239.947.5077 • Nashville 615.377.8989 • Norcross 678.906.4070 • Norfolk 757.625.8181 • Orlando 407.772.0750 • Pittsburgh 412.391.3366 • Raleigh 919.871.6300
Tampa 813.281.8767 • Washington, D.C./Baltimore 703.677.3900 • www.gbrecap.com
Loans are subject to credit approval.
APARTMENT FINANCE TODAY • MAY/JUNE 2010 35
Regional Markets
Gateway City Opens Up
Lack of new supply, improving jobs picture leads to stabilization in St. Louis this year
and growth next year. By Sean Fogarty
Big Bucks: The 300-unit
Schoettler Village, located
in Chesterfield, Mo., which
sold in March, was just one
of only three sizable sales
that have occurred since
last August.
Sean Fogarty is a managing
director in HFF’s Chicago
office and has completed more
than $3.7 billion of multifamily
transactions.
36 APARTMENT FINANCE TODAY • MAY/JUNE 2010
THE ST. LOUIS ECONOMY has begun to see
the light at the end of the recession’s tunnel.
While the next 18 months will continue to
be a challenge, there are positive signs that the
local apartment market is on its way back. For
one, this year will likely see positive job growth
for the first time since 2008, according to New
York-based market research firm Reis.
Additionally, St. Louis’ manufacturing
industry—a key component of the market’s
economy—showed positive signs early this year
with subsiding job losses. There is uncertainty,
however, surrounding the future prospects of
St. Louis’ auto manufacturers, as well as aero-
space giant Boeing, which employs more than
16,000 workers in the St. Louis area.
St. Louis’ diverse employment base,
however, should help to weather any future
downsizing on the manufacturing front. The
city is home to eight Fortune 500 firms and is
also a major medical center market, with BJC
Healthcare employing more than 23,000 work-
ers. Additionally, large investment firm Edward
MI DWEST
Jones employs nearly 5,000 folks in the metro.
Still, with a loss of more than 40,000 jobs
in 2009, apartment owners in St. Louis have
struggled to hold rents and occupancies. These
landlords have both benefited from and been
harmed by the current for-sale housing market.
On the one hand, many former homeowners
have moved to apartments due to layoffs or
foreclosures, while many would-be homeown-
ers have been hesitant to purchase a new home
in the volatile market. On the other hand, the
decreases in home prices—average local pricing
decreased from $147,000 in 2006 to $121,000
in 2010—as well as low interest rates and the
federal homebuyer tax credit have wooed some
first-time homebuyers in the past few months.
Set to Stabilize
Current apartment metrics in St. Louis in-
dicate a stabilizing economy that simply needs
time to gain positive momentum. Vacancy rates
sit at 9.2 percent, approximately 1 percentage
point above the national average. The rate is
expected to peak just above that level this year
before decreasing. By 2014, the vacancy rate
should drop 2.5 percentage points to less than
7 percent, according to Boston-based market
research firm Property and Portfolio Research.
Meanwhile, asking rents in St. Louis haven’t
declined as much as other Midwest markets
or the nation, decreasing just under 1 percent
over the past year compared to 1.2 percent in
the Midwest and 2.3 percent nationally. The
average monthly asking rent in St. Louis stands
at $724, according to Reis. To compensate for
higher vacancy rates and lower traffic, almost
all communities have increased concessions in
the past year to attract and sign up residents.
That means the rebound will be gradual
in St. Louis, with positive rent growth com-
mencing in late 2010 or early 2011 and moving
toward the 2.5 percent mark by 2013, according
to Reis. Potential upside to these projections in
St. Louis could come in the form of continued
lack of new supply to the market, as new con-
struction is virtually at a standstill.
HFF
Not only did ’09 see very few new deliveries,
GIVE AND TAKE in August 2009. Taken together, these three universities, currently employing more
St. Louis construction fundamentals deals totaled $88 million in sales price. than 9,000 workers. Washington Univer-
will start improving by 2011. sity, St. Louis University, and University of
More Light Ahead Missouri-St. Louis all offer stable, high-
Year Completions Net Absorption With positive job growth on the hori- paying jobs despite the current recession.
2009 227 -1,486 zon, the St. Louis apartment market is set As a result, though slower growth met-
2010* 174 -69 to see increases in both effective rents and rics are predicted compared to other major
2011* 145 229 occupancies as we move deeper into 2010. markets, St. Louis’ lack of new apartments
St. Louis is evolving to a more diverse puts it in a better position than many met-
2012* 415 712
market, with growth in the city’s research ros coming out of the recession. ■
2013* 517 1,064
2014* 731 1,098

* Projected
Source: Reis
REDUCED
APPLICATION FEE
OF $4,500
but it also continued a trend of very little As well as a New Streamlined
new product being delivered over the past Application Form
five years. Deliveries of market-rate rentals
in 2009 numbered only 227 units, and the
And, as always:
annual average over the past five years has • Up to 80% LTV
been less than 500 units. • Supplemental Loans Available
Major new projects have been scarce: After the First 12 Months
The 197-unit 3949 Lindell Apartments in of the First Mortgage Loan
the upscale Central West End was one of • $1-$3 Million, Up to $5 Million
the few to deliver over the past year. Other in Certain Markets
projects have been tabled or cancelled due
to overall economic conditions and a lack
of construction financing. The near term
holds more of the same, with less than 400
units projected to be delivered on average
over the next five years. Positive absorption
should be back in play come 2011 after be-
We’ve enhanced our Small Loan Program in a way.
ing in negative territory for three years.

Transaction Velocity
Transaction activity in St. Louis has
been sluggish over the past 18 months. But
two major suburban properties recently
sold, and the market is expected to pick up
steam as local fundamentals improve.
Those recent sales may also help to spur
the local transactional market. The sales There has never been a better time to apply for a small commercial real estate
were the 284-unit Charter Place located in loan at Arbor. While other firms no longer offer the program, Arbor is more
Creve Coeur, Mo., and the 300-unit Schoet- committed than ever. That’s because we have been doing multifamily small
tler Village located in Chesterfield, Mo. balance loans for more than a decade and are a top Fannie Mae DUS® small loan
Both deals, although separate transactions, lender. At Arbor, we take being your financial partner seriously and it shows.
closed in March 2010 and were sold free
and clear, allowing buyers to take advantage
of current favorable financing from the
government-sponsored enterprises.
Prior to these recent closings, the only Growing Financial Partnerships
other significant deal to close within the FANNIE MAE • FHA • 1-800-ARBOR-10 • www.arbor.com
past year was the 694-unit Baxter Crossings
located in Chesterfield, which was finalized Bloomfield Hills, MI • Boston, MA • Chicago, IL • Dallas, TX • Denver, CO
Los Angeles, CA • New York, NY • Plano, TX • Tampa, FL • Uniondale, NY
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October 4–6, 2010 | The Bellagio | Las Vegas, NV

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Parting Shots
Done Deal: Walker & Dunlop
originated a $138.9 million
Freddie Mac loan for Elan at
River Oaks in San Jose, Calif.
Race Against Time
Shea Properties refinances an apartment property, just
before maturity, under Freddie Mac’s CME program.
By Les Shaver
IN 2000, SHEA PROPERTIES put 10-year
debt under the Elan at River Oaks, a
941-unit residential building with 23,000
square feet of commercial space in San
Jose, Calif., that the company had built in
1991. During the past decade, Shea saw
rents rise and fall and completed a $15 mil-
lion renovation of the property, including
unit upgrades and a complete clubhouse
facelift. But come 2010, Shea still had
$120 million of existing debt (with a sub-
stantial pre-payment penalty) that was set
to expire on May 3. The clock was ticking.
In late April, just in the nick of time,
Walker & Dunlop originated a 10-year,
$138.9 million loan under Freddie Mac’s
40 APARTMENT FINANCE TODAY • MAY/JUNE 2010
Capital Markets Execution (CME) pro-
gram to retire the existing debt. The loan
was closed less than two weeks after rate
lock and has been the biggest Freddie Mac
financing of the year to date.
“Having a deal to take 15 percent of
your pool under CME is quite an accom-
plishment,” says Verne L. Murray III, se-
nior vice president of multifamily finance
for Bethesda, Md.-based Walker & Dunlop.
Robert O’Dell, vice president and
treasurer of Aliso Viejo, Calif.-based Shea
Properties, says there was a collective
sigh of relief when the deal closed, even
though the wheels had been in motion
since early February. “Since it was a large
pool, a lot of elements of the CME program
had to apply,” O’Dell says. “It received a lot
of legal attention, but it was a good loan.”
So good, in fact, that Shea is working
on two additional CME loans, although
O’Dell admits that he’d rather secure a
traditional Freddie Mac loan (akin to the
earlier 10-year loan for Elan at River Oaks).
“If I had my druthers, I would prefer the
traditional package,” O’Dell says. “We have
avoided CMBS in the past because you’d
always want to have control over your loan
relationships.”
But the higher proceeds and size of
the deals can make CME a more viable
option. “You have to take what’s available
to give you the proceeds and execution
that you want,” he says. “We’re in new ter-
ritory than we’ve been in the past. Given
the size of this deal, this was what was
available to us at these terms. Not every-
Walker & Dunlop
body can deliver a $139 million deal.”
At least now O’Dell knows what to
expect. “We’ve created a template that we
can replicate for future deals,” he says. ■