Sources of Multifamily Financing

The Expert: Beyond the GSEs
March 31, 2009, Commercial Property News
By: Keith Misner (pictured), Cushman and Wakefield Inc. and Michael Ryan, Cushman and Wakefield Sonnenblick Goldman

Given the current state of the debt markets, Fannie Mae and Freddie Mac are widely perceived to be the only two viable sources of debt financing for multi-family rental assets. While these two government agencies continue to be the primary sources of financing for these assets, there are a variety of alternative lenders and capital sources willing to lend on stabilized and value-add assets.

As Fannie and Freddie become more conservative and subjective in their underwriting, we have seen a recent increase in activity from the U.S. Department of Housing and Urban Development for cash-flowing market-rate assets. There is often a misperception that HUD will only finance affordable projects or that it takes six to nine months to close a HUD loan. In fact, HUD is aggressively financing Class A assets and can typically close in three to four months. HUD did not change its underwriting criteria during the peak of the market, and it has not changed its underwriting criteria as the market has deteriorated. And with financing offered at 85 percent loan-to-value, subject to a 1.17-times debt service coverage ratio, it has become a viable alternative to Fannie and Freddie.

There are also a handful of lenders and banks willing to finance on a non-recourse value-add basis. The term “value-add” is loosely used these days and is often associated with smaller REO assets in which the new buyer needs to reposition and stabilize an asset through intensive management. In these cases, local and regional lenders often offer the best execution on a lower-leverage basis--typically 65 percent LTV. Other alternative debt sources include core equity investors that are now placing senior loans in lieu of an equity investment. These loans are typically structured for three years on a non-recourse basis, with interest rates ranging from 8 to 11 percent.

At the same time, many multi-family borrowers continue to benefit from the agencies. Thus, while some investors voice concern over the future of Fannie and Freddie, they do fill a vital role in providing liquidity to the rental market, thereby helping to keep rents lower. Additionally, Fannie and Freddie’s investments continue to be the proverbial golden goose for the agencies, accounting for significant profits last year. While Congress bemoans companies like AIG, it is unlikely that they will look to cut or limit a segment of the financial market that is making money for the government and helping facilitate market liquidity.

Keith Misner is executive managing director & head of Cushman & Wakefield’s apartment brokerage services group. Michael Ryan is an executive director of the real estate investment banking firm Cushman & Wakefield Sonnenblick Goldman.