FINANCING THE DEAL

Financing is one of the best parts of the deal for passive investors. The sponsors set up all the loans associated with the deal and sign on the debt. Passive investors are not involved in this process other than being listed in our LLC docs as silent partners.

The terms of the financing will make or break any multi-family deal. There are multiple ways to structure deals, so let’s cover some of them here.

AGENCY LOANS - These are all of the big lenders in the country. They are the most intensive to borrow from and provide the most favorable terms. They are typically a 30-year amortized loan due in 10 years. They come with prepayment penalties and can be interest-only or fully amortized loans. They can often be assumed.

• Fannie Mae

• Freddie Mac

• FHA

LIFECO LOANS - These are life insurance companies lending on much larger institution-grade deals. Sometimes these can have extremely low rates and some good terms. Most smaller sponsorship groups will not qualify for these types of loans.

PRIVATE EQUITY - These are non-bank private firms with large funds used for real estate portfolios. The rates tend to be higher and the process may be easier to gain approval. They come as both interest only and amortizing. They also have shorter terms anywhere from 2-3 years. These are often referred to as Bridge Loans, meaning they bridge the gap during the stabilization process and are then refinanced into longer-term loans later.

CMBS LOANS - This is a Commercial Mortgage Backed Security loan. These loans are sold in large funds to wall street. Terms usually have mid-level rates, 30-year amortization or interest-only periods, and pre-payment penalties. These may or may not be assumable loans.

BANK OR CREDIT UNION LOANS - These types of loans are usually straightforward and utilized on smaller loan sizes under $5,000,000. They are often amortized over 25 years and can be interest only for a few years or fully amortized. They do not normally have prepayment penalties.

MEZZANINE DEBT - These are essentially second mortgages used to get additional cash out after a long term loan is placed with hefty prepayment penalties. Rather than refinancing and paying the penalty, the mezzanine loan may be added. Additionally, mezzanine debt may be utilized to acquire deals with assumable notes. Because there are favorable terms on the existing loan, the lower balance means more cash to close. The mezzanine loan fills the gap allowing groups to bring less capital to the deal.

Ultimately, there are multiple different ways to structure deals and the debt is critical to the success of the investors returns. Interest Only loans from day 1 can be great, however they can create a short fall in years 3-5 when it is time to amortize. It's important to review what happens to cash flow in the proforma when the loan starts to amortize. What risk is associated with this term change?

Remember, passive investors do not apply for the loans on these deals. The sponsors are responsible for setting up lending on these deals making it easy to truly be a passive investment vehicle.

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