The $910,000 Acquisition Loan Closed at a 4.25% Interest Rate
Last week, Janover Ventures' Camilo Padron closed a $910,000 Fannie Mae Small Loan for Sixth Avenue West, an apartment property in Hendersonville, North Carolina. I sat down with him to discuss the deal, the Fannie Mae Small Loan program, and what borrowers should know about the current state of small-balance multifamily borrowing.
What made this deal unique?
This deal was unique because it was a relatively small acquisition loan. The property was stabilized in the sense of occupancy (90%+), but the primary reason the borrower really decided to purchase the property was that it had significant value-add potential. Specifically, he saw that he could do a minor upgrade and add A/C units, which would allow him to increase rents by 25-30%. While the current cash flow was enough to cover the debt service without improvements, the borrower utilized a built-up purchase price so that they could use some of the money for rehab and repairs.
What were the terms and size of the loan?
We got the borrower a $910,000, 12-year fixed-rate loan with a 30-year amortization. The loan also had a 1-year interest-only period, which was a massive benefit for our borrower. The interest rate was 4.25%, which is also pretty great. Plus, like most Fannie Mae Multifamily deals, the loan was non-recourse, which means no personal guarantee for the borrower. In addition, the loan was arranged with a yield maintenance prepayment penalty.
How was the process for the borrower?
It was pretty straightforward; while there were a few hurdles involving the seller of the property, the process went relatively smoothly overall.
Do you recommend the Fannie Small Loan program to a lot of borrowers?
Yes, it's a great program. In general, Fannie Mae Small Loans provide better pricing in smaller markets, which is why it was a great fit for this deal. However, when you move to larger markets, Freddie Mac's Small Balance Loan (SBL) program generally offers better terms and pricing. Fannie Small Loans also provide the option of getting fully-amortizing 30-year financing, which is pretty rare in the multifamily space.
The features of the program include:
- 80% LTV
- 30-year amortizations
- 5, 10, 15, 20, 30-year fixed-rate terms
- Interest-only (I/O) options available
- 45-75 day close
What else can you tell us about the state of the small balance multifamily lending market?
About four months ago, the FHFA (Federal Housing Finance Administration), which oversees Fannie Mae and Freddie Mac, increased the agencies' loan caps to a combined $200 billion ($100 billion each) for the next five quarters (Q4 2019 to Q4 2020). A few weeks before that, Fannie and Freddie increased rates and pretty much halted their lending activities, which had a lot of people in the industry worried about the future of agency financing.
As we touched on earlier, Freddie Mac can be a great alternative to Fannie Mae, particularly in larger markets, where Freddie tends to offer better rates (particularly for small balance loans). In the last month or two, Freddie has also cut its rates, so potential small-balance borrowers may also want to look into the Freddie Mac Small Balance Loan (SBL) program as an alternative to Fannie Mae. In addition, CMBS and HUD multifamily loans also remain viable options for certain types of small-balance borrowers.