Everybody wants leverage. Ninety percent of our clients are interested in achieving maximum loan proceeds as their primary or secondary objective in a given financing assignment, this is acutely the case in multifamily following a decade of continually plunging cap rates that have pushed investor and developer expectations of value higher and higher. The easiest way to move the goal post is to continually achieve the lofty value estimates in developer proformas year in and year out. Naturally, at today’s rates, much like the US government, most people would like to borrow as much as possible.
Unlike other asset classes, which generally see higher cap rates, multifamily more recently is not necessarily purely about loan-to-value. Currently, with few exceptions, most lenders require at least a 1.3 times debt service coverage ratio (multifamily debt service coverage is calculated as net income, less reserves for replacements divided by debt service). Quick math will show you that at a rate of between 3% and 3.25% using a 30-year amortization, you will run up against the 1.3X pretty quickly at a cap rate of as high as 5%. What this means is that it can be difficult to get to full (75%) loan proceeds, especially on smaller sub $10 million loans that don’t command premium pricing from the Fannie Mae and Freddie Mac lenders. In pre-COVID times when rates were higher, closer to 3.75% to 4%, the best solution was often a 10-year interest-only loan from a CMBS lender at 65% as this would in many cases result in a higher loan than an amortizing loan due to debt service coverage. Currently, with lenders of all types offering incredibly low rates on multifamily, the best execution to achieve the highest loan could come from a bank on a portfolio or a swap deal or from an agency lender, any of which could be as low as in the 2’s for the right deal. What this means for you as a borrower is that it is best to shop around in order to get the best deal, as a lower rate will also potentially mean higher loan amount, and right now there is no clear winner on what is the best way to go.
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