Earlier this month, Berkadia, a joint venture of Berkshire Hathaway and Leucadia National Corporation, announced it had closed the first affordable single-family rental financing through Freddie Mac Multifamily for TrueLane Homes, an owner of single-family rental homes.
The 10-year, fixed-rate loan totaled $11,092,000 and secured 195 homes and one duplex in nine different metropolitan areas across six states – Arkansas, Kentucky, Indiana, Illinois, Pennsylvania, and Texas. Over 90% of the homes have rents that are considered affordable for families earning at or below 80% of the median income (AMI). Moreover, 100% of the units are affordable for families earning at or below 100% AMI.
“We’ve said from the beginning that the goal of our single-family rental pilot is to increase the availability of affordable rental housing in communities across the country, and this transaction does exactly that,” said David Leopold, vice president targeted affordable sales & investments at Freddie Mac Multifamily.
Berkadia was the first Freddie Mac seller/servicer to obtain the National Single Family Rental Designation by Freddie Mac Multifamily, permitting the organization to sell and service loans secured by single-family rental properties nationwide to Freddie Mac. This was the first transaction of this kind for Berkadia and Freddie Mac.
“The Freddie Mac and Berkadia single-family rental platform will continue to evolve as we find more opportunities to finance single-family rentals toward the goal of providing clean and safe affordable rental housing across the nation,” said Anthony Cinquini, managing director at Berkadia. “We’re excited for what the future holds.”
In an interview with BUILDER, Cinquini explained how the deal came together and shared his thoughts on what’s in store for the single-family rental market:
BUILDER: Why did Berkadia enter the single-family rental space? When did discussions on this topic first start?
Cinquini: I have been noodling in the space since the early 2000s. I was approached in 2009 by a borrower that had +/- 1,000 homes that focused in the developmentally disabled group home business and had been cut off from their normal financing channels. At the time, the mantra at Fannie and Freddie was “no new products” but that borrower and I remained in touch. In 2015, it appeared that the regulator was going to permit the financing of this product type and Freddie had already been thinking about that space. That product is very unique in that the borrower leases the homes to professional health care providers who then contract with the states to house the developmentally disabled community in group homes. Generally, those residents derive their income from Medicaid waivers and Supplemental Security Income and clearly qualify as affordable tenants and affordable housing. We closed that first deal in 2015 and a subsequent one in 2017. Again, those deals are not exactly what we just financed, however there are obvious similarities (being that they are single family homes). We are working on a few more under that type of structure/use.
During and after that first transaction, Freddie (and Fannie) were looking at the space in terms of affordable housing and the role they can play. Though there are large single-family rental (SFR) owners and operators that play at a rent level that are more market rate, it became clear that there are lots and lots of smaller players that are in the low value range or homes that are in markets where rent levels are at or below 80% of AMI. These owners have access to local banks but as those owners grow their business, the owners might exceed the local bank limits or the terms are not favorable such as terms of three to five years and require full recourse. Both Fannie and Freddie, using the discipline of their multifamily experience in terms of underwriting and servicing, can really play a role in providing a consistent capital source to owners who are providing affordable single family housing nationwide. The deal closed was a 10-year term, which is something a local bank typically does not provide, for example.
Berkadia is uniquely qualified as our servicing book is large and diverse and our underwriting platform and business model is highly GSE centric. Our vast experience in the multifamily discipline makes this emerging market a perfect fit for our intellectual talent and experience to capture and be first mover. We doubt it will rival our multifamily volume, but is a complementary bolt on business. Furthermore, we think we are assisting, in a small way, the creation of affordable housing by having a dedicated team to focus on the space. We think it is a “win-win” for everyone involved and look forward to growing the business.
B: Do you think the single-family rental market will continue to grow in the years to come? Why?
C: Yes. As stated above, post 2008, there were lots of people acquiring SFR’s for the fix and flip. As that happened another thing happened: 1) Potential single-family home buyers were strained in their financing options, and 2) Technology caught up.
Home prices had increased rapidly in the years leading up to the financial crisis. Lending to home buyers grew with it. After the crash, home prices fell and the economy took a substantive hit leaving lots of people who had negative equity and/or experienced a job loss. As those homes were sold via foreclosure, opportunistic investors acquired lots of homes with the intent of “fix and flip”. However, post-crisis, financing for home buyers tightened severely and perhaps the “flip” part of the plan didn’t pan out as well as intended. If you own a vacant home that is going to sit for a while, might as well rent it until the market recovered. Some did and realized that because technology was improving, managing a diverse portfolio of single family homes, though still more expensive than multifamily, started to become feasible. I know of SFR property managers who have apps, similar to FaceTime, where the resident can contact the property manager to fix something. The tenant can create a video of the problem which is automatically sent to the maintenance people who know what the problem is so they can load the truck with the correct part and only visit the home once. There are other people who you can contact to get the lawn mowed when the home is vacant, for example, versus having to maintain relationships with lawn mowers across the market, etc. The advancement of technology for the management of homes is permitting the expansion of the space.
B: What’s on tap for Berkadia in the single-family rental space? What are its goals in this sector?
C: We want to continue to be thoughtful and mindful of the space. For now, we are focused in becoming the best-in-class and go to player by working with new borrowers. We also want to assist in the further development of the space with the GSE’s by assisting in process, procedures, underwriting and evaluating the credit risks and pricing of the loans and most importantly expanding the rental pool of affordable single family homes that are of a quality and standard that enhances the local community they reside in. We appreciate and respect our partnership with Freddie Mac as they share the same goals.
