Multifamily Insider: Here’s Who Multifamily Investors Should Turn to for Small Loans


The Freddie mac The Low Balance Loan Program has long been the most coveted multi-family loan for stabilized properties requiring financing between $ 1 million and $ 6 million (and in some cases a little more), but is it the best product for your? property ? Statistically – unlikely.

Why? Let me explain.

For your down the fairway type loans in major markets (think Los Angeles, Miami, Austin or any of the boroughs), Freddie Small Balance may be right for you if you are looking to maximize your leverage and want that 30 years amortization.

To be completely honest, this is a great product and offers a fixed rate for up to 10 years with aggressive pricing and extremely flexible prepayment options. What the hell is wrong with that? Nothing.

But there are others, and according to your needs, better option.

It’s also worth noting that if you’re not in a top metropolitan statistical area, Freddie is not for you. Spreads do appear, leveraged contracts and other options abound, but to be clear there are other options out there anyway, and you should know them all.

Fannie Mae has an incredible small balance loan product, for example, which works very well in tertiary markets and has a non-recourse self-amortizing option (30 years fixed and fully amortizing up to 80% loan ratio). value).

Fannie Delegated Underwriting and Servicing is another great Fannie option where the government sponsored company shares the risk with lenders and allows them autonomy in decision making (which Freddie SBL does not offer), which means that “story deals” can be made (if the story is good enough).

Life insurance companies offer low-leverage non-recourse debt (yes, for as little as $ 1 million or less) with the tightest spreads in the industry. If you are looking for self-absorbing debt and care more about interest rates and amortization than leverage; Money from the life insurance company may be the best option for your stabilized multi-family property.

It looks like the ugly duckling of multi-family finance may very well be Federal Housing Administration-debt insured, which is ironic because the Department of Housing and Urban Development happens to be offering the most valuable suite products we have at our disposal.

Misconceptions abound, and the thing to remember is that the FHA (and Fannie Mae DUS) doesn’t really have a minimum loan amount – it’s up to the lender’s discretion.

So you can go out and get a $ 3M HUD 223 (f) loan at 85% LTV, fixed and fully amortizing for 35 years (or a 40-year fixed rate, 87% LTC, non-recourse construction loan. ) and it no longer takes 2 years to close.

Guess what? It is also designed for financing at market rate. Sure, the FHA has big buckets for low income housing tax credit offers, but it’s by no means exclusively in this space.

Commercial Mortgage Backed Securities are a great alternative to Freddie SBL when you can’t meet GSE’s core equity and liquidity requirements or are a little outside their underwriting framework.

It’s the same 10-year non-recourse fixed rate debt with 30-year amortization. These days CMBS lenders will see their prices tighter in order to win multi-family business because they have lost so much to Fannie and Freddie during this cycle.

All those good things said, have a glass of wine while reading your application because these application fees can seem heavy (for small loans) and the legal lender for debt securitization on Wall Street is not cheap .

The point is, your “small” loan of $ 1-6 million could be part of a CMBS deal, be on a life insurance company’s balance sheet, benefit Fannie and Freddie, or even land a loan. insured by the FHA.

This is the tip of the iceberg and a 30 basis point miscalculation (choosing the wrong loan product) on a 10 year loan costs you 3% of your loan amount.

A 35 year fixed rate loan instead of a 10 year loan can save you incredible amounts of future interest rate risk while still maintaining the ability to do so; (1) continue to recapitalize with market-rate mezzanine debt (which Fannie, Freddie, and others are proposing) and (2) sell your asset with debt in place, assumable, better than the market.

If you know what’s out there and what you can do with it, you can become exponentially more creative and flexible.

Walking into a local bank might have worked wonders just 5 years ago, but the opportunity cost of not dipping your foot into the warm, inviting waters of 2019’s multi-family capital markets is costly.

When getting your next loan, make sure you think about all the options in the capital market and get better debt.

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