As traditional lending sources take a break, specialty finance companies are experiencing an uptick in originations. For those who offer the right products for today’s uncertain market, there are many needs to be filled.
Multi-Housing News interviewed Chris Callahan, president & CEO of X-Caliber Capital, based in Irvington, NY, about how multifamily borrowers are responding to the company’s verticals, which include HUD financing, USDA lending and C-PACE.
The financing landscape has clearly changed since the beginning of the year. How is X-Caliber being impacted?
Callahan: This kind of market gives us more leverage in terms of structuring loans the right way and being really thoughtful about where we’re deploying capital. Despite all the geopolitical and liquidity events, we feel pretty good about lending in this environment, and we’ve been hitting on a number of assignments.
What kind of financing gaps are you able to fill?
Callahan:We have our HUD business, which traditionally offers the largest leverage out there from a proceeds standpoint. We also have C-PACE financing, which has been relatively constant on the proceeds side, and our USDA business is similar as well. So, I would say, by virtue of competing conventional lending or financing options, we’ve been able to outperform from a percentage of proceeds standpoint. Where we’ve had gaps in the financing, we have a mezzanine product that has allowed us to get up close to where we were even a year ago, specifically on the multi-family front.
We’re still looking obviously at coverage and making sure we’re fine there, but we’re pretty flexible in trying to offer maximum proceeds within reason. That has also been a differentiator for us as the markets have turned a little more turbulent.
But, II’m sure that the terms have changed for you.
Callahan: Yes. Leverage is lower. On the multifamily side, you’re not necessarily constrained by LTV, but you are certainly constrained by your debt service coverage ratio, and pricing, as a component of DSCR, has gone higher across all competing asset classes as well. The HUD, USDA and C-PACE products—the lower-delivered or government-guaranteed or semi-government guaranteed products—haven’t reset as high as some of the conventional products.
Eighteen months ago, you formed CastleGreen Finance, which is C-PACE lender. How have you seen interest in that product grow?
Callahan: It has been pretty phenomenal. C-PACE legislation has now been passed in 37 states. It’s active in 30 thirty of those states. There was just over $2 billion done from 2013 and 2020 and, then last year alone, there was another $1.3 billion done. The growth has been exponential. We’re continuing to see that again, but there have been dislocations in the financing markets.
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Last year, XCaliber started a division for USDA lending. What headway has that division made and what have they learned along the way?
Callahan: It’s one heck of a powerful financing tool for rural America. We started a little over a year ago, and, I believe at this point, we’re a top five USDA lender in the country. Our goal, given the pipeline and what competing financing tools are doing, is to be a top three lender next year. There’s a wide variety of financings that you can do with the product as long as you are in these rural footprints and, from our standpoint, it dovetails very well in terms of the core verticals focused on impact lending.
Who are the borrowers? Landowners and farmers?
Callahan: It’s really all over the map. We’ve done loans for nursing facilities, hotels, multifamily and more. We even executed a loan to refinance a fire truck in a rural area in South Carolina that was collateralized by the truck as well as by the taxing authority of the district. There are a whole lot of things you can do with this financing tool. The beauty of it is that we are putting money into rural communities, which are traditionally underbanked from a financing standpoint.
X-Caliber is an impact investor. With the increased focus on ESG, are you finding more access to capital and more investors that want to get involved?
Callahan: For us, ESG is right in the middle of the goal posts, and that’s why we’re having a good amount of success. When you think of our main verticals—affordable housing, energy-efficient upgrades for buildings, providing capital to underserved, underbanked rural areas and funding health-care facilities and seniors housing for low-and moderate-income seniors, I think that’s resonating well as we go out and raise additional capital for some of these strategies.
You have advocated for public private solutions to the affordable housing crisis. Do you think Federal and State governments could be doing more to get involved?
Callahan: The last data I saw stated that there is a national shortage of 7 million affordable homes across the country for extremely low-income families. So, by definition, there’s a crisis. Everyone could and should be doing more—not just the public sector, but the private sector as well.
A couple of things that come to mind that maybe could move the needle are: opportunity zones that specifically focus on very affordable multifamily; increased funding for the CDFI Fund (the Community Development Financial Institutions); expanding CRA (the Community Reinvestment Act), allowing banks to go outside of their assessment areas specifically for, and only for, affordable housing. One of the major issues is that a lot of these communities just don’t have enough access to capital. These won’t solve the problem by itself, but they are just another thing that potentially helps.
Another area that could be helpful is the expansion of C-PACE nationally to be active in all 50 states. Again, it’s not going to solve the problem itself, but it’s an incremental financing tool. With everything thrown at the problem, maybe that helps get us there.
Higher interest rates and the cloudy economic outlook are expected to impact values and transaction volumes for the rest of the year. What is your forecast for the remainder of 2022 and 2023.
For the first six months of this year, we were on record pace on the multi-family side as an industry. Last year, originations came in right around $484 billion to $490 billion. Given the drastic slowdown, I think that number gravitates down right around $425 billion for this whole year. It’s a pretty dramatic slowdown vs. the kind of run rate of where we were heading.
What I am looking for is some sort of stability in the capital markets. If you have stability in the capital markets, cap rates will gravitate to where they need to be, the warehouse lenders will feel better, capital will come back, and that will just provide a more orderly market to get transactions done. We think that will be at some point in early 2023 as long as CPI and some of these metrics cooperate.