Capped ARMs a good financing alternative

It's been two years since the subprime mortgage market blew up, taking down the residential housing industry and eventually the economy. While everyone's hoping the end of the property blues will be reached this year, there are still some sectors, such as commercial real estate, that were late coming into the down cycle and still have a long way to fall.

I bring this up because a lot of small investors -- after successfully dabbling in the residential markets, picking up forlorn properties cheap and either fixing to sell or holding as a rental units -- are realizing it might be time to move up the real estate food chain.

Although the investment market for single-family homes is still vibrant due to all the foreclosures, there's a lot of competition out there and in many cases the payoff won't come for many years.

Understanding that new dominoes are starting to fall, smart investors are already moving up, spreading their investment dollars to other forms of residential property such as small apartment buildings or senior family housing.

The problem is, of course, the next level of investment takes a lot more capital. Essentially, you could be moving up from a $200,000 investment to one that's $2 million. Even if one brings in friends and family, forming some form of partnership or joint venture to help fund this next stage of investment, there probably will be a need to borrow capital.

With the local banks having turned off the lending spigot and locking down the handles, where does one turn for this kind of financing? One of the answers is Freddie Mac, with its "capped" adjustable-rate mortgages.

For many months, I had been noticing a level of investors between institutional buyers and small-time dabblers who had been successfully completing deals using Freddie Mac's Capped ARM financing program.

Two examples that caught my eye happened earlier this year. I noticed them because both were for dual projects in Florida, a particularly tough place these days to get financing capital for just about anything. Almost the whole state is kind of a ground zero of blown-up real estate developments, so anything that gets financed there immediately draws my attention.

In the first deal, done in January, Capmark Finance Inc. arranged the refinancing on two Florida senior housing properties using Capped ARMs. One of the financings, for Allegro at East Lake, a senior housing project in the Tampa area, was not very big at $7.7 million.

The second also involved two Florida financings, the smallest being an apartment complex in the city of Longwood, for under $10 million.

The second dual set was arranged by Matthew Schoenfeldt, a director at Holliday Fenoglio Fowler LP in Chicago, who has completed in the past year somewhere in the order of $100 million in Capped ARM financings, many down in the $10 million range.

I asked Schoenfeldt what he likes about Capped ARMs, and he responded by saying the two most compelling features in this type of financing were low, current coupons and prepayment flexibility.

"Capped ARMs allow borrowers to take advantage of the low, floating rates today," he explained. "My clients were able to lock in a spread of about mid-300 basis points over LIBOR (London Interbank Offered Rate), so their coupon was less than 4 percent." ...CONTINUED

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