Need a Loan for Apartment Construction? No Time Like the Present
According to an article featured last month in the National Real Estate Investor (NREI) online, now may be a good time to seek a loan for multifamily construction projects. While financing for other multifamily investing may be harder to find, loans for apartment development are currently more appealing to financial institutions. In other words, if you're looking to build, now may be the time.
The article notes that although it might be getting a little tougher to get a construction loan, banks are still putting their money into multifamily development. Perhaps also of interest, the NREI article says that if the terms of the bank loan don't suit you, you aren't necessarily out of luck: private equity firms and and life companies are both still offering loans for construction. Last year saw growth for many large banks in providing loans for multifamily and commercial construction: for instance, data quoted by NREI shows that Citigroup's portfolio grew by a little over 43%.
NREI quotes George Currall of NRP Group saying that although some large banks have shown impressive portfolio expansion, they're actually having better luck with smaller regional and super-regional banks. For instance, he notes that banks with assets between $35-70 billion have been more active than the giant banks. The NREI article also notes the importance of timing – pointing out that the executive VP at Colliers International, Kitty Wallace, says that banks run out of money they've set aside for real estate as the year goes on. She recommends getting your debt in the beginning of the year to avoid coming up against that limit on real estate cash.
Although loans are still available, the terms are getting tighter according to NREI data. Currently, it's common to see banks offer construction loans equal to 55-60% of the cost of development. Borrowers with a solid record may be able to get higher leverage than this range, however. Lenders have become stricter about lending terms: one example they give is that equity partners often can't give cash distributions to investors until the properties are stable. Interest rate spreads are also slowing creeping up, with NREI saying many banks charge 300-400 points above LIBOR (London Interbank Offer Rate), although again certain borrowers may do better. They state that banks can also charge up to 100 basis points for origination and exit fees of 25-50 basis points for construction financing.
The NREI article went on to say that if bank terms aren't desirable, there are other loan options. Developers can pursue construction loans through the federal Dept of HUD's 221d4 program, for example. Private equity and other investors are also an option, although they carry more of a caveat emptor (buyer – or borrower - beware) notice – high interest rates, low leverage, etc according to the NREI data. The bottom line is that for multifamily investors, and especially those with a reliable record, construction loans are out there to be had. Banks are still lending for multifamily construction and other sources of funding are available but caution is always prudent.