Get Flexible CMBS Financing for Your Multifamily or Apartment Property
As of 2021, there are approximately 32.6 million multifamily properties in the United States. While some of these are 1-4 unit buildings, student housing, or other specialized asset types, most are traditional apartment buildings. According to the U.S. Census, nearly 280,000 new multifamily units were built across the country in 2019 alone. While this might seem like a large supply, the demand for multifamily and apartment housing is growing fast, with the supply barely keeping up with overall demand.
Whether you’re looking to purchase a new apartment building or refinance a property you currency lown, CMBS loans can often be an excellent option. This is particularly the case for situations where a borrower's net worth is relatively low, which can disqualify a borrower from agency apartment loans from Fannie Mae or Freddie Mac.
Among the many benefits of conduit loans are the fact that, unlike bank financing, these loans are non-recourse, meaning that the lender cannot attempt to repossess the borrower’s personal assets if the loan defaults. In addition, CMBS loans offer low, fixed-rate terms, and are available for a wide variety of multifamily property types. CMBS loans are also fully assumable, which can allow owners to avoid potentially heavy prepayment penalties when they sell an asset. Interest-only options may also be available for qualified borrowers.
Common Uses for CMBS Multifamily Loans
Acquisitions: CMBS loans are great for acquiring new properties, due to many of the features mentioned above, including their low borrower net worth requirements, which are typically set at 25% of the loan amount, excluding the borrower’s primary residence, and 5-10% liquidity.
Moderate Rehabilitation: While CMBS doesn’t directly offer funds for property rehabilitation, borrowers refinancing a property can often take cash out to make value-add improvements to their multifamily property, such as new flooring, new appliances, better landscaping, and additional amenities. This can boost their NOI (net operating income) and DSCR (debt service coverage ratio), ultimately improving the value of the property, allowing them to obtain a higher sales price, or even larger loan if they eventually refinance the property.
Refinancing New Construction: If you’ve recently constructed an apartment building or other type of multifamily asset, and need to refinance a high-interest construction loan from a bank or private lender, a CMBS loan can be a great way to do it.
Eligible Multifamily Property Types for CMBS Loans
Small Apartment Buildings: Since CMBS financing starts at just $2 million, it can be a great way to finance smaller properties, including those with between 15-25 units. These can include garden-style apartments, detached units, or other types of small apartment buildings.
Class A, B, and C Assets: CMBS lenders are relatively flexible when it comes to property classes, and unlike other lenders, may not shy away from B and C class properties, provided that they are in generally good condition and have high occupancy and good cash flow.
Affordable Properties: CMBS loans can also be used to finance affordable properties, such as those utilizing the HUD Section 8 program, HAP (Housing Assistance Payment) contracts, or even LIHTCs (Low Income Housing Tax Credits), provided that the property is not distressed, is in a decent neighborhood, and has relatively low crime.
Student Housing: Despite disruptions from the COVID-19 pandemic, student housing is still in high demand, and CMBS lenders are generally willing to finance these properties, whether they have single-tenant or multi-tenant units, or even multi-bed or single-bed rooms. However, properties must generally be located within 1-2 miles of a college or university with a significant student population, generally, 10,000+, to get approved for CMBS financing.
Assisted Living and Skilled Nursing: Around 10,000 Americans turn 65 every day, which translates to high demand for assisted living and skilled nursing facilities. CMBS lenders are generally willing to finance these facilities, but in most cases, require that the property be operated by a state-licensed and experienced third-party healthcare operator. In addition to skilled nursing and assisted living facilities, CMBS loans can also fund memory care facilities, intermediate care centers, and other similar assets.
Independent Living Communities: CMBS financing isn’t just for skilled nursing and assisted living, and can be a great option to finance independent and senior living communities, such as those limited to residents 55+ or 65+, provided there is a strong senior population, and hence a high demand in the area.
Mobile Home Parks: Mobile home parks can also be funded by conduit loans, provided that the residents are not allowed to purchase their own pad sites, as this fundamentally changes the financial structure of the asset and reduces monthly incomes.
Mixed-Use Properties: Mixed-use property developments are more popular than ever, particularly in growing urban areas. These often combine apartment units with high-demand retail spaces, such as restaurants and grocery stores, and may also include a limited amount of office space.
Prospective Terms for CMBS Multifamily Loans
Unlike bank loans or life insurance company loans for commercial properties, or Fannie Mae, Freddie Mac, and HUD multifamily financing for apartment properties, CMBS loans have relatively lenient borrower requirements.
CMBS terms and requirements typically include:
Loan Size: $2 million+, no maximum loan amount
Loan Terms: 5, 7, and 10-year fixed-rate terms, interest-only (I/O) financing available for well-qualified borrowers
Amortization: Generally 25-30 years
Eligible Properties:
Market-rate apartments
Affordable housing properties
Assisted living
Skilled nursing
Independent living
Student housing
Mixed-use
Mobile home
LTV:
Market-Rate, Affordable Apartments: 75%-80% max. LTV
Student Housing: 70-75% max. LTV
Assisted Living and Skilled Nursing: 65-70% max, LTV
Independent Living: 75%-80% max. LTV
Mixed-Use: 75%-80% max. LTV
Mobile Home: 70-75% max. LTV
DSCR:
Market-Rate, Affordable Apartments: 1.20-1.35x min DSCR
Student Housing: LTV 1.25-1.35x min DSCR
Assisted Living and Skilled Nursing: 1.40-1.50x min DSCR
Independent Living: 1.20-1.35x min DSCR
Mixed-Use: 1.20-1.35x min DSCR
Mobile Home: 1.25-1.40x min DSCR
Loan Pricing: Pricing based on current swap rate or relevant U.S. Treasury rate, LTV and DSCR, as well as asset quality, rate buydowns available in some situations
Loan Assumption: Fully assumable pursuant to master servicer approval and a fee, generally 1%
Prepayment: Yield maintenance or defeasance
Recourse: Generally non-recourse with standard bad-boy carve-outs for issues like fraud, embezzlement, or international bankruptcy
Third-Party Reports: Third-party reports are paid for by the borrower, and typically include:
Full appraisal
Phase 1 ESA (Environmental Assessment)
Property Condition Assessment (PCA) is often required
Rate locks: Available at loan commitment, 30-day rate locks may also be available with lender approval
Replacement Reserves: Typically required and paid for by borrower on a per-year, per-unit basis, may be waived or reduced in some situations, particularly for Class A assets
Lender Legal Fees: Generally $15,000 for smaller loans, larger for larger loans
Origination Fees: Generally 1%, can be higher in some scenarios