As you are evaluating multifamily property opportunities, it is helpful to understand how the Sponsoring team (the General Partners, or GPs) is securing the loan to complete the purchase. Let’s learn about the commonly used loans in Multifamily deals!
Which Loans are Most Common For Multifamily Deals?
Here are the top 3 loans used in syndications for multifamily real estate investments:
- Bridge Loans
- CMBS Loans
- Agency Loans
Bridge Loans are a specific type of short-term financing that is often used to “bridge the gap” between two transactions. It is a temporary loan that provides borrowers with immediate cash flow or capital while they await the completion of a more permanent or long-term financing solution. They are provided by banks, credit unions, or private lenders.
Bridge Loans have higher interest rates, shorter loan terms and are secured via a range of collateral, including real estate, business assets, or other forms of property.
These loans enable syndicators to take advantage of time-sensitive real estate opportunities. However, lenders require a clear exit strategy to repay, which typically involves refinancing into a traditional loan or selling the property.
CMBS Loans: Commercial Mortgage-Backed Securities (CMBS) loans involve pooling multiple loans and selling them as bonds to investors. These bonds are backed by the cash flows generated by the underlying loans. Such loans often offer flexible terms and are suitable for larger multifamily projects.
Syndicators may opt for CMBS loans when they want to finance larger properties or if they prefer the flexible underwriting provided by this type of loan, which generally have higher interest rates, but longer loan terms and higher loan-to-value (LTV) ratios.
Agency Loans are non-recourse loans that are backed, insured, or guaranteed by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac. They are designed to finance multifamily properties that meet certain criteria set by the agencies.
Agency loans often come with lower interest rates, longer loan terms, and higher loan-to-value (LTV) ratios.
Such loans are less risky for borrowers because they offer a level of protection against personal liability beyond the collateralized property. However, due to this reduced risk for borrowers, lenders may have stricter underwriting criteria and may require a higher down payment or offer slightly higher interest rates.