Apartment Loans

When shopping for apartment loans, there are many complexities which can lead to information overload. At Caffrey & Co. we work with you to make sense of loan products finding you the best loan fit for your apartment loans.

Apartments loans are vital for buyers as the majority of sellers often require a straight sale leading to the need for apartment loans.

Current Loan Rates

TermAmortLow LTVHigh LTVMax LTVMin DSC
Fannie Mae Small $1,000,000 to $3,000,0000 ($5 million in major MSA markets)
5304.064.5955%/75%1.25
7304.214.4355%/80%1.25
10304.274.4755%/80%1.25
15304.654.6555%/80%1.25
30304.974.9855%/80%1.25
Fannie Mae Large Loan Program Green $3,000,000 and Up
5303.964.4155%/80%1.25
7304.114.2955%/80%1.25
10304.174.3355%/80%1.25
15304.554.6255%/80%1.25
30304.875.0255%/80%1.25
Freddie Mac Small Program $1,000,000 to $6,000,000 (larger in select markets)

5304.063.9655%/80%1.55/1.25
7304.274.2455%/80%1.55/1.25
10304.384.1855%/80%1.55/1.25
Freddie Mac Standard Loan Program $3,000,000 and Up


5303.864.0155%/80%1.25
7304.014.2955%/80%1.25
10304.074.1855%/80%1.25
FHA/HUD - does not include MIP


3535Refinance3.7283%/85%1.1765
4040Constr/Perm4.2285%1.1765
Commercial Mortgage Backed Securities (CMBS) a/k/a Conduits $3,000,000 +
5303.64.3165%/70%1.3
7303.774.2765%/75%1.3
10303.984.5865%/75%1.3
Insurance Company Financing $1,000,000 +
5253.714.0170%/75%1.25
7253.624.1270%/75%1.25
10253.684.3370%/75%1.25
15251.564.5570%/75%1.25
20204.474.7770%/75%1.25
Below Should not appear in on Web Site
5-year UST0.0221
7-year UST0.0232
10-year UST0.0243
15-Year Avg 10/30 UST0.0265
30-Year UST0.0287

Apartment Loans FAQ

Here are some FAQ’s that may answer some of your questions:

How much money do I need to buy an apartment complex?

With apartment loans over $1 million you will generally need 20% down, plus closing costs.  An exception to this are HUD loans. HUD Loans require as little as 15% to 17% cash down.

Are 30-year fixed rate loans available for Apartment Buildings?

Yes, Fannie Mae has loan terms for 30-years.  HUD Loans offer fixed rates, fully amortizing loans going out to 35-years. For new construction HUD loan terms include the construction period plus 40-years.  When considering an apartment loan that allows the longest amortization you might want to investigate HUD loans.

Are nonrecourse loans available for apartment loans?

Yes, nonrecourse loans are available on loan amounts starting at $1 million.   Fannie Mae, Freddie Mac, HUD loans, and CMBS (Commercial Mortgage Backed Securities) all offer nonrecourse loans.

How long does it take to close an apartment loan?

The closing process norm is 60-days from the date the loan is under formal application and the borrower has signed the formal engagement letter with the lender.  This formal engagement letter is sometimes referred to as a Term Sheet, or Application. This 60-day estimate is the norm for Fannie Mae, Freddie Mac, CMBS, and portfolio lenders. A HUD loan may require a longer time to close.  When going with a HUD loan we have lending partners that will fund and close the loan in about 60-days, you continue with the HUD loan closing and when the HUD loan funds you pay-off the short term bridge loan. Using this approach to allows you to close the loan within the typical 60-days and still capture a 35-year low fixed rate with a HUD loan.

Do I have to have prior experience and ownership of apartments to finance an apartment loan?

Some lenders do require you to have four or more like properties under management or ownership.  Freddie Mac loans and Fannie Mae loans have specific requirements while HUD loans do not. If you decide to finance with a HUD loan and do not have prior experience with HUD loan financing you might be asked to hire a third party management company to assist with managing the property for the first year or so.

Are their financial statement covenants?

Yes, Fannie Mae and Freddie Mac both require the principals in aggregate to have liquidity post-closing of no less than the sum of 9-months principal and interest payments.  HUD loans do not have this requirement.

What is the minimum debt service coverage ratio required?

For the most common apartment loan products 1.25x is the minimum Debt Service Coverage Ratio (“DSCR”).  However, for HUD loans the DSCR ranges between 1.11x and 1.176x. DSCR is the annual net cash flow available divided by the annual principal and interest payments.

Which apartment loan could provide the best net cash flow to me?

Generally, HUD Loans offer some of the lowest interest rates, the longest amortization with the least amount of cash or equity in the property.  If you are looking for high leverage, fixing the interest rate for 35-years, nonrecourse, lowest debt service coverage ratio that would free up as much cash flow as possible you would want to consider financing with one of the HUD loans.

Apartment Loan Products

There are many options to consider when shopping for the right apartment loan, each has advantages and disadvantages. The following are some of the most popular options that can be financed our team at Caffrey & Co.

Fannie Mae – Highlights: Loan from $1,000,000 and up.  Two basic programs – both loan programs require the principal(s) to have prior ownership/management experience in apartments.  Fannie Mae also has liquidity requirements of the principals. It is best to call Mike Caffrey to discuss these requirements to see if Fannie Mae is an option.

Fannie Mae Loan Programs:

  • Fannie Mae Small Loan Program – $1,000,000 to $3,000,000 ($5 million in the following MSAs: Boston, Chicago, Los Angles, New York, Orange County, CA., Sacramento, San Diego, San Francisco, Seattle, Washington, D.C.)
    • Terms of 3, 5, 7 10, 15, 20 and 30 years available
    • Amortizations to 30-years.
    • Debt Service Coverage 1.25x.
    • Terms of 7+ years 80% loan to value (75% LTV is cash out).
    • Typically fixed third party costs are fixed at $10,000 for: appraisal, property condition report, processing fee, phase one environmental, lender site inspection, background check and lender legal.
    • Typically non-recourse loan terms – except for fraud, waste, misappropriation of proceeds, environmental and bankruptcy.

Fannie Mae Small Loan Program

$1,000,000 to $3,0000 (up to $5 million in large US  cities)

This program has less documentation requirements, lower closing costs, slightly higher interest rates than the Fannie Mae standard loan program.  Fannie normally requires the principal(s) to have a minimum of 4 to 5 similar multifamily properties in ownership and/or management. Additionally, Fannie would like to see post closing liquidity not less than the sum of nine months principal and interest of the new loan, plus a net worth equal to or greater than the loan amount.  If all of the principals reside more than 100 miles from the property Fannie may reduce the maximum loan to value by 5%. If you are a little short of these levels please call to discuss the possibility to obtaining an exception.

Loan Amount: $1,000,000 minimum to $3,000,000 (in the largest MSA in the country they can lend up to $5 million)

Loan Terms: 3, 5, 7, 10, 15, 20, 25 and 30 Years

Amortization:  Up to 30 Years

Minimum DSC: 1.25x

Maximum LTV:  7-year term or greater, 80%. If cash-out- 75%. 5 years, 75%. If cash-out – 70%.

Adjustable Rates are available:  Generally pricing is off the one-month or three-month LIBOR. e.

Eligible Property Multifamily, minimum five units

Eligible Borrower Individuals, co-tenants and non-single asset entities acceptable. Must be US Citizens.

Occupancy Requirements: 90-days prior to closing the property must demonstrate 90% physical occupancy

Tax and Insurance Escrows: Monthly deposits required.

Replacement Reserves: Underwritten at a minimum $250 per unit per annum.

Non-recourse: available in certain markets – subject to carve-outs for items such as fraud, waste, misappropriation of funds, environmental, and bankruptcy.

Commercial Space: Maximum 35% of net rentable area and maximum 20% of effective gross income

Prepayment Penalty Method: Yield Maintenance.

Required Third Party Reports: Appraisal, Property Condition/Physical Needs Assessment and Environmental Report.

Supplemental Loans Pricing: Eligible for secondary financing after 12 months.

Rate Lock: Standard 10-day rate lock period. Extended rate lock options available with deposits call for details.

Application Deposit: $10,000. Covers underwriting costs (including processing fee and site inspection).

Good Faith Deposit: 2% of loan amount 1% of loan amount for certain transactions of $3 million or less with commitment periods of 45 days or less

Fannie Mae Standard Loan Program

Starting at $3,000,000:

  • Terms of 3, 5, 7, 10, 15, 20 and 30 years available – Two years interest only possible.
  • Amortizations to 30-years.
  • Debt Service Coverage 1.25x.
  • Terms of 7+ years 80% loan to value (75% LTV is cash out).
  • Third Party Reports are on a bid basis, soft quote for lender legal. Normally, $12,500 will cover these expenses.
  • Non-recourse with standard exceptions for fraud and misrepresentation.

Fannie Mae Standard (Large) Loan Program (Loans $3 million and greater):

Note:  If compared the Fannie Mae Small loan program you will see the closing costs for the Small Loan Program are well below those of this Standard Program.  The big difference is the interest rate is lower for the Standard Program.

Sponsor/Owners:  Fannie Mae would like to see the owners have prior experience in ownership and/or management of multifamily properties.  Generally, this means four or more similar type and size properties (or larger) than the property up financing consideration.   What happens if you do not have this history or experience? You may consider bringing in a minority owner that would fulfill this requirement.  We could also request Fannie Mae to consider an exception to this underwriting requirement or simply move to another lender that does not have this requirement.  Fannie Mae also requires the Sponsors/Owners to be US Citizens, andto have liquid assets of not less than 6-months principal and interest payments post closing. In determining the liquidity requirement Fannie Mae will not consider unused lines of credit, or certain qualified retirement accounts such as IRAs and 401K.  There are some possible exceptions to the retirement accounts. If the sponsor is required to take minimum distributions, a portion of these accounts can be used to meet the liquidity test. Typically, liquid assets are unencumbered; checking account balances, savings accounts, publically traded stocks, bonds, and cash value in life insurance policies.

You will receive a detailed Application. This document will outline the insurance requirements, the escrow requirements, and provide additional information on closing requirements.

How long will it take to close a Fannie Mae loan?  Normally, 50 to 60-days after the lender receives the completed Application, Application Fee and requested documents.  For example the lender will ask for copies of the historic operating statements, a current rent roll, resumes on the principals, and personal financial statements on the principals.  These documents will need to be certified as being true and correct. Most often one of the principals provides this certification – do not confuse this with the need to get your accountant or attorney involved – the principals have signed these certifications.

Minimum Occupancy Requirements: 85% Physical Occupancy for 90 days. 70% economic occupancy required.

Third party reports and other loan provisions:

  1. Appraisal – ordered by the lender – this can take between three and five weeks to complete.
  2. Title Commitment with exception documents – this can take from one to three weeks to prepare.
  3. Survey: From time to time the lender may waive the requirement for survey if the title company will provide acceptable survey coverage protection without a new survey. We can often assist with this issue if a new survey is not available.  If a survey is required, this can be the longest lead item, especially during winter months where the ground is covered in snow.
  4. Phase One Environmental Report: The lender will engage a company to conduct an environmental inspection of the property. On older properties that have or are likely to have asbestos materials and/or lead base paint the Environmental Report will often recommend the property owner put in place an Operating and Maintenance (“O&M”) Plan.  These plans are prepared by a third party and typically cost $400 and $500 each.
  5. Property Inspection Report, also known as the physical needs assessment. The lender will hire a company to walk at least 10 percent of the units, walk the entire exterior and common areas.  They will prepare a report outlining those areas that need repair and replacement now (“Immediate Repairs”) and prepare a schedule showing the items that will need replacement over time on an annual basis.  The most common loan term is 10-years (with a 30-year amortization). The report will cover a period of time two years beyond the loan term (12-years in this example). The report will adjust for inflation and arrive at an annual estimated replacement reserve amount (normally between $250 and $300 per unit per year collected monthly along with your principal, Interest, insurance and real estate tax escrow accounts).  This will be known as the Replacement Reserve. These funds can be used to make future repairs to the property, e.g. property water heater, replace roof, repaint exterior, carpet hallways, replace heating and cooling units, etc. Should the report find items that need Immediate Repairs the lender will most often holdback from Closing 125% of the estimated amount of the item that needs repair. Once the work is completed the lender will release these funds to the borrower or pay direct to the contractor as instructed by the borrower.
  6. The lender will order a flood certificate.
  7. Lender will conduct a site inspection.
  8. The lender will hire an attorney to prepare the loan documents.
  9. You should factor in another $500 – $600 for the title company to handle the closing and disbursements.
  10. Unlike the Fannie Mae Small Loan Program the lender will not quote a fixed cost to close. Everything is more along the lines of A La Cart.  Below are estimates of typical costs – often the following can be capped at $12,500 a, b, c, d, e, and i:
    1. Appraisal $3,500 – $5,000
    2. Phase One Environmental: $1,800 – $2,300
    3. Property Condition Report: $2,000 – $2,500
    4. Flood Certificate: $150
    5. Background check/investigation: $1,500
    6. Lender Legal: $7,500 – $12,000
    7. Special Endorsements from the title company $1,500
    8. Title charges to close and disburse $500- $750
    9. Lender Processing Fee and Site Inspection: $2,500

In addition to the costs above you should consider the following;

  1. Lender will require a Legal Opinion from your attorney. $TBD
  2. Survey, lender will most likely require a survey. From time to time an old survey can be used.  $TBD.
  3. Title Insurance; in acquisitions the Seller most often pays for the title policy, in refinances you will have to pay for this policy.  The costs vary from State to State. In Kansas this runs about $1,050 per $1 million in loan dollars.
  4. Recording costs should also be factored in. In some states this is a few dollars while in other States this can add up to well over $1,000.  $TBD
  5. The Loan Placement Fee (Mortgage Broker). $TBD

Under this loan program Fannie Mae will increase the loan amount to allow for reimbursement of many of the above closing costs.

  1. Prepayment Penalty: Yield Maintenance.
  2. As mentioned earlier this is considered a non-recourse loan. Having stated this, Fannie Mae will ask the principals to execute a guaranty that is limited to certain provisions.  For example, if the lender suffers a loss due to fraud, wasting of the subject property, environmental, misappropriation of funds and if the borrowing entity goes into bankruptcy, then the loan can become full recourse to the principal who executed this limited guaranty.  Within the industry, this type of recourse is commonly referred to as “Bad Boy” provisions or “Carveouts.”
  3. The lender will require the entity that owns the property to be a Single Purpose Entity (SPE).

Fannie Mae Affordable Housing Financing Program: $1,000,000 minimum

  • Eligible properties are those that participate in the Low Income Housing Tax Credit (LIHTC) program, are encumbered by a Housing Assistance Payment (HAP) contract or participate in the Section 8 program (either through vouchers or direct payments).
  • Terms of 7, 10, 15, 20 and 30 years available
  • Amortizations to 30-years.
  • Debt Service Coverage 1.20x.
  • 90% loan to value.
  • Third Party Reports are on a bid basis, soft quote for lender legal. Normally, $12,500 will cover these expenses.
  • Non-recourse with standard exceptions for fraud and misrepresentation can be waived for 100% restricted properties.

Fannie Mae Affordable Housing Financing Program:

This program is very similar to the Standard Fannie Mae Loan Program except:  Eligible properties are those that participate in the Low Income Housing Tax Credit (LIHTC) program, are encumbered by a Housing Assistance Payment (HAP) contract or participate in the Section 8 program (either through vouchers or direct payments).

Sponsor/Owners:  Fannie Mae would like to see the owners have prior experience in ownership and/or management of multifamily properties.  Generally, this means four or more similar type and size properties (or larger) than the property up financing consideration.   What happens if you do not have this history or experience? You may consider bringing in a minority owner that would fulfill this requirement.  We could also request Fannie Mae to consider an exception to this underwriting requirement or simply move to another lender that does not have this requirement.  Fannie Mae also requires the Sponsors/Owners to be US Citizens to have liquid assets of not less than 6-months principal and interest payments post closing. In determining the liquidity requirement, Fannie Mae will not consider unused lines of credit, or certain qualified retirement accounts such as IRAs and 401K.  There are some possible exceptions to the retirement accounts. If the sponsor is required to take minimum distributions, a portion of these accounts can be used to meet the liquidity test. Typically, liquid assets are unencumbered; checking account balances, savings accounts, publically traded stocks, bonds, and cash value in life insurance policies.

You will receive a detailed Application. This document will outline the insurance requirements, the escrow requirements, and provide additional information on closing requirements.

How long will it take to close a Fannie Mae loan?  Normally, 50 to 60-days after the lender receives the completed Application, Application Fee and requested documents.  For example the lender will ask for copies of the historic operating statements, a current rent roll, resumes on the principals, and personal financial statements on the principals.  These documents will need to be certified as being true and correct. Most often one of the principals provides this certification – do not confuse this with the need to get your accountant or attorney involved – the principals signed these certifications.

Minimum Occupancy Requirements: 85% Physical Occupancy for 90 days. 70% economic occupancy required.

Third party reports and other loan provisions:

  1. Appraisal – ordered by the lender – this can take between three and five weeks to complete.
  2. Title Commitment with exception documents – this can take from one to three weeks to prepare.
  3. Survey: From time to time the lender may waive the requirement for survey if the title company will provide acceptable survey coverage protection without a new survey. We can often help with this issue if a new survey is not available.  If a survey is required, this can be the longest lead item, especially during winter months where the ground is covered in snow.
  4. Phase One Environmental Report: The lender will engage a company to conduct an environmental inspection of the property. On older properties that have or are likely to have asbestos materials and/or lead base paint, the Environmental Report will often recommend the property owner put in place an Operating and Maintenance (“O&M”) Plan.  These plans are prepared by a third party and typically cost $400 to $500 each.
  5. Property Inspection Report, also known as the physical needs assessment. The lender will hire a company to walk at least 10 percent of the units, walk the entire exterior and common areas.  They will prepare a report outlining those areas that need repair and replacement now (“Immediate Repairs”) and prepare a schedule showing the items that will need replacement over time on an annual basis.  The most common loan term is 10-years (with a 30-year amortization). The report will cover a period of time two years beyond the loan term (12-years in this example). The report will adjust for inflation and arrive at an annual estimated replacement reserve amount (normally between $250 and $300 per unit per year collected monthly along with your principal, Interest, insurance and real estate tax escrow accounts).  This will be known as the Replacement Reserve. These funds can be used to make future repairs to the property, e.g. property water heater, replace roof, repaint exterior, carpet hallways, replace heating and cooling units, etc. Should the report find items that need Immediate Repairs the lender will most often holdback from Closing 125% of the estimated amount of the item that needs repair. Once the work is completed the lender will release these funds to the borrower or pay direct to the contractor as instructed by the borrower.
  6. The lender will order a flood certificate.
  7. Lender will conduct a site inspection.
  8. The lender will hire an attorney to prepare the loan documents.
  9. You should factor in another $500 – $600 for the title company to handle the closing and disbursements.
  10. Unlike the Fannie Mae Small Loan Program the lender will not quote a fixed cost to close. Everything is more along the lines of A La Carte.  Below are estimates of typical costs – often the following can be capped at $13,500 a, b, c, d, e, and i:
    1. Appraisal $3,500 – $5,000
    2. Phase One Environmental: $1,800 – $2,300
    3. Property Condition Report: $2,000 – $2,500
    4. Flood Certificate: $150
    5. Background check/investigation: $1,500
    6. Lender Legal: $7,500 – $12,000
    7. Special Endorsements from the title company $1,500
    8. Title charges to close and disburse $500- $750
    9. Lender Processing Fee and Site Inspection: $2,500

In addition to the costs above you should consider the following;

  1. Lender will require a Legal Opinion from your attorney. $TBD
  2. Survey, lender will most likely require a survey. From time to time an old survey can be used.  $TBD.
  3. Title Insurance, in acquisitions the Seller most often pays for the title policy, in refinances you will have to pay for this policy. The costs vary from State to State.  In Kansas this runs about $1,050 per $1 million in loan dollars.
  4. Recording costs should also be factored in. In some states, this is just a few dollars while in other states this can add up to well over $1,000.  $TBD
  5. The Loan Placement Fee (Mortgage Broker). $TBD

Under this loan program Fannie Mae will increase the loan amount to allow for reimbursement of many of the above closing costs.

  1. Prepayment Penalty: Yield Maintenance.
  2. As mentioned earlier, this is considered a non-recourse loan. Having stated this, Fannie Mae will ask the principals to execute a guaranty that is limited to certain provisions.  For example, if the lender suffers a loss due to fraud, wasting of the subject property, environmental, misappropriation of funds and if the borrowing entity goes into bankruptcy, then the loan can become full recourse to the principal who executed this limited guaranty.  Within the industry, this type of recourse is commonly referred to as “Bad Boy” provisions or “Carveouts.”
  3. The lender will require the entity that owns the property to be a Single Purpose Entity (SPE).

Fannie Mae Mobile Home Parks – Manufactured Housing: $1,000,000 minimum

  • Terms of 7, 10, 15, 20 and 25 years available (up to 30-years if Age Restricted)
  • Amortizations to 25-years (up to 30-years if Age Restricted)
  • Debt Service Coverage 1.25x.
  • 80% loan to value (75% LTV is cash out).
  • Minimum of 50-sites, 50% or more doublewide sites, and park must be rate 4 or 5-STARS.
  • Typically fixed third party costs are $12,500 for: appraisal, property condition report, phase one environmental, lender site inspection, processing fee, background check and lender legal.
  • Typically non-recourse loan terms – except for fraud, waste, misappropriation of proceeds, environmental and bankruptcy.

Fannie Mae (FNMA) Mobile Home Parks:  

Fannie Mae offers a long term financing solution for land lease manufactured housing communities, where the Borrower owns the Manufactured Housing Community (MHC) sites and associated common amenities and infrastructure.

Property Eligibility:  Existing, stabilized, professionally managed MHC, with or without age restrictions, having a minimum of 50 pad sites. Not more than 25% of the Park Homes may be owned by the Park or Sponsor.  FNMA prefers 50% or more of the site can accommodate double-wide homes, while the actual number of double-wide homes may be less. FNMA like to see the physical occupancy at 85% or greater. Majority of the property and the entrance should not be located within a designated flood zone.

Eligible Sponsors:  At least one of the Sponsors should have previous experience in operating a

Mobile Home Park. Typically, this means four or more similar type and size properties (or larger) than the property being considered for financing.   What happens if you do not have this history or experience? You may consider bringing in a minority owner that would fulfill this requirement. We could also request Fannie Mae consider an exception to this underwriting requirement or simple move to another lender that does not have this requirement.  Fannie Mae also requires the Sponsors/Owners to be US Citizens, to have liquid assets of not less than 6-months principal and interest payments post closing. In determining the liquidity requirement, Fannie Mae will not consider unused lines of credit, or certain qualified retirement accounts such as IRAs and 401K.  There are some possible exceptions to the retirement accounts. If the sponsor is required to take minimum distributions, a portion of these accounts can be used to meet the liquidity test. Typically, liquid assets are unencumbered; checking account balances, savings accounts, publically traded stocks, bonds, and cash value in life insurance policies.

You will receive a detailed Application from the lender. This document will outline the insurance requirements, the escrow requirements, and provide additional information on closing requirements.

How long will it take to close a Fannie Mae loan?  Normally, 50 to 60-days after the lender receives the executed Application, Application Fee and requested documents.  For example the lender will ask for copies of the historic operating statements, a current rent roll, resumes on the principals, and personal financial statements on the principals.  These documents will need to be certified as being true and correct. Most often one of the principals provides this certification – do not confuse this with the need to get your accountant or attorney involved – the principals have already signed these certifications.

Minimum Occupancy Requirements: 85% Physical Occupancy for 90 days. 70% economic occupancy required.

Property Considerations:

  • The percentage of tenant-occupied homes (where the tenant does not own the home) generally may not exceed 25%.
  • Density is based on market norms and generally should not exceed 12 Manufactured Homes per acre for an existing community and 7 Manufactured Homes per acre for a new community.
  • With limited exceptions, all Manufactured Homes should conform to applicable Manufactured Housing HUD Code standards.
  • Leases with 2-year terms or longer cannot contain a tenant option to purchase the pad site.

Supplemental Financing:  Supplemental loans through FNMA are available.

Third party reports and other loan provisions:

  1. Appraisal – ordered by the lender – this can take between three to five weeks to complete.
  2. Title Commitment with exception documents – this can take from one to three weeks to prepare.
  3. Survey: From time to time the lender may waive the requirement for a survey, if the title company will provide acceptable survey coverage protection without a new survey. We can often help with this issue if a new survey is not available.  If a survey is required, this can be the longest lead item, especially during winter months where the ground is covered in snow.
  4. Phase One Environmental Report: The lender will engage a company to conduct an environmental inspection of the property. On older properties that have or are likely to have asbestos materials and/or lead base paint, the Environmental Report will often recommend the property owner put in place an Operating and Maintenance (“O&M”) Plan.  These plans are prepared by a third party and often costs between $400 to $500 each.
  5. Property Inspection Report, also known as the physical needs assessment: The lender will hire a company to walk at least 10 percent of the units, walk the entire exterior and common areas.  They will prepare a report outlining those areas that need repair and replacement now (“Immediate Repairs”) and prepare a schedule showing the items that will need replacement over time on an annual basis.  The most common loan term is 10-years (with a 30-year amortization). The report will cover a period of time two years beyond the loan term (12-years in this example). The report will adjust for inflation and arrive at an annual estimated replacement reserve amount (normally between $250 to $300 per unit per year collected monthly along with your principal, Interest, insurance and real estate tax escrow accounts).  This will be known as the Replacement Reserve. These funds can be used to make future repairs to the property, e.g. property water heater, replace roof, repaint exterior, carpet hallways, replace heating and cooling units, etc. Should the report find items that need Immediate Repairs the lender will most often holdback from Closing 125% of the estimated amount of the item that needs repair. Once the work is completed the lender will release these funds to the borrower or pay direct to the contractor as instructed by the borrower.
  6. The lender will order a flood certificate.
  7. Lender will conduct a site inspection.
  8. The lender will hire an attorney to prepare the loan documents.
  9. Closing costs: $12,500 will address the appraisal, property condition report, a phase one environmental report, property condition report, lender site inspection, lender processing fee.

In addition to the costs above, you should consider the following;

  1. Lender will require a Legal Opinion from your attorney. $TBD
  2. Lender will engage outside legal counsel to prepare the loan documents and provide additional assistance to the Closing. Most often the costs for lender’s outside counsel ranges between $7,500 to $12,500.
  3. Survey; lender will most likely require a survey. From time to time an old survey can be used.  $TBD.
  4. Title Insurance; in acquisitions the Seller most often pays for the title policy, in refinances you will have to pay for this policy. The costs vary from State to State.  In Kansas this runs about $1,050 per $1 million in loan dollars.
  5. You should factor in another $500 – $600 for the title company to handle the closing and disbursements.
  6. Recording costs should also be factored in. In some states this is a few dollars while in other states this can add up to well over $1,000.  $TBD
  7. The Loan Placement Fee (Mortgage Broker). $TBD

Under this loan program Fannie Mae will increase the loan amount to allow for reimbursement of many of the above closing costs.

  1. Prepayment Penalty: Yield Maintenance.
  2. As mentioned earlier this is considered a non-recourse loan. Having said this, Fannie Mae will ask the principals to execute a guaranty that is limited to certain provisions.  For example, if the lender suffers a loss due to fraud, wasting of the subject property, environmental, misappropriation of funds and if the borrowing entity goes into bankruptcy, then the loan can become full recourse to the principal who executed this limited guaranty.  Within the industry this type of recourse is commonly referred to as “Bad Boy” provisions or “Carveouts.”
  3. The lender will require the entity that owns the property to be a Single Purpose Entity (SPE).

The quality of the park is important as is with any investment property.  While you may have heard of a Five Star Mobile Home Park Rating Guide, it is our understanding this Woodall Guide has been out of existence for well over 25-years.  If the property fits the requirements above, and can fit closing within the old Woodall 4 and 5 Star rating we would expect to see the physical attributes as being acceptable to FNMA.  Below is the old 4 and 5 Star Ratings:

Woodall four-star park: (There are two categories. See item 4K below.) Four-star parks are luxury parks. In addition to the requirement for one-star, two-star, and three-star parks; a four-star park must have the following:

4A. Good landscaping.

4B. Most homes skirted with metal skirts, concrete block, ornamental wood, or stone.

4C. Paved streets, edged, or curbed.

4D. Uncrowded lots.

4E. Underground utilities if permitted by local conditions and authorities.

4F. Most tanks, if present, concealed.

4G. Any hedges or fences must be attractive and uniform.

4H. Awnings, cabanas, or porches on most homes in southern areas. (Except double-wide units.)

4I. Most lots to accommodate large homes.

4J. Where row parking of homes exists, all must be lined up uniformly.

4K. Community hall and/or swimming pool and/or recreation program. (If a park is four-star in

all but this requirement, the fourth star will be printed as an open star, indicating a four star

park without recreation.)

4L. Excellent management.

Woodall five-star park: Five-star parks are the finest. They should be nearly impossible to improve. In addition to the requirements for one-star, two-star, three-star and four-star parks, a five-star park must have the following:

5A. Well-planned and laid out. Spacious appearance.

5B. Good location in regard to accessibility and desirable neighborhood.

5C. In some locations park should be enclosed by high hedges or ornamental fence.

5D. Wide paved streets in perfect condition. Curbs or lawns edged to street, sidewalks, street lights, street signs.

5E. Homes set back from the street.

5F. Exceptionally attractive entrance and park sign.

5G. Patios at least 8 x 30 ft. (Except double-wide units.)

5H. Paved off-street parking such as carports or planned parking.

5I. All homes skirted.

5J. All hitches concealed. Any existing tanks concealed.

5K. Recreation, some or all of the following: swimming pool (except areas with long, cold winters), shuffleboards, horseshoe pitching, golf course, hobby shop, hobby classes, games,  potlucks, dances, or natural recreation facilities.

5K. Beautifully equipped recreation hall with kitchen. Room for community gatherings. Tiled restrooms, etc.

5L. Uniform storage shed or central storage facilities.

5M. All late model homes in excellent condition.

5N. At least 60% occupancy in order to judge quality of residents which indicates park’s ability to maintain a five-star rating between inspections.

5O. All empty lots grassed, graveled, or otherwise well maintained.

5P. If pets or children allowed, there must be a place for them to run and play without cluttering the streets and yards. Most five-star parks are for adults only.

5Q. Superior management interested in comfort of residents and maintenance of park.

Fannie Mae Student Housing Financing: $1,000,000 minimum.

  • Terms of 3, 5, 7, 10, 15, 20 and 30 years available – Two years interest only possible.
  • Amortizations to 30-years.
  • 75% loan to value (70% LTV is cash out).
  • Dedicated Student Housing – Specifically cater to a student tenant base. Not readily convertible to conventional multifamily housing. Must be greater than 80% student occupied. Requires 12-month leases and parental guarantees. Food services not permitted. 20% of tenants are allowed to have lease terms of less than 12 months. Student Housing – Must be between 40% – 80% student tenancy.
  • Student Population Requirement, minimum of 10,000 students.
  • Typically non-recourse loan terms – except for fraud, waste, misappropriation of proceeds, environmental and bankruptcy.

Fannie Mae Student Housing Financing:

Often student housing complexes are not easily converted to conventional multifamily properties.

Fannie Mae has specific underwriting requirements for properties that fall under the definition of “Student Housing.”

The property specifically caters to students, or 40% or more of the occupants are students. This requires most of the leases be 12-month leases and most often require parental guarantees.  If the occupant can demonstrate they have sufficient income and credit strength to support the rental obligation, then a parental guaranty would not be required. We see this most often in properties that have a concentration of graduate students (MBAs/Doctorate).  If the property offers meal service as part of the overall rent, this would make the property ineligible (no food services allowed) for this loan program. Overall, minimum occupancy must be 90%. The size of the overall student population for the local college/university must be at least 10,000 in active enrollment.

Sponsor/Owners:  Fannie Mae would like to see the owners have prior experience in ownership and/or management of multifamily properties.  Generally, this means four or more similar type and size properties (or larger) than the property up financing consideration.   What happens if you do not have this history or experience? You may consider bringing in a minority owner that would fulfill this requirement.  We could also request Fannie Mae to consider an exception to this underwriting requirement or simply move to another lender that does not have this requirement.  Fannie Mae also requires the Sponsors/Owners to be US Citizens to have liquid assets of not less than 6-months principal and interest payments post closing. In determining the liquidity requirement Fannie Mae will not consider unused lines of credit, or certain qualified retirement accounts such as IRAs and 401K.  There are some possible exceptions to the retirement accounts. If the sponsor is required to take minimum distributions, a portion of these accounts can be used to meet the liquidity test. Typically, liquid assets are unencumbered; checking account balances, savings accounts, publically traded stocks, bonds, and cash value in life insurance policies.

You will receive a detailed Application from the lender.  This document will outline the insurance requirements, the escrow requirements, and provide additional information on closing requirements.

How long will it take to close a Fannie Mae loan?  Normally, 50 to 60-days after the lender receives the completed Application, Application Fee and requested documents.  For example the lender will ask for copies of the historic operating statements, a current rent roll, resume’s on the principals, and personal financial statements on the principals.  These documents will need to be certified as being true and correct by one of the principals.

Minimum Occupancy Requirements: 85% Physical Occupancy for 90 days. 70% economic occupancy required.

Third party reports and other loan provisions:

  1. Appraisal – ordered by the lender – this can take between three and five weeks to complete.
  2. Title Commitment with exception documents – this can take from one to three weeks to prepare.
  3. Survey: From time to time the lender may waive the requirement for survey if the title company will provide acceptable survey coverage protection without a new survey. We can often assist with this issue if a new survey is not available.  If a survey is required this can be the longest lead item, especially during winter months where the ground is covered in snow.
  4. Phase One Environmental Report: The lender will engage a company to conduct an environmental inspection of the property. On older properties that have or are likely to have asbestos materials and/or lead base paint the Environmental Report will often recommend the property owner put in place an Operating and Maintenance (“O&M”) Plan.  These plans are prepared by a third party and typically cost between $400 and $500 each.
  5. Property Inspection Report, also known as the physical needs assessment. The lender will hire a company to walk at least 10 percent of the units, walk the entire exterior and common areas.  They will prepare a report outlining those areas that need repair and replacement now (“Immediate Repairs”) and prepare a schedule showing the items that will need replacement over time on an annual basis.  The most common loan term is 10-years (with a 30-year amortization). The report will cover a period of time two years beyond the loan term (12-years in this example). The report will adjust for inflation and arrive at an annual estimated replacement reserve amount (normally between $250 and $300 per unit per year collected monthly along with your principal, Interest, insurance and real estate tax escrow accounts).  This will be known as the Replacement Reserve. These funds can be used to make future repairs to the property, e.g. property water heater, replace roof, repaint exterior, carpet hallways, replace heating and cooling units, etc. Should the report find items that need Immediate Repairs the lender will most often holdback from Closing 125% of the estimated amount of the item that needs repair. Once the work is completed the lender will release these funds to the borrower or pay direct to the contractor as instructed by the borrower.
  6. The lender will order a flood certificate.
  7. Lender will conduct a site inspection.
  8. The lender will hire an attorney to prepare the loan documents.
  9. Closing costs: $12,500 will address the appraisal, property condition report, a phase one environmental report, property condition report, lender site inspection, lender processing fee.

In addition to the costs above you should consider the following;

  1. Lender will require a Legal Opinion from your attorney. $TBD
  2. Lender will engage outside legal counsel to prepare the loan documents and provide additional assistance to the Closing. Most often the costs for lender’s outside counsel ranges between $7,500 and $12,500.
  3. Survey, lender will most likely require a survey. From time to time an old survey can be used.  $TBD.
  4. Title Insurance, in acquisitions the Seller most often pays for the title policy, in refinances you will have to pay for this policy. The costs vary from State to State.  In Kansas this runs about $1,050 per $1 million in loan dollars.
  5. You should factor in another $500 – $600 for the title company to handle the closing and disbursements.
  6. Recording costs should also be factored in. In some states this is a few dollars while in other states this can add up to well over $1,000.  $TBD
  7. The Loan Placement Fee (Mortgage Broker). $TBD

Under this loan program Fannie Mae will increase the loan amount to allow for reimbursement of many of the above closing costs.

  1. Prepayment Penalty: Yield Maintenance.
  2. As mentioned earlier, this is considered a non-recourse loan. Having stated this, Fannie Mae will ask the principals to execute a guaranty that is limited to certain provisions.  For example, if the lender suffers a loss due to fraud, wasting of the subject property, environmental, misappropriation of funds and if the borrowing entity goes into bankruptcy, then the loan can become full recourse to the principal who executed this limited guaranty.  Within the industry, this type of recourse is commonly referred to as “Bad Boy” provisions or “Carveouts.”
  3. The lender will require the entity that owns the property to be a Single Purpose Entity (SPE).

Freddie Mac –

Highlights:  Loans from $1,000,000 and up.  Two basic programs – both loan programs require the principal(s) to have prior ownership/management experience in apartments.  Freddie Mac also has liquidity requirements of the principals. It is best to call Mike Caffrey to discuss these requirements to see if Freddie Mac is an option.

Freddie Mac Small Loan Program: $1,000,000 to $6,000,000 (can go to $7.5 Million with 75-units or less in Top and Standard size Markets).

  • Fixed-rate loan terms of 5, 7 or 10 years. Hybrid ARM loan terms of 20 years with initial 5, 7 or 10 years fixed.
  • Up to 30years, interest only options also available on a case by case basis.
  • Debt Service Coverage Requirements (DSCR):
    • 1.20x in Top Markets
    • 1.25x in Standard Markets
    • 1.20x in Small Markets
    • 1.40 in Very Small Markets
  • Maximum Loan to Value (LTV):
    • 90% in Top and Standard Markets
    • 75% if acquisition in Small/Very Small Markets
    • 70% if cash-out refinance in Small/Very Small Markets
    • Generally fixed third party costs of $12,500 – includes appraisal, property condition report, phase one environmental, processing fee, lender site inspection, flood search and lender legal.
    • Typically non-recourse – subject to carve-outs

Freddie Mac Small Loan Program:

Loan Amount:  $1 million to $6 million in all markets (Between $6 million and $7.5 million for properties with 75 units or less in Top and Standard SBL Markets).  Freddie Mac defines each market by county and city. As a result there are hundreds of classes. It is best to call for precise market designation information.

  • Loan Purpose: Acquisition or refinance
  • Loan Terms:  a) 20-year hybrid ARM with initial 5-, 7-, or 10-year fixed-rate period
  1. b) 5-, 7-, or 10-year fixed-rate loan.

Amortization: Up to 30 years

Interest Only and Partial-term interest-only; full-term interest-only may be available (generally low loan to value ratios required).

Prepayments Declining schedules and yield maintenance available for all loan types – see charts below.

Eligible Borrowers/Borrowing Entities:

  • Up to $6 million – Individuals who are US citizens; limited partnerships; limited liability companies;
  • Single Asset Entities (SAE) (are acceptable but not required to be an SAE or SPE); Special Purpose Entities (SPE); tenancy in common with up to five unrelated members; and Trusts (irrevocable trusts and revocable trusts with an individual guarantor)
  • Between $6 million and $7.5 million – Single Asset Entities.

Recourse Non-recourse with standard carve-out provisions required.

Subordinate debt: Not Permitted

Net Worth and Liquidity:

  • Net worth: Equal to or greater than the loan amount.
  • Liquidity: No less than 9 months of principal and interest.

Eligible Properties:

  • Multifamily housing with five1residential units or more, including:
    • Cooperatives in the five boroughs of New York City and Long Island.
    • Properties with tax abatements.
    • Seniors housing with no resident services.
    • Properties with space for certain commercial (non-residential) uses.
    • Properties with tenant-based housing vouchers.
    • LIHTC properties with LURAs that are in either the final 24 months of the initial compliance period or the extended use period (investor must have exited).
    • Properties with local rent subsidies for 10% or fewer units where the subsidy is not contingent on the owner’s initial or ongoing certification of tenant eligibility.
    • Properties with certain regulatory agreements that impose income and/or rent restrictions, provided all related funds have been disbursed.

Ineligible Properties:

  • Seniors housing with resident services
  • Student housing (greater than 50% concentration)
  • Military housing (greater than 50% concentration)
  • Properties with project-based housing assistance payment contracts (including project-based Section 8 HAP contracts)
  • LIHTC properties with LURAs in compliance years 1 through 12
  • Historic Tax Credit (HTC) properties with a master lease structure
  • Tax exempt bonds Interest Reduction Payments (IRPs)

Occupancy:      Property must be stabilized at:

  1. 90% physical occupancy for the trailing 3-month average prior to underwriting or
  2. 85% physical occupancy for the trailing 3-month average prior to Underwriting if the subject property has any of the following characteristics:
    1. Property is recently built or renovated in a Top Market.
    2. Property is <30 units
  • Acquisition with all of the following:
    • Sophisticated acquiring sponsorship and  management relative to current ownership.
    • Appraised occupancy and/or rents materially higher than subject’s current operations.
    • Subject property has not experienced volatile historical occupancy swings.
    • No history of serious crime at the subject property.

Replacement Reserves:             Underwritten replacement reserves will be determined based on a rating established in the streamlined PNA (Property Needs Assessment). The rating will estimate the level of improvements needed over the life of the loan. The rating scale will be generally range between $200 to $300 per unit per year.  You should assume the Replacement Reserves will be used in underwriting the loan and determining the DSCR (Debt Service Coverage Ratio), normally Freddie Mac does not actually collect for this Reserve.

Escrows:

  • Real estate tax escrow deferred for deals with an LTV ratio of 65% or less
  • Insurance escrow deferred
  • Replacement reserve escrow deferred

Rate-Lock 60- to 120-day rate-lock period available.

Fixed-Rate/Hybrid ARM LTV Ratios and Amortizing DCRs: LTV and DCR requirements vary based on the market tier in which the property resides:

Full Term Interest-Only Adjustments: Full Term IO or Full Term IO during Fixed-Rate Period of Hybrid ARM.

Maximum available Partial IO Period for Small and Very Small SBL Markets is limited to:

  • 0 years on 5-year term
  • 1 year for a 7-year term
  • 2 years for a 10-year term/20-year hybrid

Prepayment Provisions:

Notes to  prepayment penalties: Hybrid ARM consists of an initial fixed-rate period followed by a floating-rate period is LIBOR +325 margin for 5-year hybrid period and LIBOR +275 margin for the 7- and 10-year hybrid periods. Every six months, the floating rate may increase or decrease by 1%, never be less than a floor of the initial fixed interest rate and never be greater than a maximum

Freddie Mac Standard Fixed Rate Loan Program:

  • Fixed rate Terms 5, 7 and 10-years. 30-years if not to be securitized.
  • 30-year amortization – with Interest Only Options available.
  • 1.25x Debt Service Coverage Ratio (1.30x if 5-year loan term).
  • 80% Loan to Value (LTV); 75% LTV 5-year term
  • Generally fixed third party costs of $12,500 – includes appraisal, property condition report, phase one environmental, processing fee, lender site inspection, and flood search. Lender Legal expense will be estimated at Application issuance.

Freddie Mac Fixed Rate Loan – Conventional:

Sizes: $5 to $100 Million (larger and small will be considered).

Eligible Borrowers:

  • Borrower may be a limited partnership, corporation, limited liability company or a tenancy in common (TIC) with 10 or fewer tenants in common.
  • General partnerships, limited liability partnerships, REIT’s and certain trusts may also be acceptable in limited circumstances, subject to additional requirements
  • Borrower must usually be a Single Purpose Entity (SPE); however, on loans less than $5 million, upon borrower’s request, a borrower other than a TIC may be a Single Asset Entity instead of a SPE.
  • If the borrower is structured as a tenancy in common (TIC), each tenant in common must be an SPE.

Eligible Properties:   Standard multifamily housing, student housing, seniors housing, manufactured housing communities, cooperative housing and Targeted Affordable Housing cash (e.g., LIHTC Year 4-10 and 11-15, Section 8) loans. Loans may be used for acquisition or refinance.

Terms:             5- to 10-year terms (up to 30 years if loan is not purchased for securitization)

Amount:         Generally, $5 to $100 million (larger and smaller loans will be considered).

Maximum Amortization:       30 years Amortization

Amortization Calculations: Actual/360 standard; 30/360 available

Lockout Period:           2 years following securitization

Prepayment Provisions:        Yield maintenance until securitized followed by 2-year lock out; defeasance thereafter. No prepayment premium for final 90 days. If loan is not securitized within first year, then yield maintenance applies until the final 90 days. Yield maintenance without defeasance is available for securitized loans at an additional cost.

Tax and Insurance Escrow:  Generally required

Replacement Reserve Deposit: Generally required

Recourse Requirements:       Non-recourse except for standard carve-out provisions

Supplemental Loan Availability:      Yes, subject to requirements specified in the Loan Agreement

Application Fee:       Greater of $2,000 or 0.1% of loan amount for conventional first mortgages; seniors housing loans are > $5,000 or 0.15% of loan amount; supplemental loans are > $5,000 or 0.1% of loan amount and Targeted Affordable Housing loans are > $3,000 or 0.1% of loan amount.

Rate Lock Options:     Early rate-lock option available for varying durations, typically ranging from  60 to 120 days until Freddie Mac purchase; Index Lock option is also available. Sellers should consult with their regional Freddie Mac representative to determine eligibility.

Refinance Test:            No Refinance Test is necessary if the loan has an amortizing debt coverage ratio (DCR) of 1.40x or greater and a loan-to-value (LTV) ratio of 65% or      less; all partial-term interest-only loans must pass the Refinance Test.

Loan-to-Value (LTV) Ratios and Amortizing1 Debt Coverage Ratios (DCR):

Notes: The DCR calculated for the partial-term interest-only and full-term interest-only period uses an amortizing payment.  Adjustments may be made depending on the property, product and/or market. For partial-term interest-only loans, there must be a minimum amortization period of 5 years for loans with terms greater than 5 years. Acquisition loans with 5-year terms may have up to 1 year of partial-term interest-only. For terms of 10 years or more, loans may have interest only in an amount equal to no more than half of the loan term.

Freddie Mac Student Housing: $5,000,000 minimum

  • Loan Term 5, 7 and 10-years
  • Amortization up to 30-years
  • Minimum Debt Service Requirements 1.30x (1.35x if cash out)
  • Maximum Loan to Value: 80% (75% -if term less than 7-years)
  • Student Population not less than 8,000 students.
  • Specifically, cater to a student tenant base. Not readily convertible to conventional multifamily housing. Must be greater than 50% student occupied. 12-month leases and parental guarantees are preferred. Food services not permitted. Must have minimum of 1 bathroom for every 2 bedrooms, and each apartment must have a separate full kitchen. Property must be located less than 2 miles from campus or on bus route.
  • Generally fixed third party costs of $12,500 – includes appraisal, property condition report, phase one environmental, processing fee, lender site inspection, and flood search. Lender Legal expense will be estimated at Application issuance.

Freddie Mac Senior Housing: $5,000,000 and higher (will consider small level on a case by case basis):

  • 5, 7 and 10-years (up to 30-years if fixed rate)
  • Amortization up to 30-years.
  • Acquisitions, refinance loans, bond credit enhancement and targeted affordable housing transactions.
  • Typically non-recourse loan terms – except for fraud, waste, misappropriation of proceeds, environmental and bankruptcy.
  • Eligible Property Types:
    • Independent Living Properties
    • Assisted Living Properties
    • Memory care properties
    • Properties with a limited amount of skilled nursing (maximum 20% of NOI).
    • Any combination from list above.
  • Minimum Debt Service Coverage Ratio:
    • 1.30x – Independent Living
    • 1.40x if Assisted living and/or Memory care represent 50% or more
    • 1.45x if any contains skilled nursing (SNF license)
  • Closing Costs:
    • Freddie Mac Fee Greater of $5,000 or 0.15% of the loan amount:
    • Third party reports $25,000 +/- and Lender Legal $17,500 to $25,000 +/-.

FHA/HUD – Highlights of most popular FHA/HUD loans: Loans from $1,000,000 and up Loan term and Amortization 35-40-years: Maximum Loan to value 83% – 90% – Non-recourse:

FHA 223(a)(7) Program: Multifamily & Healthcare Acquisition, Refinance of Existing FHA-Insured Loans.

FHA – HUD Section 223(a)(7)

Property Type: Market-rate and affordable multifamily housing (LIHTC), elderly housing, nursing homes and assisted living facilities.

Purpose: Limited to refinancing of an existing FHA/HUD Mortgage.

Maximum Proceeds:   Limited to the existing balance, plus closing costs and/or up to 15% for renovation/rehab.  The aggregate amount may not exceed the original FHA/HUD loan amount. This program does not permit cash taken out.

Maximum LTV:      No new appraisal required.

Minimum DSCR:        Minimum DSCR (Debt Service Coverage Ratio) 1.05x for non-profit borrowers and 1.11x for “For-Profit” Borrowers.

Interest Rate: Fixed subject to market conditions

Maximum Term/Amortization: The term of the new mortgage may not exceed the remaining term of the existing mortgage. However, HUD Director may approve a term of up to 12 years beyond the remaining term of the existing mortgage if it is determined that the longer term is necessary to ensure the economic viability of the project. Notwithstanding the forgoing the Term may not exceed 75% of the remaining economic life.

Recourse:     Non-recourse construction/permanent loan. Certain non-monetary nonrecourse carve outs apply (“Bad-Boy” provisions).

Assumable: Yes, subject to FHA approval and paid Assumption Fees

Prepayment:   Typically, a 0- or 1-year lockout with a 10% – 1% declining prepayment penalty. Other prepayment options are available.

Escrows:      Monthly escrows are required for property insurance, real estate taxes, reserves for replacement and mortgage insurance premiums.

Mortgage Insurance: First years premium is paid at Closing.  Fees range from 0.45% – 0.55% of the loan amount.

Fees and Expenses: In addition to the Application Fee, the borrower is also responsible for all fees applicable to this loan, including but not limited to lender legal expenses, the HUD Fee and Lender Fees; these may be included in the final loan amount.  HUD fee: 0.3% FHA exam fee (payable from mortgage proceeds at loan closing). Inspection fee: greater of 1% of repairs or $30 per unit (payable out of mortgage proceeds)

Timing to close:  Normally 60-90-days to close.

Cash Flow Distribution & Post-Closing Reporting:  Cash flow distribution allowed up to two times per year upon HUD approval of audit.  Submission of annual audited financial statements is required.

  • FHA 221(d)(4) Program: Multifamily New Construction & Substantial Rehabilitation.

FHA 221(d)(4) Program

Eligible Property:    New Construction or substantial rehab. Multifamily rental properties and cooperatives.  All units must contain full kitchens or kitchenettes and bathrooms. Properties must meet all building and other local code requirements including properties requiring Credit Enhancement for bond, LIHTCs and affordable housing transactions.

Loan Term and Amortization:  Construction Period, Plus 40-years – fully amortizing.

Maximum Loan Amount:

  • Market Rate Properties: Maximum Loan to Costs: 85% (can include a 10% builder/Developer Credit) with a Minimum DSCR 1.176x
  • Affordable – Maximum Loan to Costs 87% to 90% with a Minimum DSCR 1.11x -1.15x

Eligible Borrower: Single Asset Entity (for profit or non-profit)

Escrows:      Monthly deposits required for RE Taxes, Property Insurance, MIP and replacement reserves. Escrows will be required for working capital (4% of mortgage amount) and for initial operating deficit.

Recourse:     Non-recourse – Construction and Permanent – subject to Bad Boy carve-outs.

Commercial Space: Maximum 25% of gross floor area and maximum 15% of effective gross income

Required Reports:   Market Study, Appraisal, Architect/Cost Review and Phase I. CPA reviewed

financial or last fiscal year – sub rehab.

Prepayment:   Negotiable. Generally two-year lockout with a 10% to 1% declining pre-payment penalty. Other pre-payment options available.

Assumable: Subject to Arbor and HUD approval and payment of assumption fee.

Good Faith Deposit:   Negotiable based on project type

Expense Escrow:     Yes – sufficient to cover Arbor’s expenses and third-party report costs

Origination Fee:          Negotiable

HUD Application Fee:  Non-refundable fee of $3 per $1,000 (0.3%) of the mortgage amount due to HUD with the firm commitment submission package. For market rate       pre-applications, V72016 a non-refundable review fee of 15 bps (50% of the firm commitment application fee) is due to HUD with the submission of the pre-application package.

HUD Inspection Fee:  0.5% of the mortgage amount for new construction. 0.5% of the cost of the repairs for substantial rehab.

Legal/Closing Fee:   Borrower pays Lender’s counsel fee and miscellaneous closing costs.

Rehabilitation Qualifications:         Repairs must exceed $15,000 per unit (adjusted for local high cost factor), 15% of the “as rehabbed” appraised value or replacement of 2 or more major building systems.

Davis Bacon Applies: Davis Bacon labor standards and wage requirements apply to construction and rehab work.

HUD Mortgage Insurance Premium Annual MIP Rates:

  • Market Rate Properties: 0.65%
  • Affordable Properties: 0.35%
  • Broadly Affordable or Energy Efficient Properties: 0.25%
  • FHA 232 Program: Seniors Housing & Healthcare New Construction.

FHA HUD 232 Program:

Eligible Property: For the construction or rehabilitation of skilled nursing and assisted living facilities. Unlicensed independent living units are also allowed but cannot exceed 25% of the total units of the project without a waiver.  Other licensed seniors housing property types are also eligible, including intermediate care facilities.

Eligible Borrowers: Experienced for profit and not-for-profit enterprises.  Single Asset Entity.

Maximum Term and amortization:  Construction period (interest only) plus 40-years.

NEW CONSTRUCTION: The lesser of:

  • 80% of stabilized value (85% for non-profits) for skilled nursing and independent living units.
  • 75% of stabilized value (80% for non-profits) for assisted living units.
  • 90% of FHA’s allowable replacement cost (95% for non-profits).
  • Amount that results in a debt service coverage ratio of 1.45x.
  • 100% of FHA’s allowable costs less grants, public loans and tax credits.

SUBSTANTIAL REHABILITATION: The lesser of:

  • 80% of stabilized value (85% for non-profits) for skilled nursing and independent living units.
  • 75% of stabilized value (80% for non-profits) for assisted living units.
  • 90% of FHA’s allowable replacement cost (95% for non-profits).
  • Amount that results in a debt service coverage ratio of 1.45x based on the underwritten Net Operating Income.
  • If owned – 100% of hard and soft costs plus the lesser of existing debt or 90% of existing value (95% for non-profits). To be acquired – 90% of hard and soft costs 95% for non-profits) plus 90% of the lesser of purchase price or existing value (95% for non-profits).
  • 100% of FHA’s allowable costs less grants, public loans and tax credits.

Prepayment Penalty: Negotiable. Generally two-year lockout with a 10% to 1% declining pre-payment penalty. Other pre-payment options are available.

Assumable: Yes, subject to approval and payment of the Assumption Fee.

Third Party Reports: Appraisal (feasibility for new construction), phase one environmental, property assessment (PCR).

HUD Application Fee:         Non-refundable fee of $3 per $1,000 (0.3%) of the mortgage amount due to HUD with the firm commitment submission package.

HUD Inspection Fee: $30 per unit when repairs are less than $3,000 per unit. 1% of the cost of the repairs otherwise.

Davis-Bacon Wages:    Davis-Bacon wage rates will apply to all projects for the construction or rehabilitation

HUD Mortgage Insurance Premium:

  • 0.65% for Market Rate Properties
  • 0.45% for Affordable Properties
  • FHA 232/223(f) Program: Seniors Housing & Healthcare Acquisition & Refinance.

FHA HUD 232/223(f) Program

Eligible Property:  Skilled nursing facilities, assisted living and board and care facilities. Must have license.  Independent Living Units are allowed up to 25% of total beds/units.

Use of Loan Proceeds:  Purchase or refinance, including moderate repairs and/or upgrades. No cash out allowed. All existing debt to be refinanced must be an obligation of the current  real estate owning entity, and i) be at least two years old, or ii) have been used for an eligible purpose. Eligible purposes include arms-length acquisition, property improvements, coverage of operating deficits, and other Project related costs.

Borrower Type:  Single Purpose Entity (SPE) – Profit and not-for-profit acceptable.

Debt Service Coverage Ratio:  1.45x

Interest Rate:  Fixed rate set at Rate Lock.  Generally rates are well below other alternative loans.

Maximum Term and Amortization:   Lessor of 35-years, or 75% of remaining useful life.

Guaranty:  Non-recourse – subject to Bad Boy carve-outs.

Assumable:  Yes, subject to HUD approval.

Prepayment Penalty:  Typically a 2-year lockout followed by a prepay penalty schedule that starts at 8% and declines by 1% per annum until year ten, and open at par thereafter.          Alternative prepayment provisions are available, but may impact the interest rate on the loan.

Fees and Expenses:    

  • FHA application fee — 0.30% of Loan Amount — payable to HUD.
  • Mortgage Insurance Premium
  • Inspection fee — greater of $30 per unit or 1.0% of required repairs cost
  • Appraisal, Phase I environmental, project capital Report (PCR a/k/a PCNA)
  • Lender financing fee.
  • Good Faith Deposit
  • Other standard real estate transactional costs (legal, title, survey, etc.).

Required Escrows:  Monthly for property insurance, Real Estate Taxes, reserves for replacement and mortgage insurance premiums.

Mortgage Insurance Premium (MIP):  MIP of 1.0% of Loan Amount due at Loan closing. 0.65% of Loan Amount due annually; 0.45% for Projects with low income housing tax credits.

Timing: Often these close between 4 and 6-months.

  • FHA 241 Program: Healthcare & Multifamily Improvements/Additions.

FHA 241 Program

Eligible Property Overview:  This program provides insured second mortgages to finance repairs, replacements (including major movables), energy conservation measures, and additions to existing FHA insured multifamily properties. The program is intended to keep a property competitive, extend its economic life, and provide replacement of obsolescent equipment.

Maximum Loan Amount:    The lesser of:   (a) 90% of the total eligible Replacement Costs of the project.

(b) The maximum statutory limitation applicable to the Section of the Act which the existing first mortgage is insured, based on the sum of the outstanding balance of the first mortgage and the supplemental loan.

(c) 90% of NOI inclusive of debt service payments on first mortgage.

Maximum Term: Coterminous with the existing FHA loan if less than 25-years left on the existing FHA loan, otherwise up to 40-years limited to 75% of the remaining useful life of the Property.

Assumable: Yes, same as other FHA loans.

Fees and Expenses: 0.30% application fee due at submission of application. Financing and permanent placement fees of up to 3.5% are based on final loan amount due upon commitment and payable at closing. HUD inspection fee for 241(a) is 0.5% of mortgage amount. Love Funding will charge a nominal processing fee.

MIP and FHA Fees:   FHA Fees 0.95% of loan amount due at initial loan closing for each 12 months of construction term, or part thereof; 0.95% of outstanding principal balance thereafter. Qualifying affordable or green transactions may have reduced MIP rates ranging from 0.25%-0.35%.

Davis Bacon Wage rules:    Normally Davis-Bacon prevailing wage requirements do apply. Contact our office to discuss exceptions.

Commercial Mortgage Backed Securities (“CMBS”), a/k/a Conduits:

Apartment loans are the most coveted property type when putting a CMBS loan pool together. As a result, CMBS originators offer lower interest rates to this category of commercial real estate. This is an excellent option to consider when the property or principals cannot secure a loan through one of the GSE (Government Sponsored Entities) (HUD/FHA, Freddie Mac or Fannie Mae).  CMBS loans, also known as Conduit loans bundle a number of loans and securitize the pool of loans. While there are disadvantages to CMBS – they generally will lend more dollars than other lenders, offer a longer amortization and most of the loans are non-recourse. The minimum loan size is generally $3 million, while some lenders have a higher minimum. This lender usually requires a Lockbox to be set up at closing.  The Lockbox is not generally activated until or unless there is a Trigger Event (e.g. major tenant not renewing, a default). When you need maximum dollars or maximum amortization this loan product is worth investigating.

Bridge loans – repositioning, minor to major rehab loans:  Loans start at $1 million with no real upper limit.  These are generally short-term in nature between one and three years.  The purpose is to reposition a property through re-tenanting, remodeling, allowing time for the property to become economically stable to either flip and sale or refinance with a permanent loan.  The lenders charge 1% – 2% points up front and often have an exit fee of 1% when the loan is paid off. Most Bridge lenders offer non-recourse loan terms. Bridge lenders are best utilized when portfolio lenders are not willing to make the loan.  Special Bridge Programs are available for Apartment complexes. The objective is to provide a credit facility that provides the funds and time necessary to stabilize the apartment complex so that the loan can be refinanced into an agency loan e.g. Freddie Mac or Fannie Mae or other institutional lenders.  Exit Fees are normally waived if refinanced with the same lender.

Insurance Company Lenders:  Minimum loan amount $750,000 no upper limit

Insurance companies have some of the best interest rates and lowest closing costs that rival a bank.  They generally prefer properties less than 15-years old (or older properties recently renovated). They can offer more flexible terms and often will not establish escrow accounts for taxes, insurance or replacement reserves. We represent over 50 insurance companies. Generally, the small loans (under $5 million) will often require some personal recourse from the principals.  The maximum leverage is around 65% to 75% for most property types. This is our go-to lender for most property types.

National, Regional Banks, and Credit Unions:  Minimum loan amount $500,000 upper limit is unique to each lender.

Many banks have a national and regional interest in originating loans on apartment complexes.  Most of these loans require the principals to provide a personal guaranty to the bank. While a few will offer 10-year fixed rates most will offering terms of 3 or 5-year fixed rates with some offering a 10-year adjustable with a rate adjustment after 5-years.  Most will consider 20 and 25-year amortizations. Loans are generally full recourse and can go to 75% and 80% loan to value. Credit Unions will require the principal to be a qualified Member of the Credit Union. Effective in early 2017 Federal Credit Unions have the legal authority to offer non-recourse loans.  However, very few are offering these loans, except on very low leverage. A great benefit of the loans from a Federally Charted Credit Union is the absence of prepayment penalties.

Mezzanine Financing or Mezz Debt:  This provides the borrower with additional funds when the first mortgage lender (Senior Lender) will not lend as much money as needed to complete the transaction.  In simple terms, it is similar to a Second Mortgage, with one large exception, the collateral is normally not the underlying real estate rather the collateral is most often a pledge of your ownership interests.  For example, if the ownership is held in a corporation where the owners’ interest in the borrowing entity is held in the form of stock, the stock of the company would be pledged to the Mezzanine Lender. In the event of a default, the Mezzanine lender would foreclose on the stock and take control of the company (and underlying asset).  Most of the ownership structures we see are held in a limited liability company. The ownership of these companies is most often held in units. So, like stock, the units would be pledged to the mezzanine lender. Because the mezzanine lender comes in at a higher risk level, their interest rates are higher than the typical first mortgage lender.  Rates for these loans vary from lender to lender based on the size, risk profile and property type. Common rates for these loans range from 10% to 15% per annum with fees of 1% to 2%, plus closing costs. These lenders and the Senior Lender will most often require an inter-creditor agreement. At first glance the pricing for a Mezzanine loan, you might consider avoiding this type of loan.  Keep in mind the alternative is to bring in more equity. There are two things to consider when you need more cash to bridge the gap between the Senior Loan (first mortgage) and the amount needed to close on a transaction. The mezzanine loan can be paid off and will go away. Whereas the equity stays in ownership, diluting your ownership and percentage of net income and tax benefits. Additionally, you must look at the costs of Mezzanine as a blend, or effective overall interest rate, when combined with the senior loan (first mortgage).  Mezzanine loans can increase the leverage on a property to 85%.

Assume the purchase price of a multi-tenanted office building is $10,000,000.  You have $2,000,000 equity to contribute towards the purchase. The senior lender with attractive rates will only go to 75%.  You are short 5% of the purchase price.

  • 5% senior interest rate on $7,500,000
  • 13% interest rate on the Mezz portion $500,000
  • The effective blended rate would be 5.50%

What would another investor charge come in with 20% of the required equity?  These loans are often on non-recourse loan terms, co-terminus with the first mortgage holder’s loan.

CMBS loans that were originally placed with significant interest-only periods, then a 30-year amortization on an 80% loan to value are sometimes in need of mezzanine funds to help refinance the maturing loan.  Or mezzanine loans could assist a buyer that wishes to purchase a commercial property subject to an existing loan with very expensive prepayment penalties. It may make more economic sense to place mezzanine debt behind the existing senior loan and ride out the maturity of the existing Senior Debt then to refinance the balloon balances with a new loan.

BLOG POSTS:

Apartment Building Loans: the Equity Required

How much money do I need to put down to buy an apartment building?

We get this question often from investors buying apartment buildings or apartment complex.  The good news there are many loan products available to investors of multifamily properties.

A loan secured by a first mortgage is often referred to as the Senior Loan.  When focused solely on first mortgage lenders the maximum leverage is as follows: 85%, 87% or 90% of the project’s value for market rate, qualified affordable or qualified rental assistance properties, respectively.  This loan comes with loan term and amortization of 35-years. While the interest rates for these loans are low the closing costs can run a little greater than some other loan products. As a result, we recommend considering this loan product with loans $3 million and higher.  (More information on this product can be found at https://www.caffreyloans.com/fha-hud-section-223a7/).

Agency loans through Fannie Mae and Freddie Mac can go to 80% of the value.  Both of these lenders have amortization schedules to 30-years. Fannie Mae offers loan terms up to 30-years while Freddie Mac does not offer this long of a term.  Both of these lenders have attractive programs starting at $1 million. If you have multiple properties being financed at the same time both Fannie Mae and Freddie Mac will consider loans as low as $750,000 if tied to other transactions. (For detailed information on these loan products please go to https://www.caffreyloans.com/loan-products/) .

Commercial Mortgage Backed Securities is another alternative with financing on the Senior Loan to 80%, with less underwriting restrictions than Fannie Mae or Freddie Mac.  You may have heard of Commercial Mortgage Back Securities under different names such as; Conduit, CMBS loans, or Wall Street Originated loan. If you need more leverage than 80% on loans over $3 million we can bring in a mezzanine piece to bridge the gap between 80% and 85%.  The blended rate between the Senior loan and the mezzanine can increase the overall interest rate by five or six basis points.

Other lenders that offer higher leverage are portfolio lenders.  A portfolio lender holds the loan on their books. HUD/FHA, Fannie Mae, Freddie Mac and CMBS lenders all sell their loans into large loan pools.  A few of these portfolio lenders offer non-recourse loans while the majority of these lenders are recourse lenders. In recourse loans, the owner(s) must personally guaranty the repayment of all or part of the loan.  A few of these lenders will consider loans to 80% of the value with most limited to 75% loan to value. These lenders have shorter fixed rate terms and amortizations schedules up to 25-years.

Lenders have different requirements, some require the owners to have four or more other multifamily properties under ownership or management some of our lenders do not have this requirement. Other lenders require the occupancy be at 90% or greater for the preceding 90-days prior to closing while some do not.  A few of the lenders have post-closing liquidity requirements equal to or greater than 9-months principal and interest payments some lenders do not have specific post-closing liquidity requirements. Some lenders will only go to the top 50-MSA population centers while others will consider smaller markets. Understanding the apartment building loan underwriting criteria for dozens of lenders is our job.  We overlay your loan request with the lender(s) that offer the best loan product to help achieve your overall goal. We work for you to find the best financing solution. We have a nationwide presence.

Please email or call an expert in apartment building loans for your next investment.  Mike Caffrey 913-402-7077 or Mike@CaffreyLoans.com

 

 

Apartment Loans with the Best Rates

Do you want the Best Interest Rate on your Apartment Loan?  Then read about underwriting secrets in loan pricing from Freddie Mac and Fannie Mae:

Does it matter which Freddie Mac or Fannie Mae lender you go through?  Since all of the pricing is the same, correct?  Wrong!  Pricing is different between licensed Freddie Mac and Fannie Mae originators.  Each originator has a specific internal profit margin they are trying achieve.  Caffrey & Company LLC has an alliance with over 40 other mortgage brokers throughout the US.  This affiliation gives Caffrey & Company LLC clout with lenders to offer the best rates for Apartment Loans, and at the lowest costs.   You, the borrower benefit from this alliance.  What other aspects go into Freddie Mac and Fannie Mae loan pricing?  Here are some of the most common underwriting events that affect pricing:

  • The population size of the assigned MSA will impact the pricing. Smaller population centers are priced wider (higher) than the same property located in a larger population center.
  • Make sure your mortgage banker checks the subject property rents against the “affordability” index used by Freddie Mac and Fannie Mae. Both of these lenders will apply a rate discount if the average rents for on your subject property fall below a certain economic threshold.  If they do you could see a reduction on the street quoted rate between 10 and 15-basis points.  This does not mean your property has to come with Low Income Tax Housing Credits, it just means your market rent property is collecting average rents below the mean in your submarket.  There are no on-going restrictions on the rents should you wish to increase the rents during the life of your new Freddie Mac or Fannie Mae Apartment loan.
  • Is your mortgage broker experienced enough to be able to identify abnormal expense levels? As a standard practice here at Caffrey & Company LLC we study the historical operating expenses.  Often a property owner has the option of classifying an expense as an ongoing operating expense or to treat this same expense as a capital item.  What difference could this make to the loan you are in the process of obtaining?  If the Mortgage Broker can demonstrate to Freddie Mac and/or Fannie Mae certain expenses found in the Operating Expense column could be reclassified as capital expenditures the lender’s Underwritten Cash Flow will go up which in turn will increase the Underwritten Debt Service Coverage Ratio (DSCR).  The higher the DSCR the lower the interest rate.  Moving the DSCR from 1.25x to 1.50x could result in a further reduction in interest rates by 10 to 15 basis points.  As a general rule, the Loan to value follows these same principals.  The lower the loan to value, the lower the interest rate will be because the DSCR ratio on a lower leverage loan is generally higher than on a higher leverage loan.  Recently we were working on an acquisition. Our client was in the market for an 80% loan to purchase.  Because of our unique and professional underwriting we were able to move certain expense items in the historical operating expenses to “below the line,” resulting in a 10 basis point reduction in the interest rate.
  • Fannie Mae and Freddie Mac have their own specific closing costs. It is difficult to know which lender has the lowest closing costs before you are engaged. Reduce these closing costs surprises by working with experienced mortgage brokers that can provide accurate estimated closing costs before you are financially committed to Apartment loans.
  • Nobody likes paying fees. If your mortgage broker charges a fee of 1.0% how does equate to the interest rate charged on the loan?  On a 10-year fixed rate term loan with a 30-year amortization roughly a 15 basis point swing in interest rates is equal to 1.0% in proceeds or on present value basis coverage the mortgage brokers 1.0% fee.  One Hundred (100) basis points equal One Percent (1.00%).