Multifamily Construction Financing Options
Explore your options for financing a multifamily construction project.
There are quite a few options for multifamily financing on the market. Among them are some programs designed specifically with multifamily construction in mind.
For apartment construction loans, HUD is, as always, offering the most competitive fixed-rate, fully amortized, high-leverage, non-recourse financing, but as you already may know, those HUD 221(d)(4) deals come with a good amount of red tape and a long timeline (usually seven to 10 months to close).
Small banks are currently lending up to 65% of the project cost at competitive interest rates, while regionals are even more aggressive. A major selling point about bank construction loans is that they are available for most commercial property construction, including mixed-use, office, retail, industrial, and more. They also allow you to take your finished/stabilized product and recapitalize once the project is complete with a cash-out refinance or sale, with limited or no prepayment penalty.
For multifamily properties, Fannie, Freddie, and CMBS offer unlimited cash-out—up to 80% LTV depending on the particular scenario. HUD loans, although offering the highest leverage, do not generally allow for recapitalization (there is a lockout period followed by a hefty prepayment penalty). For commercial properties, life companies and banks offer comfortable permanent financing options with some level of recapitalization or earn-outs.
If you’re looking into obtaining construction financing, there are a few things to consider before making your decision:
HUD loans are available for market-rate properties (not just affordable properties).
Bank, hedge fund, life company, and other construction loans are available.
HUD loans are non-recourse, including during the construction period.
Fixed rates available for construction and permanent financing with HUD.
1.11 DSCR for affordable housing projects with HUD/FHA 221(d)(4).
Small bank loan (under $4 million) rates start at Prime + 1.50%.
Bank loans for larger construction projects start at LIBOR + 250 bps.
Bank loans are generally full recourse during the construction period, with some offering burn-off options after c/o and stabilization.
Sample Construction Loan Terms for Multifamily and Commercial Properties
Size: Generally $2 million and up
Amortization: Up to 40 years fixed and fully amortizing (with HUD FHA 221(d)(4))
Maximum LTC: 75% (85% with HUD for market-rate properties)
Rate: Varies, loans generally consist of floating-rate, interest-only financing
Maximum LTV: 75% (no maximum LTV with HUD 221(d)(4))
Minimum DSCR: 1.20x