Investors, Do You Know Your Multifamily Loan Options?

Posted on December 27, 2018

Choosing the right multifamily loan option can be daunting. The tidal wave of information available to us every time we touch our phones is intimidating, to say the least. Even the savviest real estate investors are cognizant of the fact that they don’t know all their options. The biggest shops in the world hire financial intermediaries to advise on and arrange financing for themselves — why shouldn’t you? Start by seeking more information on the most basic multifamily loan options, along with some pros, cons and requirements.


Agency debt speaks of Fannie Mae and Freddie Mac, each with dozens of particular loan programs and always competing against each other. There are the Fannie Small Loans, which are special because they offer fully amortizing loans (fixed and fully amortizing up to 30 years). For loans with a little more hair on them, Fannie Mae Delegated Underwriting and Servicing (DUS) may be the way to go. DUS ultimately puts some of the decision making back in the hands of the lender, versus the standard procedure of kicking loans back to the General Services Administration (GSA) for approval.

Larger, straightforward loans are a good fit for Freddie Mac conventional. Freddie also has a very popular small balance loan (SBL) program that is great in the largest U.S. markets. Once you get into smaller markets, though, spreads widen and leverage drops. For loans from $1 to $7 million in large markets, a Freddie SBL is the way to go.

Agency loans are generally going to look for the key principals (KPs) to have good credit, a cumulative net worth greater than the loan amount and liquidity greater than 10% of the loan amount (outside of retirement accounts) post-closing (but not from the proceeds of a closing). With a good broker, you can get agency loans as small as $1 million or even a little less.


CMBS loans are a great option for KPs who don’t fit the net worth and liquidity requirements of agency debt or fall outside of their sometimes-rigid box in another capacity. CMBS lenders securitize and sell loans post-closing. They focus almost solely on the quality of the underlying asset. This means they may at times be more stringent on lock box requirements, for example, but will be easier on KP requirements or other nuances.

Something else to be said here is that they don’t have options for step-down prepayment penalties — you are generally stuck with defeasance, although you may be able to negotiate yield maintenance. Application fees tend to be heavy, as do legal costs, because of the nature of the securitization post-closing. But if you’re working with a good shop, these loans can close quickly and with less red tape than some agency options.

The options above offer fixed-rate terms up to 10 years or more, interest-only options and 30-year amortizations, and are non-recourse with standard carve-outs. Agency and CMBS loans are available for stabilized market rate, affordable, senior and student housing. Leverage will generally be up to 80% loan to value (LTV) for agency, and 75% for CMBS.


The Department of Housing and Development (HUD)-insured multifamily loans often get a bad rap. Folks associate them with loans that take a long time to close, have a lot of red tape and are only for affordable properties. Some of this is misguided. The red tape and timeline are undoubtedly a bit more arduous than agency debt; however, a HUD 223(f) loan, with the right lender, may only take another 30-60 days to close than an agency loan.

Although Federal Housing Administration (FHA) debt may not be perfect for purchase execution, it is often the best for recapitalizations. FHA-insured permanent financing is generally non-recourse, up to 85% LTV, fixed and fully amortizing for up to 35 years (subject to the remaining economic life of the property), and priced better than Fannie, Freddie and CMBS, because of the lower risk rating of debt guaranteed by the U.S. government.

Life Company

Life company debt is a great option for borrowers with Class A assets in medium to large markets (preferably large) who are focused on pricing and amortizing their debt. Essentially, you will get lower-leverage non-recourse debt, at the most aggressive interest rates in the market, with notably shorter amortizations. This is in the realm of small, stabilized product (think between $2 million and $15 million). Once you get bigger and are working on Class A infill type product, life companies can ironically push out the highest leverage and most aggressive terms — but on an extremely selective basis.

Bank Money

You still want to walk into your local bank? With low enough leverage on a large enough loan (think over $5 million and under 65% LTV) you still have a shot at non-recourse debt, but you will also have shorter terms (about five years fixed) and amortizations (often 20-25 years). Rates may be higher but prepayment penalties lighter, and closing costs almost certainly will be easier on the heart. It is a dance of the importance of recourse versus non-recourse; it’s managing long-term interest rate risk versus the ability to exit more easily, and it’s most certainly a question of cash flow versus amortization.

And then, there’s everything else. Out in a place where Wall Street meets cyberspace sits a stack of dry powder so high that if you sneezed in front of it, poverty would end. As such, there are more loan programs than stars in the sky — with risk-adjusted pricing, of course — that will boost your leverage and shrink execution risk. The bottom line is you have options, and it’s your duty as an investor to know them or to hire someone who does.

Blake Janover, Forbes.