The Scottsdale, Ariz.-based firm, which has about 15,000 houses, began offering loans in July and is targeting rental-property owners seeking $5 million to $10 million in financing, said Todd Sammann, who runs Colony’s single-family lending arm. The company intends to originate as much as $2 billion in debt during its first year, with potential to do more, including loans of as much as $100 million, he said.
“Colony’s operational expertise and capital-markets background position us well to play a meaningful role in the industry’s consolidation, which we expect to grow as the market evolves,” Sammann said in an e-mail yesterday.
Hedge funds, private-equity firms and real estate investment trusts have raised more than $18 billion and bought more than 100,000 houses, betting on rising demand for rental properties as the U.S. homeownership rate is at its lowest level in 18 years. These investors are creating a new institutional asset class from what had been a mom-and-pop industry.
“This shows how underserved the middle market and smaller operators are in getting good debt,” said Dennis Cisterna, co- head of the opportunistic-finance division at Irvine, Calif.-based Johnson Capital, which has arranged more than $125 million of loans to rental investors and has worked with Blackstone Group LP and Cerberus Capital Management LP. “And they make up a much bigger percentage of the whole pie.”
JWB Real Estate Capital LLC, an investment firm with more than 200 rental houses, expects to receive a $3.9 million loan on 54 properties from Colony within a month, according to Alex Sifakis, president of the Jacksonville, Fla.-based company.
“They had great terms, slightly better than their competitors,” he said in a telephone interview. “We’re dumping the money right back into the market. It’s a buying opportunity right now.”
Colony, which is offering five-year terms with fixed interest rates between 6% and 7%, is structuring its rental-home lending as separate loans on each property, which may make it possible to sell bonds tied to the mortgages and increase potential returns, a market that Wall Street is trying to create.
“We’re confident that demand exists somewhere in the cross section of the CMBS, ABS and RMBS investors,” Sammann said, referring to buyers of commercial mortgage, asset and residential mortgage-backed securities.
Providing nonrecourse debt to landlords will be a catalyst for consolidation among single-family rental investors, according to Sammann. Nonrecourse loans allow lenders to seize the collateral backing the debt and no other assets should a borrower default.
Blackstone, the largest single-family landlord, with more than $5 billion spent on 32,000 homes, started a unit called B2R Finance LP that’s offering floating-rate loans starting at $10 million for investors. Cerberus, the private-equity firm led by Steve Feinberg, started First Key Lending this year to lend “billions of dollars” through fixed-rate loans, Eric Atlas, First Key senior vice president, said during an April forum in Miami.
Regional lenders were the primary source of financing for landlords buying properties prior to the housing crash. More than 500 banks have failed since the real estate collapse, according to the Federal Deposit Insurance Corp. Government-backed lender Fannie Mae limits loans to 10 properties per borrower, while Freddie Mac has a four-home limit.