November 25, 2020

JF2276: Multifamily Lending Part 2| Syndication School with Theo Hicks


In this Syndication School episode, Theo Hicks explains what lenders look at before approving the loan for a multifamily real estate deal. He lists the qualifications that a prospective investor needs to have in order to be considered by various agencies, as well as how to get around them.

He also covers the specific metrics of the market and the deal that will be required to get the loan. This guide includes relevant information about the recent changes in response to the pandemic.

To listen to other Syndication School series about the “How To’s” of apartment syndications and download your FREE document, visit Thank you for listening, and I will talk to you tomorrow. 

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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:  Hello, Best Ever listeners, and welcome back to another episode of The Syndication School series, a free resource focused on the how-to’s of apartment syndications. As always, I’m your host, Theo Hicks.

Each week, we air a podcast episode that focuses on a specific aspect of the apartment syndication investment strategy, and for a lot of these episodes we give away free resources, including today, this little mini-series we’re doing. So if you want to get these free resources – PowerPoint presentation templates, a lot of Excel calculators and templates, as well as a few PDF “how to” guides – make sure you go to and then all of the previous Syndication School episodes are there as well.

As I mentioned, this is going to be a continuation of a series we’re doing about multifamily lending. This is like a multifamily 101 course, breaking down how to select the ideal loan for your apartment syndication deal. Make sure you check out part one, which was released last week, or if you’re listening to this in the future, seven episodes ago, where we talked about how to decide what lender to use, and then do you always use agency loan, agency lenders…?

We also talked about the differences between a mortgage broker and a lender, the pros and cons of those and which ones you should use. And then we talked about at what point in the process should you be engaging the mortgage broker or the lender… Upfront, and then at what point in the process should you be engaging them again.

In this episode, we’re going to talk about the qualifications for agency loans. And then we’ll also talk about a few other things like upfront reserves and renovation costs. And then likely, we’ll finish it off in part three next week, when we go over what to look forward when actually reviewing options, depending on how long this episode goes.

So let’s get started. Again, this is assuming that you’re pursuing agency financing, because their qualifications, their criteria is going to be a little more strict than your bridge loan or when you’re working with a bank, typically. And as I mentioned in the previous part, the agency loan is in a sense like the holy grail of loans, because they have the best terms. So because they’re so good, not every single person is going to qualify for them. So the borrowing party, because it may be multiple people, which includes you—it’s less about who the borrower is, but the borrower is going to be analyzed, and then the deal itself is going to be analyzed, and it must meet particular criteria set forth by Fannie Mae and Freddie Mac in order to actually qualify.

So let’s start with a borrower. So the borrower is going to be the guarantor; this is the individual who guarantees the loan, who signs the loan, the people or peoples who sign the loan. So it might be you, it might be your business partner, it might be someone else, or one of your investors or something. And then the key principles, which is defined as any person who controls and/or manages the partnership or the property, that is critical to the successful operation and management of the parts of other property, and who may be required to provide a guarantee. So again, assuming you and any of your partners who are on the actual GP.

And then the third are going to be principals; this is any person who owns or controls a specific interest in the partnership. So for example, the LLC is going to be someone who owns 25% or more membership interest. So this could be the GP, but they’re already covered by the key principals; so it could really be someone on the LP that has a really big investment, then they’ll be considered a borrower as well. So they will analyze these group of individuals across a few different factors.

So first it’s going to be the organizational structure… This is important, but it’s not something that you’re not going to be able to do. So for example, for most agency loans, only single-purpose entities are eligible borrowers. So a brand new entity needs to be created for each transaction, which is not that difficult to do. And there’s really no, from my understanding, criteria that you need to meet in order to create an entity. There are some exceptions with small balance loans, where you can put that in your name, or in a non-single asset entity… But if you’re going to do an agency loan, you need to create a brand new LLC for that deal. So the LLC can be under another LLC, but the LLC that property’s name is going to be in needs to be an LLC that doesn’t own any other real estate.

The next thing they’re going to look at is the experience of the borrower. Again, the parties that are involved in the borrower. So both Fannie Mae and Freddie Mac have different ways in which they qualify the borrower, based on their experience. So Fannie Mae uses a service called Application Experience, ACheck. So their DUS lenders submit the information of the borrower to this ACheck system, and then it will take a look at the members and the borrower, their experience with Fannie Mae loans in the past, and then the DUS lender is going to get a go or no-go from ACheck, based on the borrower’s history.

So generally speaking, one of the borrowers needs to have been on a Fannie Mae loan in the past in order to receive that pass score from ACheck. If no one has ever had a Fannie Mae loan, then I’m not sure if it’s a definite no-go, but the likelihood of it getting a no-go goes way up.

Freddie Mac’s is a little bit different, and they also go into a lot more specifics on their website for how they qualify borrowers. So a borrower must have a minimum of three years in experience in the same capacity that it will have for the proposed transaction, which means that they must have three years of experience doing whatever they plan on doing for this particular deal. And they also say that they must have owned a minimum of three separate deals in the past.

They also must have owned and managed other property in the same market that the subject property, the property that is being purchased is located in. And then if the borrower is lacking in one of these areas, so if they don’t have the three years experience, they haven’t done three properties, they don’t own a property in the same market, then — that doesn’t necessarily mean they’re not going to qualify, but Freddie Mac might come back and say, “Well, you’ll have to put down a larger replacement reserve deposit in order for us to trust you enough to give you this loan.”

So again, Freddie Mac is a lot more specific than Fannie Mae. But overall, you’re going to need to have experience doing this. And if you don’t, then you’re going to bring someone on the GP who does have that past experience with Fannie Mae, Freddie Mac and multifamily in general.

Next is going to be a general credit check. So nothing too fancy here, just taking a look at any other loans or liabilities that the members of the borrower have, to make sure that they’re able to fulfill the debt obligations based off of a past debt obligations they’ve had, or current allocations they have; what’s your credit score, basically.

They’re also going to take a look at the current and prospective financial strength. So the agencies don’t have a specific liquidity and net worth requirement for their conventional loan programs, so it’s going to vary from deal to deal. And then if you have a weak liquidity or a weak net worth, again, combined with a borrowers, then you might need to put more upfront reserves. But to get a general idea of how much liquidity and net worth you’re going to need, you can take a look at the loan requirements stated for Fannie Mae and Freddie Mac small balance loans.

So for Fannie Mae, these are loans between $750,000 to $6 million. And for Freddie Mac, these are loans between $1 million and $7.5 million. And the requirements for both of these are nine months of principal and interest in liquidity, and then a net worth equal to the loan amount. So they’re going to want to see that amount of liquidity and that net worth between the borrowers in order to qualify for the small balance loan. So it’s safe to assume that for conventional loans, it is going to be something similar to that in order to qualify… Although it could be less, it could be more depending on your background and your experience. These are general rule of thumbs. So to get more specifics, you’re going to want to talk to the lender or the mortgage broker, because they’ll be able to look at your history, your finances to see if you qualify or not.

Now, assuming that the borrower qualifies for agency debt, it doesn’t mean that every single deal qualifies for agency debt. The first check is, “Okay, I qualify,” or “Me and my business partners and my guarantor, we qualify for Fannie Mae or Freddie Mac debt.” Now, you need to make sure you find the actual right property. So they’re also going to look at the specific deal, to make sure that it meets their requirements for agency loans.

So first is the actual property itself. So they only provide loans on certain types of properties. There’s a really long list of all the different checks that the property needs to meet. But as long as it’s like a normal multifamily property, then you’re going to be fine. Most of the things on there are just things that are kind of, obviously always at a multifamily property that’s fully developed and not in complete disarray. So it will check to make sure that it is actually multifamily, it’s accessible by a road, all the units have bathrooms and kitchen, there’s water and sewer services hooked, these are up to code, there’s access to emergency services, things like that.

The main criterion that the deal needs to meet relates to occupancy, and this is going to be the major factor that determines if a deal is going to qualify for agency debt or not. So for Fannie Mae’s conventional loan program, they want to see a minimum physical occupancy of 85%, and a minimum economic occupancy of 70% for 90 days leading up to close. And then the occupancy requirement is even higher for your small loan balance, at 90%. So, in other words, it needs to be a stabilized deal. Same thing for Freddie Mac, that has a minimum physical occupancy of 90% for 90 days. So the deal needs to be stabilized. If it is not, it is not going to qualify for Fannie Mae or Freddie Mac’s conventional loan programs. It might qualify for one of their more renovation type programs, but most likely, if it’s not stabilized, you’re not going to be able to get an agency debt.

And then lastly, they’re going to want to take a look at the property management company and the market. So they have some criteria for the company that’s actually managing the deal. They don’t really have any stipulations on whether it’s in-house or third-party, but the borrowers must have adequate experience with this particular size of property and type of property. And then I thought I remember seeing somewhere that you actually might have to have an in-house or third-party, depending on your experience and if you live in the market or not. But overall, the management company needs to have experience managing this type of property and this size of property.

And then for the market, they want to make sure that it’s a strong market, and so they look at these typical metrics like vacancy, demand, supply, jobs and [unintelligible [00:15:05].23]. And then for some of the loans, for example, for Freddie Mac, they have different minimum debt service coverage ratios and maximum LTVs based off of the market. So they break it down to top markets, standard markets, small markets and very small markets, where the terms are more favorable to the bigger markets.

Something else that you need to keep in mind when you’re dealing with the agencies, as I mentioned a few times earlier in the episode when talking about the requirements of the borrower and the experience requirements, and how they might have to put down a larger upfront reserve if they have less experienced or weaker financials… And one thing I wanted to mention – this is something that’s timely and is likely to change, so make sure you’re consistently staying up to date on these COVID-related changes, but they did change their reserve requirements in response to the pandemic.

So Fannie Mae is actually requiring 12 months of principal and interest for loans that are $6 million and more, and 18 months for loans less than $6 million. And then it could be as low as six months or down to zero dollars if you go past a certain debt service coverage ratio and loan-value ratio. So a debt service coverage ratio of 1.35 or higher, and an LTV that is 65% or lower, then it’s six months, and if the debt service coverage ratio is 1.55 and the LTV is 55 or less, then there’s no reserves required. So the more money you put down and the more cash flow there is, then the less reserves they’re going to require. But if it’s got a lower debt service coverage ratio, then they’re going to want more money upfront to protect themselves.

For Freddie Mac, it is nine months principal and interest on loans, with a debt service coverage ratio of less than 1.4, and then six months if it’s above 1.4 and then 12 months for their small balance loan. So pretty large upfront reserves.

And then when you have access to that money, it kind of really depends… So this is something that you really need to talk with your lender about, to know exactly what you need to have upfront in reserves… Because again, this is going to impact the cash-on-cash return to your investors, and also have an understanding of when you can distribute that money back to your investors or when you can tap into that capital to do a value-add renovation program.

Which brings us to my last point I wanted to make in this episode, which is going to be the renovation costs. So with Fannie Mae and Freddie Mac, with agency debt, can you get a loan where the rehabs are included? And the answer is yes, they both have a loan programs that cover renovation costs.

Fannie Mae offers a DUS moderate rehabilitation supplemental loan, aka the mod rehab loan. It’s actually you’re getting two loans; you get the regular conventional loan, and then you can get a supplemental loan on top of that to cover renovation costs. And the advantage here compared to other supplemental loans that Fannie Mae offers, is you don’t need to wait the full year to get a supplemental loan; you can get it right away, as long as the renovations are at least $10,000 per unit.

Freddie Mac offers two renovation loans – a moderate rehab loan and a value-add loan. And the difference between these two is going to be the renovation costs. And so for the second loan, the value-add loan, renovations need to be between $10,000 and $25,000 per unit. And then the moderate rehab loan would be renovations that are $25,000 to $60,000 per unit. And then the minimum of $7,500 needs to go into the actual interior. So that includes the exterior costs as well, obviously.

So if renovations are less than $10,000 per unit or greater than $60,000 per unit, then you’re going to need to get a bridge loan or pay for those renovations out of pocket, a.k.a. out of your passive investor’s pocket.

So that’s going to conclude and wrap up this part two. We talked about how to qualify for agency debt as a borrower, what deals qualify for agency debt, some of the changes to the upfront reserves based off of the Coronavirus, and then the fact that you are able to get a loan that covers the renovation costs.

So we’re going to wrap up next week with part three, where we’re going to go over the various different metrics of a loan – debt service, loan amount, interest-only, what these things mean, and then how you can analyze and compare and contrast multiple loan options based off of these variety of metrics.

We’re giving away a free document for this series. It’s the top loan programs document where you’re able to view more specifics on the different Fannie Mae, Freddie Mac, and the non-agency loans, the terms of each of those loans in more detail… Because in this episode and in this series we’re focusing more on not necessarily high-level, but we’re not going to go into detail on every single loan. Like here’s the interest rate, here’s the service coverage ratio, here’s the LTV, here’s all these various different terms. But we are, next week, going to talk about what those terms actually mean, and then what the pros and cons are for the different options that you’ll have.

So until next week, make sure you download the free top loan program’s document. Make sure you listen to some of the other Syndication School episodes. Have a best ever day and we’ll talk to you tomorrow.

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