Small-balance loans bring big benefits to owners

Forest Street apartments was refinanced to take advantage of the small-balance loan

Larry Wilemon
Vice president, Walker & Dunlop

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On March 26, Gary Ghiselli closed on refinancing Forest Street, the 24-unit property he has owned for several years. Leveraging a rally in the U.S. Treasury rates, he locked in a 4.09 percent fixed rate for 12 years, interest only and nonrecourse – a great improvement over his previous loan, which featured a variable rate and was set to mature within the next four years.

In less than 45 days, Ghiselli improved his payment schedule, protected his business from market volatility with a fixed rate and received cash out to further invest in the workforce housing property. He achieved all of this with low fees, limited paperwork and a smooth process – the ideal situation for a property owner who’s a busy surgeon by day.

This loan wasn’t from a bank, however. It was from Fannie Mae.

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• Special financing for smaller properties. To help accommodate the nationwide need for affordable housing, Fannie Mae and Freddie Mac have launched special programs for small-balance (under $7 million) multifamily property loans. In just a few years, the programs have taken off. In fact, government-sponsored enterprise volume on small multifamily loans rose 57 percent from 2016 to 2017.

Fannie Mae’s program offers owners of smaller properties nonrecourse, longer-term loans as an alternative to traditional bank financing. Often, regional banks have to turn down requests for small-balance loans because the requests are outside of their geographic area, are too long term or exceed the bank’s loan limit for an individual customer. As a longtime Fannie Mae program partner and experienced multifamily lender, we are one of a limited number of companies licensed to offer these small multifamily loans. The Forest Street transaction, originated by Tom Toland, Hal Reinauer, and Karl Rincavage, is our first loan under the program in Denver.

As the conduit between property owners and Fannie Mae, firms add simplicity to the transaction. We find that for properties of five to 50 units, the process needs to be as easy for the borrower as possible, as these owners usually don’t have extensive staff to manage complex underwriting and application details.

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• Financing tailor-made for the 2019 Denver market. Denver’s multifamily supply and demand situation is experiencing an interesting confluence of trends. Over 100,000 more people live in the city than 12 years ago and housing prices have risen alongside the population surge; roughly half of all of Denver’s renters struggle with housing affordability. Meanwhile, the metropolitan area has a significant number of apartment buildings produced in the 1980s and 1990s that are ready for refinancing or refurbishing.

Small multifamily loans are an ideal product to support the Denver housing market at this time. Their reduced size (under $7 million) is the perfect fit for smaller, older properties without a surplus of expensive amenities. Meanwhile, the longer terms of small-balance loans give both property owners and renters greater stability.

“Since the rates and fees were low, I was able to refinance the property while keeping rents affordable for the families who live here,” said Ghiselli. “The new financing also allows me to reinvest in the property by improving certain features and carrying out additional maintenance.”

Lenders are excited too. “These smaller loans are going to be revolutionary in helping property owners maintain their assets while preserving vital workforce housing for the community as a whole,” said Tom Toland, senior vice president at Walker & Dunlop. “The lower-cost solution is available to owners of properties nationwide and is a truly differentiated product from what was previously available in the market.”

Loan information before and after refinancing Forest Street, a 24-unit property:

  Before: Bank Loan Execution After: Fannie Mae Small Loan Execution
Term 10 years 12 years
Interest Rate LIBOR + 2.45% 4.09%
Rate Type Variable Fixed
Payment Type Partial interest only Full-term interest only
Recourse Yes No

Featured in CREJ’s May 2019 Multifamily Properties Quarterly

Edited by the Colorado Real Estate Journal staff.