Multifamily Debt and Financing

A brief overview of how debt works in the multifamily industry.

Hey spencer hey man what’s going on what is debt what is debt well i mean essentially debt is something that’s owed by someone else it’s also what our you know entire economy is based on you know currency the dollars they’re all essentially debt they’re not real money if everything’s based on debt issued by the federal reserve federal reserve issues federal

Reserve notes buys treasury bonds which are other forms of debt having to be repaid to u.s government but breaking it down a lender lends money to a borrower they borrow money the borrower pays interest on that money and has to repay it at some later date okay why should you use debt why can’t i just pay for it up front well i mean it depends on what we’re

Talking about if it’s um if you’re buying a car maybe it does make sense to buy it with cash versus you know using debt it depends if we’re talking about buying assets or buying liabilities if you’re buying an asset that’s going to be producing cash flow or going to be appreciating it makes sense to use debt you’re able to have a much less much smaller down

Payment much less of an equity requirement you’re going to have higher returns and there are more tax benefits for using debt versus buying something with all cash okay so how do you get the debt how do you get a loan especially for a multi-family project so it’s easy and not easy at the same time i mean relationships in all forms of business are important so

Having good relationships help but it’s not everything typically you know a lender whether that’s a bank whether that’s a debt fund whether that’s uh you know a government gsc like a fannie mae or freddie mac you know there’s they’re gonna be looking at two things first the project does the project meet their requirements and then secondly do the guarantors of

The sponsors of the loan do they meet their requirements and both of those requirements are going to change depending on the bank the institution the type of project it is okay so you mentioned gses what what are these common sources of multi-family debt so there’s a lot of different ways you can finance a multi-family property most investors i believe around

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48 use some form of gse which is a government sponsored enterprise the main ones are fannie mae or freddie mac you’ve probably heard of them housing urban development or hud is also they’re not a gse but they’re a government agency that guarantees debt so all these different groups facilitate multi-family borrowing and debt in some way they’re also also just

Regular banks there are thrift banks there are cmbs loans there are life insurance companies that issue debt there are debt funds and a couple of other smaller sources but those are the main forms and sources of debt for multi-family investments so what are some kind of of the variables that go into these different kinds of loans the the things that kind of

Differentiate each type of loan that you’re gonna that you might get yeah so i mean a lot of debts have a lot of loans have a lot in common you know again there’s a entity that’s going to be issuing you know funds to another entity and that one entity has to pay back those funds on a given interest rate over a certain time and has to return that capital balance

At a certain time um but the variables that kind of make up the terms of those loans can be relatively variable in different terms and different structures work better or worse for different types of projects you know but the you know main variables are you know what’s the term of the loan or how long until you actually have to pay back the balance of that loan

Um and then how long that one’s going to be amortized over so if you’re stretching out all of your principal payments is it going to be stretched out over you know a 15-year period like a 15-year mortgage uh 25-year period which a lot of commercial mortgages are based on based off of or 30 years which fannie mae and freddie mac typically base their amortization

Schedules began all but hud has a 35-year amortization schedule so it really kind of depends um there’s also the interest rate different lenders have different interest rates on their loans a lot of times they can be negotiated to a certain degree they’re typically based on a base rate like the 10-year treasury or some kind of other you know larger um you know

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Indexed rate used to be libor libraries being phased out for sofer and then a spread or a difference that the bank’s going to make money off of that base rate so you know libor may be trading ads right now like 0.14 interest the bank might want to make two point you know five or three percent interest of spread between that that libor underlying benchmark rate

And what they’re actually going to be charging and what the lender is going to be paying on that mortgage itself um there’s other variables such as recourse or non-recourse a recourse loan typically the the bank will be able to go after the guarantors personally if there’s a default or if the property goes into foreclosure non-recourse typically means that the

Recourse is limited to that asset itself although there are carve outs and certain provisions of non-recourse loans that turn them into recourse loans and then other variables such as whether you’d be paying any kind of like mortgage insurance like mip or whether the loan is going to be an interest-only loan for a certain period of time where you’re only having

To pay the interest that’s due or a fully amortizing loan without interest only where you’re paying interest and paying some of the principal back on that loan that so what is what does it mean to amortize something so when you’re amortizing you’re essentially just paying off the loan balance okay and so if you have an interest rate of you know you know four

Percent on a 100 loan you’re paying four percent a year but if you’re amortizing you’re taking that balance of the loan that you call it a hundred dollars you’re paying a little bit of that back paying like five dollars instead of four dollars yeah okay one more question one more bonus question i hear a lot about bridge to hud or bridge to this bridge to

That what is a bridge loan yeah so a bridge loan is a financing tool um it’s similar to a construction loan they’re often used when either the asset is not ready to put permanent financing in place a lot of times that can mean that the property isn’t stabilized yet a lot of lenders especially fannie mae and freddie mac they won’t lend on a project until it’s

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Stabilized which they typically define as 90 occupied so let’s say you’re buying a more distressed property it’s 70 occupied you’re going to fix it up lease it out get to that 90 occupancy but you can’t close on the property if you want to use financing with that agency loan so you might go to a bank or a bridge lender that will provide you a short-term interim

Loan with a term of you know one to four years possibly interest only possibly amortizing possibly recourse or non-recourse there’s a lot of different variables with bridge loans you’ll close on the property with that bridge loan and then as soon as that property is stabilized you’ll put that permanent loan in place where you may have heard bridge to hud hud

Loans are really attractive long-term financing vehicles but they take a long time to put in place sometimes it can take four to six months and put the lum together go through all the underwriting process if you’re trying to purchase a property that seller may not want to wait four to six months for you to put your loan together so what we’ve done quite a few

Times is we’ve closed the property with a bridge loan and then the first you know six months of the project will put the hud loan in place and so it’s essentially it’s allowing us to close faster which can be a big difference because if we’re willing to pay the same price as another potential buyer would but we’re going to close in six months but they can close

In three months the seller’s gonna choose the quicker close nine times out of ten so it allows us to close quicker it’s a more it’s uh easier it’s an easier loan to get typically and so it just helps us when we’re going to execute on a project and but it has to make sense for the deal there are additional costs with bridge loans and there’s different costs

And fees associated with all the different kinds of financing options you

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Multifamily Debt and Financing By Gray Capital