Dive Brief:

• Loans backing 61 beleaguered multifamily properties in San Francisco are being offered for sale, according to The San Francisco Business Times.
• Two securitized deals back the properties, owned by a joint venture between San Francisco-based Veritas Investments and affiliates of Boston-based Baupost Group, according to data provider Trepp. One has a balance of almost $350 million, while the other has a balance of $104 million. There is also non-securitized debt by insurance companies, bringing the total debt stack to almost $675 million, according to a Trepp note shared with Multifamily Dive.
• The properties are struggling from an occupancy perspective, only sitting at 65%, according to Trepp. Last year, the data provider put out a report saying that “the loan was facing imminent maturity default and that the borrower was not going to exercise its extension option.” Eastdil Secured has been retained to market the loan, according to The San Francisco Business Times.

Dive Insight:

In January, Fitch Ratings reported that the joint venture between Veritas Investments and affiliates of Boston-based Baupost Group defaulted on the loan backing the San Francisco properties. 

Fitch said that Veritas had indicated it was not going to exercise its one-year extension option or be able to pay off the loan at maturity. At the time, it was interested in finding a partner to help recapitalize the properties, according to the rating agency.

Approximately 12% of the total units were offline due to Veritas performing renovations on vacant units at loan issuance. They were expected to be re-leased at market rental rates, according to Fitch.

The Fitch report came on the heels of a December report that the Veritas multifamily loan pool was transferred into special servicing in November. When it matured on Nov. 15, 2022, it was not repaid. In December, it was reported as a non-performing matured balloon loan.

More issues on the horizon

As the Veritas loans head to the market, the issues facing apartment communities backed by commercial mortgage-backed securities eased in April, according to Trepp. The multifamily delinquency rate fell 9 basis points to 1.82%, while the servicing rate fell 3 basis points to 3.0%.

However, many observers expect more owners to face stress as the year goes on and more borrowers face issues refinancing their loans in a more difficult lending environment.

“Eventually, they’re going to run out of reserves, the rate cap is going to expire or they have a loan maturity,” said Michael Becker, co-founder and principal of Dallas-based owner SPI Advisory. “If they bought a deal in late 2021 or early 2022 and put a three-year bridge loan on it and you have 80% leverage or maybe 85% leverage, get some pref behind them on the first and their values have dropped 20%, all their equity is gone.”

Eventually, those owners will have to sell their properties. “I think that moment of inflection really comes in the latter part of this year into the beginning quarter of next year,” Becker said.

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