Return of RTLs Boosts Liquidity for Smaller Multifamily Properties

Neal Johnson, CEO & CIO, Hunter Street Partners. Image courtesy of Hunter Street Partners

The COVID-19 pandemic has brought a lot of uncertainty for both multifamily property owners and their tenants. The Eviction Moratorium introduced by the CARES Act has put pressure on landlords and managers not only of professionally-managed properties but also of smaller entities, which usually do not get included in the official data reports. Those dealing with rent delinquencies have been particularly at risk as they had to find ways to continue making their mortgage payments. 

At the beginning of August, Hunter Street Partners teamed up with Rice Park Capital to invest in portfolios of loans secured by single-family and small multifamily properties. The partnership announced that they are initially targeting performing and non-performing residential transitional loans used to help renovate and sell properties in need of repair. 

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“The recent uncertainty caused by the COVID-19 pandemic had led to a retrenchment of traditional capital providers in the residential transition loan market even though fundamentals for housing have remained relatively stable,” said Neal Johnson, CEO & CIO of Hunter Street Partners. Johnson spoke with Commercial Property Executive about how the investment platform can help smaller business entities and also shared some additional financing solutions offered by his company. 

How would you describe the lending environment for owners and managers of small multifamily properties since the COVID-19 outbreak?

Johnson: As the COVID outbreak hit, originators of residential transition loans (RTLs) stopped making the loans because their warehouse lines shut down and the investor demand for the resulting loans stopped as everyone was concerned about the impact of the outbreak on the economy. Liquidity for RTLs dried up as a result of general economic uncertainty. However, the impact of COVID-19 has been positive for RTLs. Lower interest rates and a desire by consumers to transition from dense urban areas to single-family housing has spurred housing demand and provided a tailwind to home prices.

Have you noticed any changes or fluctuations in demand for residential transitional loans since the outbreak?

Johnson: New originations of RTLs are just now starting to come back and demand is strong. The U.S. consumer is helping drive demand as they are looking for more space due to working from home and moving away from more densely populated living arrangements. RTLs help revive existing housing stock which is often the source of starter homes. While demand for RTLs is strong, new loans have higher coupons, lower loan amounts and higher credit requirements due to the uncertainty from the impact of the pandemic.

How can the investment platform that your partnership with Rice Park Capital is launching assist owners and managers of small multifamily properties?

Johnson: The investment platform is bringing needed liquidity to the strong demand for RTLs. We are helping small contractors makeover existing housing stock for the increased demand from first-time homeowners. We are also helping small property owners revive their properties to meet the demand from new tenants looking for more space. In addition, we are helping small landlords finance their rental properties with loans matched to the needs of landlords.

Tell us about a recent acquisition you made and how it is representative for the current economic conditions.

Johnson: When COVID-19 hit, the warehouse lines originators used demanded repayment. Originators were forced to use capital to pay down existing loans which forced them to stop making new loans. We worked with an originator to acquire a pool of their pre-pandemic originations at a slight discount to help them free up capital to restart originations. The pool was all performing collateral with strong loan characteristics. It was a win-win situation. We made an investment with strong returns and the originator was able to restart originations.

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What other investment solutions does your company provide to small businesses?

Johnson: Our platform is asset class agnostic across corporate finance, real estate and specialty finance. We target dislocated asset classes where traditional sources of liquidity have paused activities or exited the market and opportunities to provide creative capital solutions to special situations involving strong companies with near-term liquidity needs. Other recent examples of investment solutions we have provided small businesses include senior loans typically with warrants attached.

What’s your advice for small business owners who are having difficulties in making their mortgage payments?

Johnson: Be proactive and transparent with your lender. Your lender is invested in your project as well and wants to see you succeed. There is always room to make accommodations for a period of time if the end result makes sense.