Commercial Real Estate Finance - Financing Your Apartment Building With Fannie Mae
Article by Brett D Twente
My family has owned and operated apartment buildings for over 25 years. One of the most important component's of owning an apartment building is arranging the proper financing. This article outlines one of the most attractive financing options available in the market today.
Despite recent poor press and economic reporting, Fannie Mae continues to be the active leader in providing multifamily financing throughout the United States. They also currently offer the most attractive interest rates and terms for apartment financing.
While, Fannie Mae does not originate loans directly to borrowers or investors, they do work with a nationwide network of lenders (this network is comprised of Delegated Underwriting and Servicing [DUS] lenders). As of July, 2011 there are 25 DUS lenders in the United States that are very active in underwriting and funding apartment loans.
While the majority of DUS lenders are well equipped to provide financing, it is highly recommended to employ a qualified broker to help navigate the complicated process in closing a Fannie Mae loan. The loan application process can be grueling, as strict DUS loan requirements from cash flow, guarantor credit, management experience, property location, and property condition requirements can be difficult to circumvent at the credit level.
Assembling a proper application package is a key component to moving the underwriting process along smoothly. Aside from presenting three years trailing personal (or entity based) tax returns, a rent roll showing high occupancy levels (currently a 90% occupancy for 90 days) is key. The Fannie Mae program is reserved for stabilized apartment buildings (both in terms of occupancy and property structural condition). The DUS lender will also need to see a full Schedule of Real Estate Owned and Personal Financial Statement for all key principals and guarantors involved in the transaction.
Upon a review of all property and sponsor financial information, third party reports (including an appraisal, environmental, and often an engineering report) will be ordered to ensure the property condition qualifies for the DUS program. These reports can range from $2,750 to $5,500 for smaller transactions (and well above for larger loans) and are required to paid for upfront. While third party reports are being engaged and compiled, the lender will require a completion of the property and sponsor financial package.
Upon the receipt and review of third party reports and the completion of financial package qualifications, a commitment letter will be issued to the borrower. It is quite common for pre-rate lock and post close property improvement items to be listed in the commitment letter (as Fannie Mae is protected their collateral) to ensure that property condition standards remain intact.
Fannie Mae loans are typically fixed for 5, 7, 10, 15, or 30 years with hefty prepayment penalties. The prepayment penalties (often Yield Maintenance) or due to the loans being securitized and sold in the secondary market to investors. In order to maintain the investor's yield, these prepayment securities often match the term of the remaining life of the loan. While loans can be assumed upon the sale of the building to a new owner, the owner must qualify under Fannie Mae guidelines and pass a review of their financial information (and management experience) prior to taking title to the building.
Rates on Fannie Mae loans change daily (even hourly). It is best to contact a broker to fully understand what financing options are available in the current market. This financing product typically takes 45-90 days to close and it is highly recommended that borrowers turn to a broker well before an acquisition or refinance.
Brett Twente is a licensed California Real Estate Broker and currently works at CS Financial in Beverly Hills. At CS Financial, Brett is active in the arrangement of real estate debt for commercial properties, lines of credit, and real estate business loans. For more information on Brett, visit [http://csfinancial-commercial.com/brett-d-twente].
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