Skip to content

lender-criteria.md

Latest commit

 

History

History
774 lines (629 loc) · 42.5 KB

lender-criteria.md

File metadata and controls

774 lines (629 loc) · 42.5 KB
Raw

Lender Criteria & Financing Sources

What this is: A comprehensive guide to multifamily debt sources, qualification criteria, loan parameters, and structuring considerations, covering Agency, CMBS, Bank, Bridge, Life Company, and Debt Fund/Mezzanine capital sources. How to use it: Load this knowledge base alongside any skill file that references it, or use it as a standalone reference for capital stack design, lender selection, and loan package preparation for any multifamily acquisition strategy.

A comprehensive guide to multifamily debt sources, qualification criteria, and structuring considerations. This reference covers the full spectrum of lending options from conservative life company loans to aggressive bridge and mezzanine capital, enabling precise capital stack design for any acquisition strategy.

Agency Lending (Fannie Mae / Freddie Mac)

Agency lending is the backbone of multifamily permanent financing in the United States. Fannie Mae (DUS program) and Freddie Mac (Optigo program) provide the most competitive rates and terms for stabilized multifamily properties through their network of approved seller/servicers.

Eligibility Requirements

Requirement Fannie Mae Freddie Mac
Property type 5+ units, multifamily residential 5+ units, multifamily residential
Occupancy 90%+ physical occupancy for 90+ consecutive days 90%+ physical occupancy for 90+ consecutive days
Property condition Good to excellent physical condition Good to excellent physical condition
Borrower net worth Equal to or greater than loan amount Equal to or greater than loan amount
Borrower liquidity 9-12 months of debt service in post-closing liquidity 9-12 months of debt service in post-closing liquidity
Experience Demonstrated multifamily ownership/management experience Demonstrated multifamily ownership/management experience
Special purpose entity Required (single-asset SPE) Required (single-asset SPE)

Loan Parameters

Parameter Details
Loan-to-Value (LTV) Up to 80% (75% most common for standard execution). 80% available for affordable, green, or mission-driven properties.
DSCR Minimum 1.25x (standard). 1.20x available for select programs (affordable, green).
Debt Yield Minimum Typically 7-8% depending on market tier and property class.
Amortization 30 years standard. Interest-only periods available (typically 1-5 years) for strong sponsors/properties.
Loan Term 5, 7, 10, 12, and 15 years available. 10-year is most common.
Rate Fixed rate. Typically 10-year Treasury + 170-220 basis points. Pricing varies by LTV, DSCR, property quality, and sponsor strength.
Loan Size $1 million to $100 million+ (no hard maximum). Small balance programs for $750K - $7.5M with streamlined process.
Recourse Non-recourse with standard carve-outs ("bad boy" guarantees for fraud, environmental, bankruptcy).

Green / Energy Incentive Programs

Both agencies offer significant incentives for energy-efficient or green-certified properties.

Fannie Mae Green Rewards / Freddie Mac Green Advantage:

  • Rate reduction of 10-25 basis points
  • Additional interest-only period
  • Higher LTV (up to 80%)
  • Lower DSCR (down to 1.20x)
  • Requirements: Commit to energy/water consumption reductions (typically 15-30% improvement)
  • Eligible improvements: LED lighting, low-flow fixtures, HVAC upgrades, insulation, smart thermostats, solar panels, Energy Star appliances

Required Reserves

Reserve Type Typical Amount Notes
Replacement reserves $250 - $350/unit/year Escrowed monthly. Higher for older properties.
Tax and insurance escrows Monthly 1/12 of annual amount Standard requirement
Completion/repair reserves Varies by PCA findings Holdback for identified deferred maintenance
Operating deficit reserves 3-6 months of debt service Required if occupancy or collections are borderline

Prepayment Provisions

Type Description Cost
Yield maintenance Compensates lender for lost interest income Can be very expensive in declining rate environment
Defeasance Replace loan collateral with government securities Administrative cost ($30K-$75K) plus securities purchase
Step-down Declining percentage over loan term Less common for agency, more predictable cost

Best practice: If you anticipate selling or refinancing before loan maturity, negotiate the prepayment structure carefully. Yield maintenance in a declining rate environment can cost 5-15% of the loan balance.

Timeline and Process

Stage Timeline Key Items
Application to term sheet 1-2 weeks Property details, borrower financials, preliminary underwriting
Term sheet to commitment 2-3 weeks Appraisal, environmental, PCA, title, survey ordered
Commitment to closing 3-4 weeks Legal document preparation, final due diligence, rate lock
Total 45-60 days Can be expedited to 30-35 days for repeat borrowers

Ideal Candidate Properties

  • 50+ unit stabilized multifamily in primary or secondary markets
  • 93%+ occupancy with stable or improving trends
  • Good physical condition (PCA confirms limited deferred maintenance)
  • Strong submarket fundamentals (job growth, population growth, limited new supply)
  • Experienced borrower with multifamily track record

CMBS Lending

Commercial Mortgage-Backed Securities (CMBS) lending pools individual commercial mortgage loans into securities sold to investors. CMBS provides non-recourse financing for a broad range of commercial property types and is particularly useful for properties or borrowers that do not meet agency requirements.

Loan Parameters

Parameter Details
LTV 65% - 75% (lower than agency). LTV constrained by debt yield requirements.
DSCR Minimum 1.25x - 1.35x (stricter than agency for most executions).
Debt Yield Minimum 8% - 10% (this is often the binding constraint, not LTV or DSCR).
Rate Fixed rate. Typically 10-year Treasury + 200-280 basis points. Pricing depends on property type, location, and leverage.
Term 5, 7, or 10 years. 10-year is most common.
Amortization 30 years. Interest-only periods available (typically 2-5 years) for lower-leverage loans.
Loan Size $2 million minimum. No practical maximum. Larger loans ($25M+) can achieve better pricing.
Recourse Non-recourse with standard carve-outs. Narrower carve-outs than agency in some cases.

Key Characteristics

  • Non-recourse: Major advantage for borrowers seeking to limit personal liability
  • B-piece buyer approval: The lowest-rated tranche buyer has approval rights over each loan in the pool. This can cause delays or rejections for properties or borrowers they deem risky.
  • Lockbox / cash management: Springing or hard lockbox provisions. Cash management triggers if DSCR falls below threshold (typically 1.10x-1.15x).
  • Subordinate debt restrictions: Generally prohibit additional secured debt. Mezzanine or preferred equity may be permitted with approval.
  • Assumption: Loans are generally assumable with lender approval and a 1% assumption fee. This can be valuable to buyers.
  • Servicing: After securitization, loans are serviced by a master servicer. Special servicer handles defaults. Limited flexibility for modifications.

Eligible Property Types

Property Type CMBS Appetite Notes
Multifamily Strong Preferred asset class. Best terms.
Industrial / Warehouse Strong Growing demand, stable cash flows.
Retail (grocery-anchored) Moderate Anchored centers with strong tenancy.
Office (suburban/urban) Moderate to Weak Market-dependent, post-COVID concerns.
Hotel / Hospitality Moderate Seasonal and cyclical, higher spreads.
Self-storage Moderate Growing acceptance, shorter lease terms.
Mixed-use Moderate Depends on composition and tenancy.
Specialty (healthcare, student, etc.) Selective Requires specialized underwriting.

Prepayment

  • Defeasance: Standard prepayment mechanism for CMBS loans. Borrower purchases a portfolio of US government securities that replicate the remaining debt service payments.
  • Defeasance cost: Administrative fees ($30K - $75K) plus cost of purchasing the securities portfolio (which depends on the interest rate environment).
  • Yield maintenance: Less common in CMBS but available in some programs.
  • No prepayment during lockout: Typically the first 2 years of the loan term have a complete prepayment lockout (no prepayment allowed at all).

Timeline

Stage Timeline
Application to term sheet 1-2 weeks
Term sheet to commitment 3-4 weeks
B-piece buyer approval 1-2 weeks (can delay)
Commitment to closing 3-4 weeks
Total 60-90 days

Best For

  • Properties or borrowers that do not qualify for agency lending
  • Non-multifamily commercial properties
  • Borrowers seeking non-recourse execution without agency track record requirements
  • Larger loans ($10M+) where CMBS economics are favorable
  • Properties with strong cash flow but located in tertiary markets

Bank / Credit Union Lending

Local and regional banks and credit unions provide flexible, relationship-driven commercial real estate financing. These portfolio lenders hold loans on their own balance sheet, which gives them more flexibility in structuring but also more conservative underwriting in some respects.

Loan Parameters

Parameter Details
LTV 65% - 75% (some up to 80% for strong relationships).
DSCR Minimum 1.20x - 1.30x.
Rate Fixed (3-7 year terms, then resets) or floating (SOFR + 200-350 bps).
Term 3 - 7 years typical. Some up to 10 years. Balloon at maturity.
Amortization 25 years typical. Some 20-year amortization for older properties.
Loan Size $500K - $25M (varies by bank). Some larger institutions go higher.
Recourse Full recourse (personal guarantee) is standard. Some offer partial recourse or burn-off provisions.

Key Characteristics

  • Relationship-driven: Existing deposit and business relationships can improve terms significantly
  • Flexible underwriting: Can consider factors that agency/CMBS cannot (borrower character, business plan, cross-collateralization)
  • Faster execution: 30-45 day closings are achievable with cooperative borrowers
  • Portfolio lenders: Hold loans on balance sheet, no secondary market constraints
  • Recourse: Primary disadvantage. Personal guarantees expose borrower's personal assets.
  • Interest rate risk: Shorter fixed-rate periods mean refinancing risk at maturity
  • Cross-collateralization: Banks may offer better terms if multiple properties are pledged
  • Covenants: Operating covenants, reporting requirements, DSCR maintenance tests

Prepayment

Structure Details
No prepayment penalty Common after year 2-3 on shorter-term loans
Step-down 3-2-1 or 5-4-3-2-1 declining percentage
Minimal penalty 0.5% - 1% of outstanding balance
Yield maintenance Less common for bank loans

Reporting Requirements

Banks typically require more ongoing reporting than agency or CMBS lenders:

  • Annual financial statements (often audited or reviewed for larger loans)
  • Annual rent rolls
  • Annual operating budgets
  • Quarterly or annual DSCR certification
  • Insurance certificates
  • Property tax payment confirmation
  • Entity and guarantor financial statement updates

Best For

  • Smaller properties (5-50 units) below agency minimum thresholds
  • Borrowers with strong local banking relationships
  • Properties needing flexible terms (unusual unit mix, commercial component)
  • Speed-of-execution situations where 30-day closing is required
  • Borrowers who plan to refinance into agency/CMBS once stabilized
  • Properties in early lease-up that do not yet meet agency occupancy requirements

Bridge / Transitional Lending

Bridge loans provide short-term financing for properties in transition -- whether undergoing renovation, lease-up, or repositioning. These loans bridge the gap between acquisition and permanent financing.

Loan Parameters

Parameter Details
LTV 70% - 80% of as-is value. Some lenders underwrite to 65-70% of as-stabilized or after-renovation value.
DSCR 1.0x or no DSCR test (interest-only). Debt yield 5-7% on as-is basis.
Rate Floating rate. SOFR + 300-600 basis points (all-in 8-11%+).
Term 12 - 36 months initial term. 1-2 extension options (6-12 months each) with fees and conditions.
Amortization Interest-only (no amortization).
Loan Size $1M - $50M+ (varies by lender).
Recourse Varies. Some non-recourse with completion guarantees. Many require partial or full recourse.
Origination Fee 1 - 2 points (1-2% of loan amount).
Extension Fee 0.25 - 0.50 points per extension.

Holdback / Future Funding Structure

Most bridge loans include a holdback structure for renovation capital.

Component Description
Initial advance 65-75% of as-is value, funded at closing
Renovation holdback Budgeted renovation costs, funded in draws upon completion of work
Draw process Borrower submits draw request with invoices/receipts, lender inspects work, funds released (typically 5-10 business day process)
Retainage 5-10% of each draw held back until project completion
Completion guarantee Borrower guarantees completion of renovation scope and budget

Interest Reserve

Many bridge loans include an interest reserve to cover debt service during the renovation/lease-up period when cash flow may be insufficient.

  • Typically 6-18 months of projected interest payments
  • Funded from loan proceeds at closing
  • Reduces net loan proceeds available for acquisition/renovation
  • Ensures lender receives timely payments during transition period

Extension Conditions

Condition Typical Requirement
No default Current on all payments and covenants
Renovation progress Substantially complete (80-90%+ of scope)
Occupancy test Often 80-85%+ physical occupancy
Extension fee 0.25-0.50% of outstanding balance
DSCR test May require minimum 1.0x DSCR at extension
Rate cap May require purchase or extension of interest rate cap

Exit Strategy

Every bridge loan requires a clear exit strategy.

Exit Description Timeline
Agency permanent loan Refinance into Fannie/Freddie once stabilized (90%+ occupancy, 90+ days) 18-30 months from acquisition
CMBS permanent loan Refinance into CMBS for non-agency-eligible properties 18-30 months
Sale Sell stabilized asset to core/core-plus buyer 18-36 months
Bank refinance Refinance into bank loan if agency/CMBS not available 12-24 months

Best For

  • Value-add acquisitions requiring significant renovation
  • Properties below 90% occupancy (not yet agency-eligible)
  • Lease-up of recently constructed or renovated properties
  • Repositioning plays (Class C to Class B, rebrand, amenity additions)
  • Properties requiring rapid closing (bridge lenders can close in 14-21 days)
  • Turnaround situations with clear path to stabilization

Life Insurance Companies

Life insurance companies (life cos) are among the most conservative and lowest-cost sources of commercial real estate debt. They invest policyholder reserves and seek stable, long-term returns with minimal risk.

Loan Parameters

Parameter Details
LTV 55% - 65% (very conservative). Rarely exceed 65%.
DSCR Minimum 1.40x+ (highest requirement among major lender types).
Debt Yield 9% - 10%+ minimum.
Rate Fixed. Lowest rates in the market. Typically 10-year Treasury + 150-200 basis points.
Term 10 - 30 years. Long-term fixed rate available (20, 25, 30 years).
Amortization 25 - 30 years. Self-amortizing loans available (fully amortize over the term).
Loan Size $5M+ (prefer $10M+). Sweet spot $10M - $100M.
Recourse Non-recourse with limited carve-outs.

Key Characteristics

  • Lowest cost of capital: Life cos consistently offer the lowest fixed rates for commercial real estate
  • Long-term horizon: Can offer 20-30 year fixed-rate terms (unavailable from other sources)
  • Conservative leverage: Low LTV means large equity requirement
  • Selectivity: Life cos are very selective -- they prefer core, institutional-quality assets in top markets
  • Slow process: 60-90+ day closings are normal. Not for time-sensitive transactions.
  • Relationship-oriented: Repeat borrowers get preferential treatment and streamlined process
  • Limited flexibility: Once committed, terms are generally non-negotiable
  • Self-amortizing option: Some life cos offer fully self-amortizing loans (no balloon), eliminating refinancing risk entirely

Property Preferences

Preferred Acceptable Avoid
Class A multifamily, 100+ units Class B multifamily, 50+ units Class C properties
Gateway and primary markets Strong secondary markets Tertiary markets
New construction or recently renovated Well-maintained older properties Deferred maintenance
95%+ occupancy, stable tenancy 90-95% occupancy Below 90% occupancy
Institutional-quality management Reputable regional management Self-managed or inexperienced

Prepayment

  • Yield maintenance: Standard prepayment protection for life co loans
  • Cost: Can be very expensive in declining rate environments (similar to agency)
  • Make-whole provision: Some life cos use make-whole provisions that calculate the present value of remaining payments
  • No lockout: Unlike CMBS, there is typically no hard lockout period
  • Best practice: Only use life co financing if you intend to hold through the loan term or accept the prepayment cost

Best For

  • Core assets with long-term hold strategy (10+ years)
  • Borrowers seeking maximum rate certainty and lowest debt cost
  • Large, stabilized, institutional-quality multifamily in top markets
  • Properties where low leverage is acceptable (significant equity available)
  • 1031 exchange buyers who need to deploy equity and want conservative leverage
  • Pension fund / institutional investors with low return requirements

Debt Fund / Mezzanine

Debt funds and mezzanine lenders fill gaps in the capital stack above senior debt, providing additional leverage for acquisitions that require more capital than senior lenders will provide.

Mezzanine Debt

Parameter Details
Position Subordinate to senior mortgage. Secured by pledge of equity interests in the borrowing entity.
Combined LTV Senior + mezzanine typically reaches 75-85% of value.
Rate 10% - 15%+ (fixed or floating).
Term Co-terminus with senior debt or 2-5 years.
Amortization Interest-only (typical). Some principal amortization.
Loan Size $1M - $25M+ (fills the gap between senior debt and equity).
Intercreditor agreement Required between senior lender and mezzanine lender. Governs cure rights, foreclosure, and payment priority.

Preferred Equity

Parameter Details
Position Equity position (not debt). Senior to common equity in distribution waterfall.
Combined leverage Senior debt + preferred equity can reach 80-90% of value.
Return 10% - 15%+ preferred return. May include participation in profits.
Term 2 - 5 years. Co-terminus with business plan execution.
Control rights Preferred equity holders often gain control rights if preferred return is not paid.
Advantages over mezz No intercreditor agreement needed with senior lender. More flexible structuring. Agency lenders more accepting of preferred equity than mezzanine debt.

Debt Fund Lending (Whole Loan / Stretch Senior)

Parameter Details
LTV 70% - 85% (stretch senior -- higher than traditional senior lenders).
Rate SOFR + 350-700 basis points (all-in 8.5-12%+).
Term 2 - 5 years. Bridge-like terms with more flexibility.
Structure Single loan covering entire debt stack (no intercreditor complexity).
Advantages Simplicity (one lender, one loan), higher leverage than traditional sources, flexible structures.
Disadvantages Higher cost than bifurcated senior/mezz stack. Shorter terms.

When to Use Subordinate Capital

Scenario Structure Rationale
Senior lender caps at 65% LTV but deal requires 80% leverage Senior (65%) + Mezz (15%) Minimize equity requirement while maintaining competitive senior debt terms
Agency loan at 75% LTV, need 85% total leverage Agency (75%) + Preferred Equity (10%) Agency lenders more accepting of preferred equity structure
Value-add deal requiring maximum leverage Debt fund stretch senior (80%) Simplicity, single lender, fast execution
Development deal with limited equity Senior construction loan (60-65%) + Mezz (10-15%) Fill equity gap during construction period

Capital Stack Example

A typical value-add multifamily capital stack:

Layer % of Total Capital Cost Source
Senior debt 65% - 70% 6% - 7% (fixed) Agency, CMBS, or bank
Mezzanine / Preferred equity 10% - 15% 12% - 15% Debt fund, private lender
Common equity (LP) 10% - 15% 15% - 20% (target IRR) Limited partners, investors
Common equity (GP / Sponsor) 5% - 10% 20%+ (target IRR with promotes) Sponsor co-investment
Total 100% Blended WACC 8-10%

Comparison Matrix

Criteria Agency CMBS Bank Bridge Life Co Debt Fund/Mezz
Max LTV 75-80% 65-75% 65-75% 70-80% 55-65% 75-85% (combined)
Min DSCR 1.25x 1.25-1.35x 1.20-1.30x 1.0x (I/O) 1.40x+ N/A (subordinate)
Rate Type Fixed Fixed Fixed/Floating Floating Fixed Fixed/Floating
Rate Range 5.5-7.0% 6.0-7.5% 6.0-8.5% 8.0-11.0% 5.5-6.5% 10-15%+
Term 5-15 yrs 5-10 yrs 3-7 yrs 1-3 yrs 10-30 yrs 2-5 yrs
Amortization 30 yrs 30 yrs 25 yrs I/O 25-30 yrs I/O
Recourse Non-recourse Non-recourse Recourse Varies Non-recourse Varies
Min Loan Size $1M $2M $500K $1M $5M $1M
Closing Timeline 45-60 days 60-90 days 30-45 days 14-30 days 60-90 days 21-45 days
Best For Stabilized MF Diverse CRE Small/flex deals Value-add/trans Core long-hold Leverage gaps

Lender Package Requirements

A complete lender submission package accelerates underwriting and improves terms. Having these materials ready before engaging lenders demonstrates professionalism and can save weeks in the process.

Property-Level Documents

Document Description Notes
Trailing 12-month financials (T-12) Monthly income and expense statement for the most recent 12 months Must be current (within 30-60 days). Lenders want to see trends.
Rent roll (current month) Unit-by-unit listing of all tenants, rents, lease dates, deposits Must be current (within 30 days of application). Include unit type, SF, market rent.
Historical financials 2-3 years of annual operating statements Shows trends and stabilization. Audited preferred for larger loans.
Property photos Exterior, interior (representative units), amenities, common areas Professional quality. Include any deferred maintenance or renovation areas.
Unit mix / floor plans Summary of unit types, sizes, and counts Helps lender assess property configuration.
Capital improvement history Summary of recent capital expenditures (last 3-5 years) Demonstrates property maintenance and investment.
Lease expiration schedule Month-by-month summary of upcoming lease expirations Shows rollover risk and renewal opportunity.
Service contracts Copies of all active service contracts (landscaping, pest control, elevator, etc.) Lender reviews for assignability, cost, and termination provisions.

Market / Third-Party Reports

Document Description Notes
Appraisal Independent valuation (lender will order, borrower pays) $3,000 - $10,000 depending on property size. Required by all lenders.
Phase I Environmental Site Assessment Environmental contamination screening $2,500 - $5,000. Required by all lenders. Must be within 180 days.
Property Condition Assessment (PCA) Engineering assessment of building condition $3,000 - $8,000. Identifies deferred maintenance and reserve requirements.
Survey (ALTA/NSPS) Legal boundary and improvement survey $3,000 - $10,000. Required for most commercial loans.
Title commitment Preliminary title report showing ownership, liens, encumbrances Ordered through title company. $500 - $2,000 for commitment.
Market study / rent comp survey Analysis of comparable properties and market conditions Sometimes included in appraisal. May be separate for larger loans.
Seismic study (if applicable) Probable Maximum Loss assessment for earthquake-prone areas Required in seismic zones (CA, Pacific NW). $1,500 - $5,000.
Insurance quote Preliminary insurance coverage and premium estimate Required to verify expense projections and confirm availability.

Borrower-Level Documents

Document Description Notes
Personal financial statement Borrower/guarantor net worth and liquidity Must be current (within 90 days). Standard format.
Tax returns 2-3 years of personal and/or entity tax returns Verifies income and financial capacity.
Real estate owned schedule (REO) Summary of all properties owned, debt, and performance Demonstrates experience and portfolio quality.
Resume / track record Borrower's multifamily acquisition and management history Especially important for first-time agency borrowers.
Entity documents Operating agreement, articles of organization, certificate of good standing For the borrowing entity (LLC, LP, etc.).
Authorization to proceed Entity resolution authorizing the loan and designating signatories Required for entity borrowers.

Transaction Documents

Document Description Notes
Purchase and sale agreement (PSA) Executed contract for acquisition Required for acquisition loans.
Business plan / renovation scope Detailed plan for value-add or repositioning Required for bridge/transitional loans. Includes budget, timeline, target rents.
Sources and uses statement Summary of total project cost and funding sources Shows how the deal is capitalized (debt, equity, reserves).
Pro forma projections 5-10 year projected income, expenses, and returns Required for bridge loans. Helpful for all loan types.

Submission Best Practices

  1. Organize digitally: Create a shared data room (Dropbox, Google Drive, or dedicated platform) with clearly labeled folders
  2. Name files consistently: Use format like "PropertyName_T12_2025.pdf" not "scan001.pdf"
  3. Be current: All documents should be dated within 30-90 days of submission
  4. Be complete: Missing documents delay underwriting. Submit everything upfront.
  5. Include a summary: Prepare a 1-2 page executive summary with the loan request, property highlights, and borrower summary
  6. Pre-screen with multiple lenders: Get 2-3 quotes to ensure competitive terms before selecting a lender
  7. Disclose issues proactively: Environmental concerns, deferred maintenance, tenant issues -- lenders will find them. Better to disclose upfront and control the narrative.

Lender Selection Decision Tree

Use this decision tree to systematically narrow the lender universe from all available sources to the 2-3 best-fit options for any given deal. Start at Question 1 and follow the branching logic. Each terminal node identifies the recommended lender type(s) and key considerations.

How to Use This Tree

  1. Answer each question using data from the deal configuration and underwriting model.
  2. Follow the indicated path at each branch.
  3. When you reach a terminal node (lender recommendation), cross-reference the recommendation against the detailed lender sections earlier in this document to verify the deal meets all minimum requirements.
  4. If multiple paths are viable, pursue 2-3 options simultaneously for competitive quotes.

Decision Tree

Q1: IS THE PROPERTY STABILIZED?
    (Stabilized = 90%+ occupancy AND 12+ months operating history)
    |
    |--- YES (Stabilized) ──────────────────────────> Go to Q2a
    |
    |--- NO (Transitional / Value-Add / Lease-Up) ──> Go to Q2b

Stabilized Path

Q2a: WHAT IS THE TARGET HOLD PERIOD?
     |
     |--- LONG-TERM (7+ years) ──────────> Go to Q3a-Long
     |
     |--- MEDIUM-TERM (3-7 years) ───────> Go to Q3a-Medium
     |
     |--- SHORT-TERM (under 3 years) ────> Go to Q3a-Short

Q3a-Long: DEAL SIZE?
          |
          |--- Under $5M ────────> BANK (portfolio loan, 5-7yr fixed)
          |                        Rationale: Agency may not be cost-effective
          |                        at small sizes. Bank offers simpler process.
          |                        Alt: Credit Union for <$3M.
          |
          |--- $5M - $25M ──────> AGENCY (Fannie/Freddie) preferred
          |                        Rationale: Best rates, non-recourse, 10-12yr
          |                        fixed terms align with long hold.
          |                        Alt: Life Company if LTV <65% acceptable.
          |
          |--- Over $25M ───────> AGENCY or LIFE COMPANY
                                  Rationale: Agency for max leverage (75-80% LTV).
                                  Life Co for lowest rate (but 55-65% LTV max).
                                  Decision depends on equity availability and
                                  target leverage.
                                  Consider: Life Co if hold is 10+ years and
                                  low leverage acceptable. Self-amortizing
                                  Life Co loan eliminates refinance risk entirely.

Q3a-Medium: DEAL SIZE?
            |
            |--- Under $5M ─────> BANK (5yr fixed, 25yr amortization)
            |                      Rationale: Flexible prepayment aligns with
            |                      medium hold. Relationship pricing possible.
            |                      Alt: Credit Union for <$3M.
            |
            |--- $5M - $25M ───-> CMBS or BANK
            |                      CMBS: Non-recourse, 5-7yr term, higher rate
            |                      but no personal guarantee.
            |                      Bank: Recourse but flexible prepay and
            |                      potentially better rate.
            |                      Decision: Prioritize CMBS if non-recourse is
            |                      critical. Prioritize Bank if prepayment
            |                      flexibility matters (plan to sell in year 4-5).
            |
            |--- Over $25M ─────> CMBS or AGENCY (7yr term)
                                   CMBS: Standard 5-7yr term, non-recourse.
                                   Agency: 7yr fixed option, non-recourse,
                                   typically better rate than CMBS.
                                   Decision: Agency preferred if property meets
                                   all Agency requirements. CMBS as backup.

Q3a-Short: DEAL SIZE?
           |
           |--- Under $5M ─────> BANK (3yr fixed or floating)
           |                      Rationale: Shortest term available from
           |                      traditional lenders. Minimal prepayment penalty.
           |                      Fast execution (30-45 days).
           |
           |--- $5M - $25M ───-> BANK preferred
           |                      Rationale: 3-5yr term with step-down or
           |                      no prepayment penalty after year 2.
           |                      Agency/CMBS yield maintenance or defeasance
           |                      makes <3yr hold prohibitively expensive.
           |                      Alt: Bridge if property has near-term
           |                      repositioning before sale.
           |
           |--- Over $25M ─────> BANK or BRIDGE
                                  Bank: Large bank with CRE lending platform.
                                  3-5yr term, flexible prepayment.
                                  Bridge: If the short hold involves any
                                  repositioning or capital improvement.
                                  Avoid: Agency and CMBS (prepayment penalties
                                  destroy returns on short holds).

Transitional Path

Q2b: WHAT IS THE BUSINESS PLAN?
     |
     |--- LIGHT VALUE-ADD (under $10K/unit renovation) ──> Go to Q3b-Light
     |
     |--- HEAVY VALUE-ADD (over $10K/unit renovation) ───> Go to Q3b-Heavy
     |
     |--- GROUND-UP DEVELOPMENT ─────────────────────────> Go to Q3b-Dev

Q3b-Light: DEAL SIZE?
           |
           |--- Under $5M ─────> BANK or BRIDGE
           |                      Bank: If property is 85%+ occupied and
           |                      renovations are unit-by-unit (no full vacancy).
           |                      Bridge: If occupancy <85% or renovations
           |                      require taking units offline.
           |                      Decision: Bank if the property cash flows
           |                      today (DSCR >1.20x on current income).
           |                      Bridge if negative leverage during renovation.
           |
           |--- $5M - $25M ───-> BRIDGE LENDER preferred
           |                      Rationale: 2-3yr term with future funding
           |                      for renovation draws. I/O during renovation
           |                      period. Exit to Agency permanent loan upon
           |                      stabilization.
           |                      Alt: Bank if occupancy >85% and DSCR >1.15x.
           |
           |--- Over $25M ─────> BRIDGE LENDER or DEBT FUND
                                  Rationale: Larger bridge lenders and debt
                                  funds offer 70-80% LTV with full renovation
                                  holdback. Non-recourse options available
                                  at this size.
                                  Exit: Agency or CMBS permanent loan.

Q3b-Heavy: DEAL SIZE?
           |
           |--- Under $5M ─────> BRIDGE LENDER
           |                      Rationale: Heavy renovation requires I/O
           |                      period, draw schedule, and completion
           |                      guarantee structure. Banks rarely accommodate
           |                      heavy value-add at small sizes.
           |                      Caution: Limited lender pool under $3M.
           |                      May require higher rate (SOFR + 450-600 bps).
           |
           |--- $5M - $25M ───-> BRIDGE LENDER or DEBT FUND
           |                      Bridge: Standard choice. 2-3yr term +
           |                      extensions. Full renovation holdback.
           |                      Debt Fund: Stretch senior (80-85% LTC) if
           |                      more leverage needed. Higher rate but single
           |                      loan simplicity.
           |                      Decision: Bridge if standard leverage (70-75%
           |                      LTC) is sufficient. Debt Fund if need 80%+.
           |
           |--- Over $25M ─────> BRIDGE LENDER or DEBT FUND
                                  Same as above but with more competitive
                                  pricing at scale. Non-recourse more readily
                                  available. Multiple lender quotes essential.
                                  Consider: Structured capital stack with senior
                                  bridge + mezzanine/preferred equity for
                                  maximum leverage (80-90% LTC).

Q3b-Dev: DEAL SIZE?
         |
         |--- Under $10M ────> BANK (construction loan)
         |                      Rationale: Local/regional bank with
         |                      construction lending expertise.
         |                      Parameters: 60-65% LTC, full recourse,
         |                      18-24 month term, floating rate.
         |                      Exit: Agency or bank permanent upon CO
         |                      and lease-up to 90%+.
         |
         |--- $10M - $50M ──-> BANK or DEBT FUND (construction)
         |                      Bank: Traditional construction loan. Full
         |                      recourse. Competitive rate (SOFR + 250-400).
         |                      Debt Fund: Higher leverage (65-75% LTC),
         |                      potentially non-recourse, but higher rate
         |                      (SOFR + 400-600).
         |                      Decision: Bank if recourse acceptable and
         |                      lower rate preferred. Debt Fund if need
         |                      higher leverage or non-recourse.
         |
         |--- Over $50M ─────> BANK SYNDICATION or DEBT FUND
                                Multi-bank syndicated construction loan
                                for largest projects. Lead bank arranges,
                                others participate. Alternatively, large
                                debt funds (Blackstone, Ares, etc.) can
                                provide full-stack construction financing.

Cross-Cutting Questions (Apply to All Paths)

After determining the primary lender type(s) from the tree above, apply these additional filters:

Q4: IS PREPAYMENT FLEXIBILITY IMPORTANT?
    (Will you likely sell or refinance before loan maturity?)
    |
    |--- YES ──> PRIORITIZE: Bank (flexible prepay, step-down or none after
    |            year 2-3) or Bridge (no prepayment penalty).
    |            AVOID: CMBS (defeasance is expensive and complex) and Agency
    |            (yield maintenance can cost 5-15% of loan balance).
    |            Exception: If Agency is the only viable option, negotiate for
    |            a shorter term (5yr or 7yr) to reduce prepayment exposure.
    |
    |--- NO ───> ALL OPTIONS VIABLE. CMBS and Agency yield maintenance /
                 defeasance are acceptable if you intend to hold to maturity.
                 Life Company yield maintenance is also acceptable for long holds.

Q5: WHAT IS THE CLOSING TIMELINE?
    |
    |--- UNDER 30 DAYS ──> BRIDGE LENDER only (14-21 day close possible)
    |                       or BANK if existing relationship and pre-approved
    |                       (28-35 days achievable).
    |                       ELIMINATE: Agency, CMBS, Life Company.
    |
    |--- 30-60 DAYS ──────> BANK (30-45 days), BRIDGE (14-30 days),
    |                       AGENCY (45-60 days -- tight but possible for
    |                       repeat borrowers with DUS lender).
    |                       Marginal: CMBS at 60 days is very tight.
    |                       ELIMINATE: Life Company (60-90 days minimum).
    |
    |--- 60-90 DAYS ──────> ALL OPTIONS VIABLE.
    |                       Full lender universe available. Optimize for
    |                       rate, leverage, and terms rather than speed.
    |
    |--- OVER 90 DAYS ────> ALL OPTIONS VIABLE.
                            Consider Life Company for best rate if long
                            timeline allows their slower process.
                            Use extra time to shop 3-5 lenders aggressively
                            for best execution.

Decision Tree Summary Matrix

Use this quick-reference matrix to map deal characteristics to recommended lender types:

Property Status Hold Period Deal Size Primary Recommendation Secondary Option
Stabilized Long (7+ yr) <$5M Bank Credit Union
Stabilized Long (7+ yr) $5M-$25M Agency (Fannie/Freddie) Life Company
Stabilized Long (7+ yr) >$25M Agency or Life Company --
Stabilized Medium (3-7 yr) <$5M Bank --
Stabilized Medium (3-7 yr) $5M-$25M CMBS or Bank Agency (7yr)
Stabilized Medium (3-7 yr) >$25M Agency (7yr) or CMBS --
Stabilized Short (<3 yr) Any Bank Bridge
Light Value-Add 2-3 yr <$5M Bank or Bridge --
Light Value-Add 2-3 yr $5M+ Bridge Lender Bank
Heavy Value-Add 2-3 yr Any Bridge or Debt Fund --
Development 18-24 mo <$10M Bank (construction) --
Development 18-24 mo $10M-$50M Bank or Debt Fund --
Development 18-24 mo >$50M Bank Syndication or Debt Fund --

Decision Tree Usage Notes

  1. Multiple viable paths are normal. Most deals will have 2-3 viable lender types. Pursue quotes from each to ensure competitive execution.
  2. Sponsor strength shifts outcomes. A first-time borrower with limited net worth eliminates Life Company and may limit Agency options. A repeat Agency borrower with strong net worth gets preferred pricing and faster execution.
  3. Market conditions matter. In tight credit markets, the viable lender pool shrinks. Bridge lender appetite fluctuates with capital markets conditions. Bank appetite fluctuates with regulatory cycle. Agency is the most consistently available source.
  4. Layer capital when needed. If no single source provides sufficient leverage, layer senior debt + mezzanine or preferred equity. The Debt Fund / Mezzanine section of this document covers structuring.
  5. Always verify current market terms. The rates and parameters in this document are reference ranges. Actual market terms change weekly. Obtain 2-3 live quotes before selecting a lender.

Last updated: January 2026. Lending terms, rates, and availability change frequently. Always obtain current market quotes from multiple lenders before finalizing a capital structure.