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Multifamily Construction Loan

What is multifamily construction?

Multifamily construction is the development of multifamily investment properties. Multifamily investment properties are residential assets with five or more units on a single property. For example: apartment buildings.

What is the purpose of the loan?

The main purpose behind multifamily construction loans is to secure funding for the development of the multifamily property. Most developers don’t have the capital to develop a multifamily property out of pocket. Multifamily construction loans allow for developers to scale into a larger project compared to their capital’s capabilities alone.

How to qualify for a larger multifamily construction loan?

Partnerships: Multifamily construction loans are for the development of buildings that come with an an immense financial responsibility and commitment. Therefore, lenders require proof of liquidity (20% of the loan amount). To help lessen the responsibility and commitment per borrower, investors will develop multifamily properties with a partner(s). Partnerships allow investors to combine their capital to qualify for a larger loan to develop are a larger multifamily building that they wouldn’t be able to develop as an individual investor. Partnerships also decrease the level of risk that each investor will hold in the deal.

Example

Individual

Loan Amount = $1,1250,000
Individual Cash = $225,000
Liquidity Requirement = 20%

Partnership

Loan Amount = $3,000,000
Combined Cash = $600,000
Liquidity Requirement = 20%

Interest Rates

Interest rates are one of the most significant components of financing especially when receiving a multifamily construction loan. The percentage of interest will vary depending on the developer’s credit and current market. Rates on Construction loans are usually fixed and remain the same during the time of the loan.

Financing option for developers with poor credit and legal issues

Commercial mortgage-backed securities (CMBS) are significantly more flexible with the approval process of a developer with a poor credit report and legal issues. Commercial mortgage-backed securities are more lenient on developers and offer low interest rates.

What is the term for a multifamily construction loan?

Most multifamily construction loans are between 12 and 24 months as that is typical time frame for a construction project. At the end of the term the developer / borrower is obligated to pay back the entire loan balance within 1 to 2 years post-construction.