Real estate syndications allow you to combine funds with other investors and participate in professionally managed commercial properties. When buying an apartment complex through a syndication, you invest in a segment of commercial real estate experiencing exponential growth. In the last decade, apartment complex prices rose by 156%, with rents increasing 37%. These trends are a boon for syndications and the investors who participate.
Financing a multifamily purchase requires a more sophisticated financial structure to make the deal happen. In most cases, investors contribute funds that cover the down payment, and the general partner or sponsor secures financing for the balance due. Lenders may require anywhere from 10 to 40% down, with one or more lenders involved in the transaction.
Sponsors secure funding through conventional or alternative financial sources.
Conventional financing
Conventional Commercial lending typically comes from banks, life insurance companies, agencies, or CMBS lenders
Banks and financial institutions: Nearly all banks have a commercial arm and work with syndications to underwrite multi-million dollar loans. The sponsor or managing partners guarantee the debt, limiting the liability for limited partners. Banks can be large national corporations, regional, or community lenders.
While national banks such as Citibank underwrite syndication loans, community lenders may offer better terms. Local banks and credit unions understand their hyper-local market and can adjust borrowing parameters to match those conditions. National banks tend to have broader criteria based on the market as a whole rather than specific regions.
Life insurance or LifeCo loans offer lower rates than other traditional lending options. However, they have the strictest underwriting.
Agency loans involve government-sponsored enterprises or GSEs and are often backed by Fannie Mae or Freddie Mac. Fannie Mae and Freddie Mac often bundle closed loans and sell them to investors in the form of bonds. These mortgages have a lower risk because they have an implied guarantee that the government will cover a default. Multifamily properties are the only commercial property category that qualifies for agency loans.
CMBS or Commercial mortgage-backed security loans are packaged and sold to investors through bonds. Banks or life insurance companies generally offer CMBS loans, which are not government-backed.
Alternative Financing
The most common forms of alternative financing include debt funds, marketplaces, and hard money lenders.
Debt funds involve pools of private equity-backed capital. Sponsors use them for complex commercial structures, bridge loans, or lease-up financing on a rehabilitation project.
Online marketplaces are an emerging form of commercial financing. They operate like peer-to-peer lenders such as Prosper and Lending Club, but for commercial properties. The online platforms connect lenders and borrowers, allowing investors to pool capital and provide financing for specific projects. StackSource, CommLoan, and Finance Lobby are three major platforms for FinTech loans.
Hard money lenders are private creditors offering short-term loans. They generally come with high fees and less than optimal interest rates, making them the resource of last resort. Hard money lenders are best utilized for shorter-term loans with the expectation of refinancing or selling at the end of the loan term.
Final Thoughts
We favor agency non-recourse loans between 7 and 12 years at McKee Capital Group. Smaller loans tend to be backed by Freddie Mac, whereas Fannie Mae secures more extensive lending needs. Loans for shorter durations of three to five years get funding through bridge loans.
To learn more about investing with McKee Capital Group, watch our introductory video.
