Loans options for owners of small multifamily properties

You hear in a lot of places that the only commercial loans available today are for apartments.  Apartment loans are available especially for larger apartment project (over $5 million) where the agency lenders, Freddie Mac and Fannie Mae, and HUD are keeping the market going.  These lenders are offering very aggressive rates and in some cases aggressive loans.   HUD loans are still available up to 85% LTV and Freddie and Fannie loans are available in the 75%-80% LTV range in most markets.  However, Freddie and Fannie do not generally service the smaller loan market.  You can get a loan from them in the $3-$5 million range, but only if you find the right correspondent lender.  For loans under $3 million its very tough to get a Freddie or Fannie lender interested in talking to you at all.

So for smaller properties is there capital still available?  Thee quick answer is yes.  Owners of properties under $5 million still have choices.   There are fewer choices today compared to last year, but of coarse who has more choices today when compared to last year.  There are still some banks lending and some Fannie lenders are offering loans to borrower needing between $1 and $3 million.  

Over the last week my office called over 100 banks in the Chicago area looking to see who is lending.  We found 21 banks (about 20%) who said they were willing to consider new loans.  A slightly smaller survey earlier in the year found almost 50% of the banks we called saying that they were lending.   Additionally many of these lenders who said they were looking to make loans were offering terms so onerous that I would not really consider them in the market.   These banks were only willing to do amortization schedules of 20 years or less and/or requiring LTV's under 60%.  The rates offered had a wide range with some offering rates slightly below 6% and others being at 7.5% or higher.  In reality fewer than 10 loans were really looking for new loans and wanted to compete for new business.

The good news is that the terms from these banks were pretty good.   Maximum LTV's were typically 75% though some lenders were willing to consider 80% for the right borrower and property.  Most lenders wanted a 25 year amortization, but some were willing to do 30 years.  Terms were typically 5 years with flexible step-down prepayment premiums and low fees.    Most banks were quoting rates between 6% and 6.75%, but a couple of banks were quoting rates below 6%.   These rates are up 25 - 50 Bps from our survey performed a few months ago.  The one negative for most of these quotes were the requirement for a depository relationship, typically the operating accounts.   In general banks are looking for relationships and not just a loan transaction.

In addition to bank loans there are also a few lenders participating in the Fannie Mae small loan program.  These loans are only available in major markets, but they offer low fees and great rates.   Additionally, your loan really needs to be above $1 million.   These are the best deals out there for smaller properties.   The LTV's are typically 75% or less with debt service coverage ratios of 1.25x or greater.  The loans are often quoted as recourse loans, but non-recourse is available for the right deal and/or borrower.   These are probably the only non-recourse loans available for smaller properties.  One small loan lender has fees of just 12.5 Bps ($2,000 minimum) including all lender legal and reports.   This is the kind of fee structure that makes sense for loans of this size.  Fannie small loan rates below 6%, for a 5 year loan and just over 6% for a 10 year loan.   These low rates with this cost structure should not be missed.  The one negative of this loan is the prepayment premium is yield maintenance, but at this rate the prepayment premium is probably worth it.

If you need assistance in finding a loan send me an e-mail (aklingher@mfloan.com).   To stay current on rates and trends in multifamily finance visit our web site MFLoan.com and subscribe to MFLoan Update, our monthly newsletter on multifamily finance.