Funding Sources for Multifamily Developers Abound

When it's time to consider building the future of multifamily housing, an important early step for most developers is to secure the funding needed for the project. The financing you secure as a developer can dictate your ability to deliver on your vision and reap the returns you want from your investment. Luckily, many funding options for owner/developers exist, coming from a wide variety of sources. Whether it's your first build or you're rehabbing or adding to your portfolio of multifamily housing properties, it's helpful to review what's out there for revenue streams to determine which might be right for your latest venture.

Multifamily housing financing can be secured for any expenses associated with your project, such as acquiring property, working with a design-build firm, remodeling an existing facility and much more. Multifamily loans and other financing are available through a variety of financial institutions, including banks, commercial lenders, and credit unions, as well as private investors, angel investors, and even government funding — particularly for affordable housing projects.?

Specific loan options for multifamily housing projects include:?

• Conventional bank loans.
• Loans from the Federal Housing Finance Authority (FHFA).
• Fannie Mae/Freddie Mac loans: Non-recourse, similar leverage to bank.
• Loans from the Federal Housing Administration (FHA).
• HUD: Typically, highest leverage, longest fixed-rate term, longest processing time.
• Bridge loans: short-term loans that allow borrowers to navigate the gap between buying a property and securing permanent financing.
• Mezzanine loans: financing for borrowers who do not have enough equity for a conventional loan.
• CMBS loans: securities loans used to purchase a multifamily property backed by commercial mortgages.
• Financing from private lenders.

In today's market, with higher interest rates and slowed rent growth, it has become increasingly difficult to have multifamily projects immediately 'pencil out' and demonstrate financial feasibility using traditional bank financing. An example of traditional bank financing was a 20% equity down payment/80% bank loan or an 80% LTV (loan-to-value). With higher interest rates and a cautious lending environment, 60% and 70% LTVs are becoming more common. As a result, investors are particularly leveraging gap funding and other sources of financing to build their 'capital stack' and demonstrate financial feasibility. ?

In the current economic environment, gap funding options have become increasingly popular as creative solutions when real estate investors face an equity gap. Gap funding can help investors cover down payments and predevelopment costs while serving as an invaluable tool for investors without sufficient capital who might otherwise not be able to move forward with an investment opportunity and for those who want to leverage their current investments.

Among gap funding options are bridge loans, which are short-term loans that allow borrowers to navigate the gap between buying a property and securing permanent financing, often with interest-only payments. These loans can allow projects to move ahead for a few years until interest rates decline and refinancing under a more traditional approach to funding a project is more affordable. In addition to bridge loans, gap funding can come in the form of a joint venture partnership, and funding can be generated through private lenders, hard money loans based on property value, or even real estate crowdfunding initiatives.

Gap funding is often secured with the property the investor is purchasing, which means the investor is incurring limited risk while potentially increasing their returns. Gap funding is not without risks, and borrowers will want to consider these potential issues carefully with their financial advisors. But this option can help investors lock in deals that might otherwise pass them by.

It may seem like borrowers have a lot of choices for loans and other financing, and that's to their benefit. Because there are so many options to fund multifamily housing projects, borrowers can often shop around for the right multifamily financing for them and their unique commercial construction.?

As with any loan, to qualify for multifamily financing, developers must meet certain financial qualifications the lender sets, typically related to their liquid assets, credit score, debt-to-income ratio, and personal guarantees.

Beyond the gap funding, you may also want to explore the numerous state and federal funding sources available, particularly for affordable housing construction. For example, the U.S. Department of Housing and Urban Development offers several grants, funding opportunities, and other resources that may be worth exploring, depending on the scope of your project. You may also want to research economic development incentives such as TIF or Abatement that may be available at the local municipality level. All of these options require a little more homework and planning on the front end. However, the impact of applying these tools to your project's financing can be the catalyst that brings your vision to life. Case in point: DBS Group recently helped a client secure a $1 million grant for a multifamily senior housing project through our predevelopment services.

And let's not forget the potential for real estate partnerships. It's common for investors to partner together and divide the financial obligations so that no single entity carries the entire financial responsibility. To enter into a real estate partnership, it's important to establish a legal agreement that clearly outlines the terms of the agreement.

Whatever the financing routes you choose to take to get started on constructing, acquiring, or remodeling your next multifamily housing investment, the potential benefits are worth the legwork. And we're here to help, from concept to completion. If you're considering a multifamily or senior housing project, DBS Group can ensure you have the professionals in place to optimize your spending power and help you build your vision for your multifamily housing portfolio.