How Is Leverage Strategy Changing in Northern CA?
by Josh Anderson
SAN FRANCISCO, CA – CapRE’s Sixth Annual Northern California Apartment Summit took a broad view of the industry’s most pressing and buzzworthy challenges, and included panels on a variety of topics impacting activity in the region. One panel, Exploring the Play of Equity in Today’s Multifamily Arena: Beyond 2018, What Might we Expect? offered insight into one such aspect of the market – equity, cap rates, and the whole shebang. Below we highlight a snippet of that conversation.
Mike Ballard, Partner, Ascent Multifamily Accounting: What is your methodology related to the amount of leverage you’re putting into deals? Has that changed based on the changing trends that we’re seeing?
Peter Wilson, President, PTLA Real Estate Group: Our leverage strategy is to be around 55% LTD on cost or going into a deal, and then if we can re-fi out, 16-24 months later, and it’s a value-add deal, then maybe we will go up to 65% or 70% of the original cost of the asset. So again we are really low leveraged. We are bring a lot of equity and acquisition. So for us we bring fewer deals. But again for those value-add deals, we are really investing in great assets and great locations that we’re going to hold for a long time.
Lisa M. Trapp, Senior Vice President, Sequoia: Yeah, so we don’t have any plans to de-leverage in the near future. Right now the focus on our side, on the maturity side of the house, right now, when we are looking to re-finance we are obviously looking to pay down mezz debt and gain a longer-term 4.25 interest rate. On the new deal side, when we’re talking about leverage, we are still very bullish on it.
So we will take as much as Fannie is willing to give us. Let’s just call it 65% on the mean. And then we will subsidize that, particularly on the value-add front, with what you would all know as mezz debt, but it’s just Class B and Class C Notes that our investors are financing against the general partnership.
So we’re bullish on leverage. A lot of what has guided our thinking there is that we’ve had a great deal of history operating in the market, particular in the Bay Area where we’re acquiring, and if you look back to what happened during the Dotcom, which is when we saw some softening, and if you look back to what happened, it was the same story during the recession, when we saw some softening, if you look at what was happening during that time, we may have had some rent declines from the peak in 2007 or 2008 even for the Bay.
We may have had between a 1 and a 3 and a half cent decline, depending on which part of the Bay Area you were in. Right now, even with all of the leverage that we have, our underwriting assumes that we’re still going to be able to run at 22, 24, 25 percent vacant. If something tectonic were to happen. We’d still be breaking even. So we’re very well leveraged, but it’s positive leverage, and when we are underwriting, we are really paying attention to what is our break-even.
For more coverage of this panel, check out a previous CapRE Insider Report: