Illinois BIS

There are 4 major lender types that account for the majority of multifamily lending These include agency lenders, banks & thrifts, insurance companies and conduits Together they hold approximately 92% of outstanding multifamily mortgage debt totaling more than $1 5 trillion Below is a breakdown of the major lender types, their market share and the characteristics of their multifamily lending products

This group, which includes Fannie Mae / Freddie Mac / HUD lenders, are by far the most active multifamily lenders Outstanding multifamily debt originated by agency lenders is approximately $838 billion, close to 50% of all outstanding multifamily mortgages In 2020, Freddie Mac alone funded $83 billion in multifamily loans, accounting for approximately 27% of total multifamily lending that year The "agencies" were created by Congress to provide liquidity and affordability in the U S housing market and are considered government sponsored entities While the agencies do not lend directly, they purchase mortgages from approved lenders who underwrite multifamily loans according to their guidelines

49 68% of multifamily debt outstanding was originated by agency lenders

Agency lenders will lend in all states and regions, and are particularly focused on affordable housing Loan amounts start at $750,000 with the Fannie Mae small loan program, but generally range between $1 million to $100 million Borrowers can receive up to 80% leverage in some markets depending on property operating metrics Other benefits to agency loans include; long term fixed rates (up to 30 year fixed loan options), rate discounts for affordable housing, non-recourse loan structure and interest only payment options In addition to standard stabilized multifamily loan products, agency lenders have specialized programs that can meet the needs of a variety of multifamily property types and situations

This group includes commercial banks, savings and loans, thrifts and credit unions These lenders account for $480 billion in outstanding multifamily mortgages Holding 28% of total multifamily debt outstanding, these lenders are the second most active lender group in multifamily lending These lenders range from national mega banks to small regional financial institutions Banks and thrifts lend on other investment property types and their multifamily lending only accounts for just under 20% of their total commercial mortgages outstanding

28 45% of multifamily debt outstanding was originated by banks

This group includes insurance companies that invest in loans secured by commercial and multifamily real estate While not well known as mortgage lenders, insurance companies hold almost 10% of all multifamily mortgages outstanding, totaling $167 5 billion These lenders have a lower risk threshold than other lender types Accordingly, they are usually active on lower leverage multifamily loan requests in defensible markets They primarily focus on larger loan amounts, with a handful of insurers originating smaller loans The major benefits to insurance company multifamily debt are low rates and long term fixed rates

9 94% of multifamily debt outstanding was originated by insurance companies

This group includes financial institutions that originate and fund loans that are ultimately structured for sale in the capital markets as commercial backed securities, collateralized debt obligations or asset backed securities These lenders are generally investment banks or other firms with extensive knowledge and expertise in the capital markets These lenders account for $50 billion in outstanding multifamily mortgages, or just over 3% of total outstanding

3 02% of multifamily debt outstanding was originated by conduits

These lenders focus on larger dollar loan amounts as these transactions are more costly to execute due to additional third party reports and legal fees Loans through conduits generally make sense on loans greater than $10 million Some benefits to conduit loans are interest only payment options, maximum leverage and larger (>$100 million) loan amounts

Non-traditional lenders account for the remaining 8 91% (or approximately $150 billion) in outstanding multifamily mortgages The largest share, 6 26% or $105 billion, is held by state and local governments The remaining is held by the federal government, real estate investment trusts, government retirement funds and other various entities

8 91% of multifamily debt outstanding was originated by other institutions

While each multifamily loan will have some variance in process, the general flow of the process is as follows

1 Get Quote - The first step is to get indicative pricing and terms from the lender for your loan request This usually includes loan amount, general terms and rate To do this they will need to review some items pertaining to the property and borrower/ sponsor The standard items needed are; property address, a current detailed rent roll, historical operating statements (i e last 1-2 years and a year-to-date) and a personal financial statement for the borrower or sponsor

2 Letter of Intent (or Interest) LOI - When you decide to move forward with a proposed loan, you will request a Letter of Intent (or Interest) that lists the relevant loan terms, requirements and costs Both you and the lender will execute this document indicating their intent to lend to you and your intent to move forward with their loan proposal Some lenders will require a deposit to cover third party report fees, others require this with the Application Package

3 Submit Application Package - Once the LOI has been executed, you are expected to submit to the lender all items needed for them to start their underwriting process These items usually include; additional operating history, information on capital expenditures over the last few years, tax returns (if required), lender specific forms and disclosures, leases or sample lease and contact info for third party inspections Some lenders will allow you to lock a rate at this point If that is an option, usually a refundable deposit is required to lock your rate

4 Ordering Third Party Reports - As part of the lenders underwriting process, they will require third party reports (property specific reports from outside vendors) Usually, the lenders will request bids from approved vendors, which they then share with you for approval Once approved, these reports are engaged It is important to get this process started as soon as possible because the finished reports are required by the lender to complete their underwriting

5 Open Escrow or Engage Attorney - Depending on the state where your property is located, you will need to either open escrow and/or engage an attorney to start the process for title insurance and loan payoffs (if a refinance) The lender will want a preliminary title report for your property Your title officer or attorney will provide this as part of their services

6 Additional Underwriting Items - It is common for the lender to request additional items or information after you have submitted the loan application package These are additional items that the lender will need to complete their underwriting of your loan Some lenders will also require you to obtain estoppels from your tenants

7 Receipt of 3rd Party Reports - After about 3-5 weeks of being ordered, your third party reports will be completed and sent back to the lender for review and will be included as part of their final underwriting If the third party reports come back without issue (i e valuation issues on the appraisal or recognized environmental concerns on Phase 1), your loan is on its was to final approval or commitment

8 Insurance Requirements - At least several weeks before the estimated funding date, you will want to coordinate with your insurer and your escrow officer or attorney to make sure that the insurance policies required by the lender are lined up and ready to go into effect

9 Loan Approval - Once the lender has completed their underwriting they will issue a loan approval and/or issue a loan commitment with the final loan terms If your loan rate was not locked earlier in the process it can locked at this point or at funding depending on the lender

10 Funding and Closing - The lender will then send loan documents to escrow or your attorney for signing preparation Your escrow officer or attorney will have also made sure all final title items are complete, loan payoffs are coordinated (if you are refinancing) and ensure insurance items are set up At this point your loan documents should be ready for signing and when the lender’s instructions have been followed and your executed loan documents have been sent back to the lender, your loan will fund

Qualifying for a Multifamily Loan

Unlike a home mortgage that uses a borrower's income to qualify, 5+ unit multifamily loan qualification is based primarily on the financials and operating condition of the property itself and then secondarily on metrics related to the sponsors (individuals who own the borrowing entity) Property specific loan analysis includes occupancy, loan-to-value and debt service coverage ratio Sponsor specific metrics include liquidity, net worth, experience and credit history

Property Specific Loan Metrics

• Occupancy is the percentage of units occupied
• Different lenders will vary in their occupancy requirements, but generally most lenders on stabilized multifamily properties will require a minimum of 85-90% occupancy
• Some lenders will even have a timeframe in which they require a specific level of occupancy
• For example, agency lenders usually require 90% occupancy for the last 90 days
• Loan-To-Value (LTV) is the percentage of debt in relation to the property's value or purchase price (whichever is less)
• Loan Amount ÷ Property Value = Loan-To-Value (LTV) For example, a loan request for $700,000 on a property with a market value of $1,000,000 would have a loan-to-value of 70%
• Lenders generally have upper limits on the maximum loan-to-value they will allow