7 Construction Apartment Loan Programs
HUD Multifamily Construction Loans are considered the best in America with 85% Loan to Cost, Non Recourse Financing, and rolling into a 40-year fully amortizing permanent loan. Life Companies and National Banks have the lowest rates, but average only 70% LTC. Regional Banks, Community Banks and Credit Unions average 75% Loan to Cost with higher rates and Private Debt Funds lending 70% LTC, are easier to qualify for, but have the highest rates.
What Multifamily Construction Loan is the Best Fit for You?
This article is designed to save you time by providing you with the guidelines and qualifications for the 7 top multifamily construction loans in America. It is equally important to determine which loan programs you qualify for as it is to know which loan programs fit your needs. Terms and guidelines will include the top benefits, minimum and maximum loan size, loan to cost, loan to stabilized value, and net worth, liquidity and experience requirements for the developer and key principals. Also, whether the loan is recourse or non-recourse.
Keep in mind that during the tough economic times we are now experiencing, all lenders with the exception of HUD/FHA are lending less and requiring more financial strength. This is due to high construction and permanent loan interest rates and uncertain property values.
Apartment Loan Store has specialized in multifamily construction lending since 1997. We do construction loans for: Apartment Buildings, Senior Housing/55 and older, Independent/Assisted Living, and Student Housing.
7 Best Multifamily Construction Loan Programs
1. HUD FHA New Construction or Major Rehabilitation – 85% - 87% of Cost, Non-Recourse Construction and Perm Loan. Loan Most likely to Close as Proposed during Tough Economic Times.
- Minimum Loan: $7,000,000 Maximum Loan $100M and above
- 85% of Cost for Market Rate Developments, 87% of Cost for Affordable Housing
2. Life Company Program – Very Low Rates, Roll Over to Long Fixed Rate Perm
- Minimum Loan $20,000,000, No Maximum
- Loan to Cost up to 70%
3. National Bank Program – Lowest Construction Loan Rates, Seamless Transition to Perm Loan
- Minimum Loan $7,000,000 Maximum Loan $100,000,000
- Up to 70% Loan to Cost
4. Regional Bank Program – Loan tailored to your needs, great service
- Minimum Loan $5,000,000, Maximum Loan: $28,000,000 to $80,000,000
- Up to 75% of Cost
5. Community Bank Program – Best in Service, Local Construction Monitoring
- Minimum Loan: $1,000,000 Maximum Loan: $15,000,000
- Loan to Cost up to 70%
6. Credit Union – Local Construction Monitoring, Decent Perm Loan Rates
- Minimum Loan: $1,000,000 Maximum Loan: $20,000,000
- Loan to Cost up to 70%
7. Private Debt Fund – High LTC. Seamless Roll Over to Perm
- Term up to 36 months
- DSCR: 1.25 on Permanent Loan
Here is What You Need to Have When Applying
- Executive summary highlighting the scope of the project and the experience of you and your team
- Construction costs including hard costs, soft costs, and land value. It’s better to have a line by line itemized budget than an estimate based on square footage.
- Land value – what you paid for it and when, what you own on it and what its current worth is.
- Zoning of the land and how far you are with obtaining entitlements
- Site plan, floor plans and elevation drawings
- Conceptual Design drawing if you have one
- A brochure or website for your general contractor and architect, highlighting the projects they have built and their qualifications
- A brochure or website for your property management company
- Bio’s or resumes for yourself and other key principals showing multifamily ownership and construction experience.
- You and your partner’s personal financial statements
- 4 Year Pro-forma showing the projected net operating income from day one of lease up through the first 4 years of operations
- Pro-forma rent roll
Multifamily Construction Loan Considerations
During these tough economic times it is important to choose a loan program that is the most likely to close as proposed. With the uncertainty of property values and mortgage rates, most lenders are lending at historical low loan to costs or have their brakes on entirely. HUD Multifamily is an exception to this. Although the cost of materials and labor has come down, many multifamily development projects just don’t pencil due to high construction loan expense. Also, multifamily construction loan to costs are always constrained by projected permanent loan sizes and rates. Most banks stress today’s perm loan rates by at least one percent on projected permanent loans.
The question arises as to if this is a good time to build, or should you wait until property values and rates come down. It is imperative that when preparing a four year pro-forma for a multifamily development project that you project a range of interest rates for both the construction and permanent loans to determine at what numbers the project pencils or does not pencil.
2024 Multifamily Construction Loan Outlook
1. Decline in Construction Starts: There has been a significant drop in new multifamily rental and condominium construction starts in 2023, compared to the high levels experienced in 2022. This decline is attributed to the uncertainty in property values as a result of high interest rates and low inventory of multifamily properties for sale through 2023. This has resulted in record low construction loan amounts averaging 60 – 70% Loan to Cost. HUD Multifamily Construction loans are an exception to this. Loan to cost goes up to 85%, 87% on affordable properties with loans being constricted by net operating income and DSCR.
2. Dominance of Apartment Rentals: The demand for apartment rental units continued to increase over 2023 as many first time home buyers were priced out of the housing market. This has resulted in one of the highest demands for apartment units in recent history. Condominium starts have declined rapidly. For instance, in the first half of 2023, only 16,338 condo units were started, representing just 6.7% of total starts.
3. Estimated Multifamily Starts: The U.S. Census Bureau estimated an average of 552,000 multifamily units started annualized in the first quarter of 2023. This number includes condo properties and is based on permits data. However, in the latter three quarters of 2023 starts slowed dramatically ending the year down by 6.4% compared to 2022.
4. Record Completions Anticipated: Despite the decline in starts, the number of apartment units completed in 2023 may reach a record. Nearly 730,000 units are underway with expected completion dates in 2023. This is higher than the total completions in 2022 and 2021, indicating a significant pipeline of ongoing projects.
5. Geographic Concentration and Class A Oversupply: Multifamily rental development is concentrated in large metropolitan areas, with New York City, Dallas, Austin, Houston, and Atlanta leading in terms of units underway or completed. Most of the ongoing developments are more expensive, Class A-type apartment units, which may lead to an oversupply in this segment and potentially depress rent growth for these units relative to Class B units through 2024.
6. Geographic Concentration and Class A Oversupply: Multifamily rental development is concentrated in large metropolitan areas, with New York City, Dallas, Austin, Houston, and Atlanta leading in terms of units underway or completed. Most of the ongoing developments are more expensive, Class A-type apartment units, which may lead to an oversupply in this segment and potentially depress rent growth for these units relative to Class B units through 2024
7. Rising Financing Costs and Future Demand: Financing costs for new developments have risen significantly since early 2022 due to increasing interest rates. This is expected to hold during the first two quarters of 2024. However, because of the increase in demand among renters that would have been home owners for units with more space and amenities, an increased demand for A class units is expected in 2024, despite a short-term potential oversupply.
These trends highlight the complexities and challenges in multifamily construction financing in 2023, going into 2024, shaped by economic conditions, market preferences, and geographic factors.