Four Things to Know About Multifamily Financing

October 15, 2014

Multifamily financing is on the rise throughout the US. Multifamily is a preferred asset class in the commercial real estate world for investors and lenders alike. This has caused aggressive competition and created a broad range of loan options. Which of these myriad lending directions are the most beneficial for you to pursue depends on your unique business model.

Here are four things you need to know about multifamily financing:

This complex landscape can be broken down into fundamental lending types.

Banks are typically portfolio lenders that prefer shorter term fixed/hybrids, bridge or construction loans. Hybrid loans are usually 30-year adjustable rate loans that offer a fixed rate for the first 3, 5, 7 or 10 years of the loan. Banks generally offer loans from $500,000 to $25 million, with loans from $1 to $5 million being common. Rates will typically range from 3.50% for the 3 year, to 4.65% on the 10 year. Prepayment penalties, if applicable, are typically step down (5% year 1, 4% year 2, 3% Year 3, 2% year 4, 1% year 5, etc.).

Life companies are also portfolio lenders. Like banks they seek interest income, but they are also focused on the timing of their revenue streams, matching interest income to projected policy payouts occurring years in the future. As a result, the life companies offer attractive fixed rate loans with terms from 3 to 25 years. Life company loans typically range in size from $1 million to $100 million. Rates may range from 3.50% to 5.00% for 10 year money. Prepayment penalties are typically yield maintenance.

Commercial mortgage backed securities lenders specialize in packaging pools of commercial real estate loans which are used to securitize and sell bonds. Because the loans are the asset that back up the securities, the terms of CMBS loans are more restrictive than those of other lenders. CMBS lenders frequently offer higher leverage than other lenders. Rates are very competitive with 10-year interest only loans becoming quite common. CMBS lenders originate loans of $5 million and larger. Rates range from approximately 3.50 – 4.0% on the 5-year and 3.50 –  4.50% on a 10-year. Prepayment penalties are defeasance.

Agency loans are those purchased by Fannie Mae or Freddie Mac. They may hold loans in their respective portfolios, though more often, they provide credit enhancements in the form of loan guarantees and issue mortgage backed securities. Thanks to the agency guarantees these loans often bear low, fixed-interest rates. Terms range from 5 to 30 years. Agency loans are a bit more complex to process and generally require a greater level of ongoing reporting by the borrower. However, the attractiveness of their rates often justify the extra effort. Fannie Mae typically funds loans in the $1 to $50 million range, while Freddie Mac tends to structure deals in the $5 to $100 million range. Rates currently range from 3.50% to 4.50% for 10 years, as well as 5-year in the same arena. Prepayment penalties are yield maintenance.

by Brian Whitney, Commercial Mortgage Banker