Multi Family Loans
Multi Family loan underwriting is similar to the underwriting of other commercial real estate properties, but also has its own unique characteristics. A strong commercial mortgage broker such as Financial Compound can help borrower’s determine a multi-family property’s underwritable cash flow and borrowing capacity. Generally, lenders will use 5% to 10% vacancy factors, management fees, and a per unit capital reserve of at least $200 per unit to account for non-recurring items such as parking lot striping or repainting of the buildings. Given that the multi family segment was not hit as hard during the 2007 recession as some other property types, we did not see as much of an increase in cap rates as characteristic of other property types. Therefore typically a mult-family loan is debt coverage constrained as opposed to loan-to-value constrained.
For agency lenders such as fnma, the physical characteristics of the property have become increasingly important, such as good maintenance upkeep of common areas, weatherproof roof, no visible dry rot or termite damage. Similarly, the borrower track records and its history with lender relationships are scrutinized- particulalry to make sure that the borrower has never been foreclosed, given a property back to a lender, and in general has not caused problems or fought with its prior lenders. In today’s tighter credit environment lenders dont want to take risks with potentially troublesome problems.
Given the conservative and relatively strict underwriting parameters of the agency lenders like fnma and freddie mac, there has emerged a niche segment of multi-family with more flexible underwriting. Whereas the agency lenders package the loans and sell them in the public debt markets, this niche segment of multi-family portfolio lenders hold the loans to maturity on their books, allowing them to be more flexible as well as to customize the transactions specifically to the borrowers’ needs and desires.
Since the credit crunch in 2007 commercial real estate underwriting also tightened, but not as much for multi family underwriting. Borrowers with property types including shopping centers, office buildings, and industrial buildings can no longer fetch 80% or 80% loan to values, with 60% to 65% LTV being the maximum that lenders today are willing to stretch. However, for multi-family properties it is still relatively easy to obtain 75% or 80% LTV financing. Lenders generally feel that the multi-family sector shows resilience and good prospects for the future, particulalry in light of the lack of affordable single family housing.