There are only three, globally-speaking, options for the type of loan we can get for multifamily. The main distinction comes down to the state and condition of the property itself. Let’s discuss.
Portfolio loans are loans you can get from a local community bank. These banks are small banks with several locations that serve specific communities. Thee are not national institutions.
Typically, these banks will hold commercial paper on their books instead of bundling and selling it on the secondary market.
There are drawbacks to portfolio loans. The biggest drawback is that these loans are almost always full recourse. Let me explain:
You know how people always tell you that you are not the one qualifying for the commercial loan, the property is. Therefore it’s easier to qualify because of your DTI and credit history never enter the equation. They say that because it’s the building itself doing the qualifying, a good deal will always get qualified.
While all of that is true, portfolio banks nonetheless require a personal guarantee from you, meaning that they require recourse to your house, boat, and motorcycle if things go sideways. This is a huge deterrent…
The other limitation of a small portfolio bank are the terms. Typically, these are smaller size loans, simply because a relatively small bank doesn’t want to put all its; eggs in one basket. A $10M loan might constitute 2% of their balance sheet, and that’s scary. Additionally, the amortization is almost always 15-25 years, with 20-year being the average, which may not be the best…
Fannie and Freddie
Swinging in the completely opposite direction we have Fannie Mae and Freddie Mac type of loans. Lot’s can be said about these, but to boil things down:
The main benefits are that all of the problems found in the portfolio loan space are cured here. There is no personal guarantee. The loans can be much, much larger. 30-year amortization is typical.
However, there are two drawbacks. First of all, it’s hard to get a small loan, for say $1.5M. Both Fannie and Freddie have small balance programs but both are challenging in a couple of ways. This pushes you back into commercial portfolio space, which is not ideal for syndications because of the resource…Which basically means that you are better off either buying buildings for $500,000 or $5M – the in-between stuff is harder to finance.
But, more importantly, both Fannie and Freddie are designed for stabilized assets. They don’t want to see high economic vacancy. This makes it hard for us since we don’t buy stabilized assets – we buy a broken asset and then we fix them and sell them to the guy who wants a stable asset and will finance it with a Fannie or Freddie loan.
Solution – Bridge Debt
There are companies out there who specialize in destabilized asset financing. They understand our business and know how to underwrite such value-add deals. These are typically floaters and require caps, and between the caps and the interest rate, they are more costly. But, these are the only game in town if you want to finance a project with 40% economic vacancy in-place.
And now you know more than the next guy. Feel free to post questions and comments below.