May 23, 2019

JF1724: How to Secure Financing for an Apartment Syndication Deal Part 2

Time to get back into financing for apartment syndication deals. Today Theo will be discussing the top agency loans available. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Joe Fairless: There needed to be a resource on apartment syndication that not only talked about each aspect of the syndication process, but how to actually do each of the things, and go into it in detail… And we thought “Hey, why not make it free, too?” That’s why we launched Syndication School.

Theo Hicks will go through a particular aspect of apartment syndication on today’s episode, and get into the details of how to do that particular thing. Enjoy this episode, and for more on apartment syndication and how to do things, go to, or to learn more about the Apartment Syndication School, go to, so you can listen to all the previous episodes.


Theo Hicks: Hi, Best Ever listeners. Welcome back to another episode of the Syndication School series, a free resource focused on the how-to’s of apartment syndication. As always, I am your host, Theo Hicks.

Each week we air two podcast episodes, every Wednesday and Thursday, that are typically a part of a larger podcast series that focus on a specific aspect of the apartment syndication investment strategy… And for the majority of the series we will be offering a document/spreadsheet/some sort of resource for you to download for free. All of the free documents, as well as the past Syndication School series can be found at

This episode is a continuation of yesterday’s episode. This will be part two of the series entitled “How to secure financing for an apartment syndication deal.” If you haven’t so already, I recommend listening to part one, where we discussed the two main types of debt – the recourse and the non-recourse debt. We talked about the loan guarantor or the key principle, who is either going to be your or someone else that meets the lender’s requirements to qualify for the loan… And then we started to talk about the two main categories of financing, which were the agency permanent loans and the bridge loans.

As I mentioned in that episode, that was a general overview. In this episode I want to get into more specifics and talk about some of the most common and most popular loan programs that are offered by some of the most popular and common debt providers used by value-add apartment investors… Which if you don’t know already, a value-add apartment investor is someone who is going to find a deal that is distressed in some minor way – all the main mechanicals are either fine, or only a few of them need changing; maybe you need to restripe a parking lot, maybe you need to replace a few roofs, but nothing insane, nothing major. The property is already stabilized, the occupancy is at least 85%, but the rents are low, or the units are outdated, or the management isn’t as good as it should be and the value-add investor will go in there and add value by fixing those things and increasing the rent.

So these main loan programs that I’m gonna talk about today are going to be the agency debt, which is going to be the Fannie Mae and Freddie Mac; also the government program which is HUD, and then I’m gonna talk about a few other types of loans you can secure – CMBS, traditional banks, or life companies.

This is actually going to be a free document. It’s going to be essentially a matrix that goes over all the characteristics of these loan programs. Description of the loan, term, size etc. But I wanted to go over these on the podcast as well, just for those of you who just listen and don’t wanna download the document, so that you’re gonna have at least a basic understanding and a familiarity of different types of loans, so that when you’re actually reaching out to your lenders — first of all, you can start to think about “Okay, I wanna be a value-add investor. Here’s my business plan. Okay, so these are the types of loans I can potentially pursue, and based on those loans, here’s how much money I’m gonna have to put down, and here’s how much money I’m gonna pay on an ongoing basis, and here are some of the other risks of that loan.” And so that once you are talking to your mortgage broker, when you’re talking to your investors and they ask you questions about the loan, you know what you’re talking about.

The spreadsheet is not gonna be completely exhaustive. I did not include every single loan program that there is. There’s actually a really good website out there that goes over essentially every single loan that there is. Just google “multifamily loans”. The website is literally If you want to find all of the loans that are out there or learn more on these particular loans, I recommend going to that website.

Now, the first category of loans I mention are those agency loans – Fannie Mae and Freddie Mac. We’ll start with Fannie Mae. Fannie Mae – they have the top four loans, and I’m not gonna go over all the different characteristics; I’m just gonna go over the description, and then we’ll kind of talk about the pros and the cons of these loans.

The first one is gonna be the Fannie Mae Small Loan program. What’s nice about this one is that for their main loan program, their DUS program – which we’ll go over in a second – the loan size minimum is going to be 3 million dollars. So before this Small Loan program, unless you found a deal that was above 3 million dollars, then you couldn’t pursue a Fannie Mae loan. So they created this small loan program, which has a loan size as low as $750,000, which means that people that are buying these smaller multifamilies can still use Fannie Mae. Also, the application process is very streamlined, so there’s a lot less paperwork and a lot less fees associated with it… But overall, for the description – it’s just a loan that has a minimum size of $750,000, and the process of securing that loan is a lot more simple and a lot less expensive compared to their other programs.

For the actual pros for this loan program – you’re gonna be facing competitive interest rates, which I feel like all of these say “Competitive interest rates.” Some of them say “Very competitive interest rates.” Maybe those are the ones that are the best… But most of them just say “Competitive interest rates.”

You’ve got a loan-to-value of up to 80%. Again, the process is very streamlined. The capital improvements can be included in the loan; it is possible. The debt is going to be non-recourse, as well as assumable. Supplemental loans are gonna be available after 12 months, and there’s no processing fees.

The cons – these aren’t necessarily cons. Maybe some drawbacks, or extra-requirements for this loan. One, you’re going to have to have replacement reserves that are equal to $250/unit, which if  you remember, during the underwriting podcast series, we were already taking that into account, so that’s not that big of a con.

Something else that’s pretty important is that there’s a required occupancy of at least 90% for 12 months before closing. That’s gonna be physical occupancy. So if you’re buying a 100-unit property, then over the previous 12 months the average physical occupancy needs to be 90 units occupied.

There’s gonna be a $10,000 application deposit required, and the lender fees are gonna be anywhere between $4,500 and $13,000. That’s that first Fannie Mae program, the Small program.

The next one is gonna be the DUS, or the Delegated Underwriting Service loan. This is one of the most popular loans for multifamily investors that use Fannie Mae, or really in the industry in general. The difference between the Small and the DUS is going to be that minimum, as well as the application process. The minimum for the DUS is gonna be higher, and the process is a little bit more in-depth than for the small. But other than that, the majority of the loan terms – debt service coverage ratio, LTVs – are all the same.

I’ll just go over the pros really quickly… Competitive interest rates (same as Small). Up to 80% LTV (same as Small). Non-recourse and assumable (same as Small). Supplemental loan available after 12 months, but for this one there is interest-only available. It is available for the other one as well, but that’s kind of a selling point for the very popular DUS  Fannie Mae loan.

The drawbacks of this loan are gonna be you’re still gonna need replacement reserves. The occupancy rate requirements are a little bit better for this loan program. The requirements are an 85% physical occupancy and an 80% economic occupancy, 90 days before closing. Then the application deposit is gonna be $20,000, and unlike the Small, there is a processing fee of 3k for this one.

Then something else that’s interesting is that if you’re gonna be an absentee owner of the property, then in order to qualify for this loan program you need to hire a third-party property management company, and you’re gonna need to have a strong track record… Whereas for local owners, this [unintelligible [00:09:33].23] doesn’t apply. I thought that was pretty interesting.

Now, Fannie Mae does offer a rehab loan. It’s called a Moderate Rehabilitation Loan. They say if you currently own or want to purchase, this is something that could be secured when you already have a deal and you want to do some renovations.

This essentially allows you to include a minimum of $10,000 per unit in the loan. These are for — not heavy renovations, but not just a few cosmetic updates. These are things where maybe you’re redoing the entire kitchen, redoing the entire bathroom, doing new floors, things like that. The loan size is going to be a minimum of 10 million dollars, so this doesn’t work for smaller deals. If you’ve got a million dollar property you’re not gonna be able to do this moderate rehabilitation loan. It allows you to loan up to 80% of the stabilized value. That’s not necessarily an LTV or an LTC, it’s just based on the ARV, in a sense.

So the pros for this one, besides obviously the renovation costs being included in the loan, $10,000 premium or higher, there’s gonna be also competitive interest rates; it is still non-recourse and assumable. Typically when you do these types of rehab loans, you’re gonna have a floating interest rate, whereas for this there’s a possibility of having a fixed rate and there’s also a possibility of interest-only.

Some of the cons or drawbacks or extra things to think about – there’s the $25,000 application fee. Expect to pay anywhere between $15,000 and $20,000 in the legal fees, and then if you are doing $20,000 or more per unit renovations, then there’s something called a Rehabilitation Work Evaluation Report that you’ll be required to fill out, or have filled out and it’ll probably require inspections… And then you’re also gonna provide them with a scope of work before you qualify for the loan.

The fourth loan that I wanted to talk about is called the Near Stabilization Execution Loan. This is when maybe you secured a bridge loan, or maybe you developed a property, or recently renovated a property, and the property is expected to achieve stabilized occupancy within 120 days. That’s above 85%-90%. Then you can secure this Near Stabilization loan. Essentially – and I mentioned this in the last podcast episode, in part one – this is what you would get after your bridge loan has expired. Let’s say you put your three-year bridge loan on the property, then this is the type of loan that you wanna secure after you’ve stabilized the property.

But again, some of the important loan terms to think about – there is a 10 million dollar minimum, so it’s not gonna work on those smaller properties… But everything else is gonna be very similar to their DUS Loan program. So from a pros and cons perspective… Pros – that competitive interest rate comes back again; they’re gonna be non-recourse and assumable. You still have that ability for the supplemental loan after 12 months. A pretty big difference is the occupancy requirement. The requirement is 75% physical and 60% economic occupancy over the past 12 months. Again, this is a loan that you can secure before the property is even stabilized, so it’s eligible for properties that are partially leased, that are recently built or newly-renovated.

And then some of the cons, and drawbacks, and other things to think about – there is a $12,500 application deposit required, as well as a $3,000 processing fee. Then there’s a 1% origination fee for the loan. Those are the top Fannie Mae types of loans.

The other agency is Freddie Mac. For Freddie Mac there are going to be five loans that I wanna talk about. As you’re listening to this, you’ll realize that the loan programs are fairly  similar to the loan programs offered by Fannie Mae, with slightly different terms, but it’s nothing too different.

The first one – Fannie Mae has their Small Loan, Freddie Mac has their Small Balance loan. The Small Balance loan is going to have a minimum of $750,000. Remember, for Fannie Mae, their small balance loan had the exact same minimum… But for the Freddie Mac Small Balance loan, the maximum is actually gonna be a little bit higher. Their maximum is 7.5 million, compared to the 5 million for Fannie Mae.

Similar to the Fannie Mae loan, this is gonna be a streamlined loan. There are substantially compressed costs and rates for this loan program.

The pros and cons for the Small Balanced Loan… Pros – LTV up to 80%. Again, you’re gonna have that streamlined application process, it’s gonna cost you less money and take less time. The loan is gonna be assumable as well as non-recourse, and there is that interest-only available. Again, if you download the free document (it’s called Top Loan Programs), you’ll see exactly how they determine the interest rates for all the loans that I’m discussing.

And then the cons, the drawbacks, some things to think about – there are replacement reserve requirements for this loan, between $200 and $300 per unit. Expect to pay a $7,000  application fee, as well as  a processing fee equal to approximately 0.1% of the loan amount. You are required to obtain a variety of third-party reports during the due diligence process, that need to be signed off on by the lender. Then there’s going to be a net worth requirement, so a net worth equal to the loan amount, as well as a liquidity requirement, with a liquidity equal to nine months of debt service, as well as an experience requirement, which they state as effectively having one year’s worth of experience with a similar size sized deal. So that’s the Small Balance loan.

Their standard loan is called the Fixed Rate Conventional loan. This is going to be their most popular loan program. For this one, you’ve got a loan size between 5 million dollars and 100 million dollars. But besides that, pretty standard loan terms. I’ll go into the pros and cons.

The pros – you’ve got competitive interest rates, LTV up to 80%, non-recourse, unassumable; supplemental loans are available after 12 months. You’re actually able to secure this loan not only for apartments, but also for mixed-use properties as well. And then the closing process is under 60 days, so it’s a pretty quick process.

The cons, things to think about, some drawbacks – there are, again, going to be replacement reserves required, as well as third-party reports, and then from a cost perspective there’s a $2,000 application fee, or 1% of the loan amount plus $15,000, so at least $17,000 for the application fee. And then there’s also gonna be a loan origination fee, and then also legal fees between $8,000 and $12,000.

Now, the mirror image of the fixed rate conventional loan is going to be the floating rate. So really the only difference between the fixed rate and the floating rate is going to be the interest rate. So for the fixed rate conventional, there’s a fixed interest rate. For the floating rate, there’s a floating interest rate, and the floating interest rate is based on the one-month LIBOR index.

The pros and cons for this are essentially the exact same, except a potential con for the floating rate is that the interest rate is not going to be locked in; it could go up and down based on, again, that one-month LIBOR rate/index.

And the last two loans are going to be [unintelligible [00:16:55].01] two value-add type loans. The first one is called the moderate rehab loan, and the second one is called the value-add loan. For the moderate rehab loan they will fund up to 80% of the renovations, and they will fund between $25,000 and $60,000 per unit. That includes interiors and exteriors. So you need to spend at least $7,500/unit for the interiors for this loan program. The debt service coverage ration must not go below 1, and the projects need to be completed within three years, so 36 months… Whereas for the value-add loan, this is a property that is high-quality and requires only moderate renovations; unlike the moderate rehabilitation loan, which it’s interesting that it’s called moderate, because it is their actual top rehab loan that they have… Because for the value-add loan you are only able to get $10,000 to $25,000 per unit, and you must spend half of that money on the interiors.

The maximum number of units is 500 units, so if you have a 501-unit property, you can’t get this loan… And the renovations must start within 90 days, and must be completed within 33 months. So a total of three years.

For the moderate rehab loan, some of the pros and cons… The pros – they’ll fund up to 80% of the renovations; there are gonna be competitive interest rates again, with interest-only payments during renovations, and it’s also gonna be non-recourse.

Some of the cons, drawbacks, things to think about… There is additional documentation that’s going to be required, since you are doing those renovations, and the borrower should be well-funded and experienced in the successful completion of some other renovation projects.

And then lastly, monitoring is going to be required. You’re going to have to send quarterly progress reports and inspections, as well as the rent roll operating statements on a quarterly basis. For the value-add, you are able to secure up to 85% LTV.

Something else that’s nice for a pro is that the budget can be increased by up to 20% without approval. So if your initial budget is a million dollars, then you can do 1.2 million dollars in renovations without having to get additional approval. You’re also able to spend up to 50% of funds on the exteriors. So at least 50% needs to be spent on the interiors.

The loan can also be extended for one year, with a 0.5% extension fee, and another year at the lender’s discretion for a 1% fee. Typically, the value-add loan term is three years, but you can pay for up to two one-year extensions.

In regards to the drawbacks of this loan, your underwriting needs to support a 1.3 debt service coverage ratio, and a 75% LTV based on the stabilized value. That’s essentially the end of year three. Debt service coverage ratio and LTV need to be 1.3 and 75% respectively. The engineering review is required at the loan maturity, so at the end of that 36 months. Then there’s gonna be an engineering review. There’s also replacement reserves required. The loan is not assumable, and there is a $2,000 or 0.1% of the loan amount required as a fee.

Now, I think I’m gonna stop there for today. I think this is a good stopping point, because we were able to cover both of those agency loans, the Fannie Mae loan and the Freddie Mac loan. In the beginning of next week’s episode I’m gonna finish up talking about these loan programs. That is going to be the HUD loan – the HUD loan actually has four different programs, and as you will see, their loan programs are going to be relatively similar to the Fannie Mae and Freddie Mac, with one pretty big difference. We’ll talk about that on the next episode. And then also there’s a few other ones, not necessarily one-off, but — not super-common, but they’re out there, they exist, and you might hear these terms out there when people are discussing debt and loans.

That concludes this episode. I recommend listening to part one, which was posted yesterday, or if you’re listening to this in the future, the podcast episode directly before this one. I also recommend listening to the other Syndication School series about the how-to’s of apartment syndications, as well as to download the free Top Loan Programs document. All of these can be found at

Thank you for listening, and I will talk to you next week.

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