AptBiz.com article from February 2000
by: David Dennis Repka

Congratulations, you own an apartment complex, the most sought after real estate asset in the market today! If you have owned it a while, I'm sure you've been doing the right thing such as increasing the rents to keep up with the market and looking for ways to decrease your expenses. Along the way you have built a solid track record and steadily increasing NOI. Now that you have created some additional equity in the property you have a decision to make: to sell, refinance or do nothing. This article assumes that doing nothing is not an option and that despite the attractiveness of a lower capital gains tax, you believe in real estate as a long term investment and want to refinance.

There are three major refinancing options available for multifamily investors today:

1. Long term portfolio investors such as insurance companies, pension funds and thrifts;
2. Wall Street Conduits;
3. Government and quasi-government insured programs such as FannieMae.

Each program has its own list of benefits and drawbacks that this article will overview.

Portfolio investors such as insurance companies, pension funds and thrifts seek stable assets that will provide a prudent return over the long term. These investors seek high quality assets in strong locations. The last thing that this type of investor wants is a problem with an asset in the portfolio so underwriting is conservative and preservation of capital is the key. They will take a lower return than other investors on safe, secure assets. If your property qualifies, this is a great non-recourse loan. The catch is that these loans are not for "flippers" or deals that are not intended to be owned for the long term due to onerous prepayment or yield maintenance requirements. Summary: A great loan for class A properties.

Wall Street Conduits have single-handedly reshaped the financial landscape over the last decade. Just as the junk bond market created a paradigm shift for corporate finance, the CMBS (Collateralized Mortgage Backed Securities) market has reinvented real estate finance. Unlike portfolio investors, this Wall Street creation is not a loan put up on the shelf and never touched again as long as payments are made in a timely basis. These loans are made for selling (hey, those 20something kids on the Street got to do something to be able to afford their $2 million loft apartments in NYC). A security is created with the help of the rating agencies such as Standard and Poors which divide up the risk into discreet pools. Why does this matter to you, the investor? Because these guys don't really care about the real estate. Unlike the portfolio players, they are not looking for trophy assets. To Wall Street cash flow is king! An asset that will not pass muster with a portfolio investor due to construction type, location, demographics will pass with flying colors with Wall Street...at the right blend of price and loan to value. They have a machine that must be fed and they are clamoring for product to put into the pipeline. I have heard some Wall Street guys quip, "we will look at any property with a track record and verifiable cash flow, as far as the location is concerned, rule number one is that nobody gets shot during the due diligence process." The drawback of this loan is that since a security is created, they want that income stream for a long time to come. If you plan on selling the property in the short term, you need to have a buyer assume the loan (usually for a one percent fee) since the prepayment penalty will be a deal killer. Another deal killer is that these loans DO NOT allow for subordinated debt meaning your purchaser will have to buy with significant cash to the mortgage. A hidden bonus to this type of loan when you are negotiating a deal is that since these are the most desirable loans to have in a securities portfolio a conduit lender will want to add more multifamily loans to their portfolio as window dressing right before they do a securitization (maybe they have too many hotel loans [yuck] that they need to change the ratios) so you can get especially great rates & terms. Summary: A great loan for class C properties.

In my opinion the Fannie Mae program is the hottest permanent loan product in the market today for multifamily properties since it essentially combines the best of both the Portfolio Investor world as well as the best of the Wall Street World and adds a few nice ingredients of its own. While there is more restraint in the underwriting process than in the CMBS loans since the lender must share in some of the default risk (it is not FNMA's money that makes the loan it is only their guarantee) the benefits outweigh the brain damage of the added paperwork burden. I don't know another loan program that allows a borrower to finance additional sums as the value increases over time at an interest rate that is truly affordable (170-200 over like term treasuries). This loan gives investors more control over their destiny since this benefit alone overcomes the biggest detriment in both the Portfolio Investor and Conduit loan programs. Summary: The best combination of rate, terms and flexibility.