In 2023, commercial real estate loans totaled $429 billion. Behind this impressive figure lies a range of different lender types, each offering unique advantages and opportunities for real estate syndicators.
Consider a syndicator evaluating an apartment complex: Just as an investor in single-family properties might choose between a 30-year fixed mortgage for stability or an adjustable-rate loan for lower initial payments, the syndicator’s choice of lender significantly impacts the deal’s success.
Knowing these lending options goes beyond securing funds—it helps syndicators structure deals that can handle market shifts and maximize returns. Here, we’ll explore the key parties in commercial real estate lending and how experienced syndicators use them to execute their investment strategies.
Comparison of Lender Types for Real Estate Syndications
Before looking at each option in detail, here’s a comparison table of different lender types and their suitability for various scenarios in real estate syndications:
| Criteria | Agency Lenders | Bridge Lenders | HUD Loans | Bank Loans | CMBS Loans | Life Insurance Companies |
| Value-add projects | Yes | Yes | Yes | Maybe | No | No |
| Long-term holds | Yes | No | Yes | Yes | Yes | Yes |
| High-leverage needs | Yes | Maybe | Yes | No | Yes | No |
| Non-recourse | Yes | Maybe | Yes | No | Yes | Yes |
| Interest rates | Low | High | Low | Moderate | Moderate | Moderate |
| Loan term lengths | 5-10 years | 6-36 months | 35-40 years | 5-10 years | 5-10 years | 10-30 years |
| Fees | Low | High | High | Moderate | High | High |
| Prepayment penalties | Fixed rate = high; floating rate = low | Yes | Yes | Yes | Yes | Yes |
Agencies (Fannie Mae & Freddie Mac)
Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs). Their role is to make sure that there’s funding available for apartment loans, which helps keep mortgage loans stable and apartment costs in check.
Types of properties financed
- Multifamily apartment buildings
- Some senior housing and assisted living facilities
- Manufactured housing communities
Loan terms and conditions
Fannie Mae and Freddie Mac offer competitive interest rates with loan terms from five to 10 years. They provide both fixed- and variable-rate options. Loan-to-value (LTVs) ratios can go up to 80%, and they offer non-recourse options as well.
Pros
Advantages of these agency loans include:
- Lower interest rates: Agency lenders often offer lower interest rates than commercial banks, typically by 0.5% to 1%.
- Higher leverage options: Fannie Mae and Freddie Mac can lend up to 80% of a property’s value.
- Flexible prepayment terms: Borrowers willing to accept interest rate risk using a floating-rate agency loan can pay off loans early with only a 1% exit fee.
- Longer loan terms: Loans can last up to 30 years (maximum loan size $9 million) or up to 10 years (for loans >$9 million), letting investors lock in good rates for the long term and protect against future interest rate increases.
- Reporting requirements: Compared to other lender types, agency loans can have simpler reporting requirements. Borrowers submit regular financial and property reports, but the process is generally less burdensome than with other commercial loans.
- Reliable source of financing: As GSEs, Fannie and Freddie keep lending even when other lenders may pull back.
Cons
Some of the disadvantages of these funding sources include:
- Strict underwriting criteria: Both lenders have high standards for property quality, financial performance, and borrower qualifications.
- Yield maintenance: Fixed-rate agency loans typically have a very punitive prepayment penalty called “yield maintenance.” Under this framework, the borrower is guaranteeing that the lender will be paid the present value of all future interest payments. In the simplest terms, this means that paying off a 10-year fixed-rate agency loan three years after origination would result in a prepayment penalty roughly mirroring the present value of seven years of interest payments. Depending on the interest rate environment, this penalty could be de minimis or disaster.
When syndications typically use agency loans: Example scenario
A syndicator is looking at a 50-unit urban property needing updates. They’re considering a Fannie Mae loan for its competitive rates and high leverage. The loan’s 15-year fixed rate suits their renovation plans. With this financing, their goal is to update units, boost occupancy, and increase property value, potentially leading to better investor returns.
An agency loan makes sense here because:
- The property fits the criteria: Agency loans work well for multifamily buildings in growing urban areas.
- The long-term fixed rate provides stability: The 15-year fixed rate protects against interest rate fluctuations, allowing for more accurate long-term financial planning.
Bridge Lenders
Bridge loans are short-term financing solutions that “bridge” the gap between immediate capital needs and long-term financing. These loans give syndicators quick access to funds.
Bridge loans work for syndicators who need to:
- Buy properties quickly in competitive markets
- Pay for immediate property upgrades
- Improve a property’s performance before getting long-term financing
- Allow time to fill vacancies or raise rents
Types of bridge loans
Common bridge loans include:
- Acquisition bridge loans: Used to quickly buy properties when traditional financing isn’t available or takes too long.
- Renovation bridge loans: Fund major property improvements or upgrades immediately after purchase.
- Refinance bridge loans: Replace existing loans with short-term financing to avoid balloon payments or maturity defaults.
- Lease-up bridge loans: Provide funds to cover costs while filling vacant units and increasing property income.
- Construction bridge loans: Finance the completion of partially built properties or new construction projects.
Loan terms and conditions
Bridge loans last six to 36 months and have variable interest rates that are higher than traditional loans. Lenders may finance 65% to 80% of the property’s value and 80% to 100% of the capital improvement costs. To ease cash flow, most bridge loans only require interest payments during the term.
Borrowers can expect to pay origination and exit fees and sometimes extension fees. Prepayment penalties are common, and sponsors might need to provide personal guarantees. Depending on the project, loan amounts can vary from $1 million to well over $100 million.
Pros
Bridge loans offer several advantages, including:
- Fast closing: Deals can close in weeks. This helps syndicators win bids in competitive markets and buy distressed properties quickly.
- Flexible underwriting: Lenders focus on the property’s future potential, not just its current performance. This allows syndicators to purchase underperforming properties with strong upside.
- Higher leverage: Sponsors can borrow up to 65% to 80% of property value, plus 80% to 100% of capital improvement costs.
- Interest reserve: Many bridge loans include funds to cover interest payments during renovations.
Cons
Some of the drawbacks of this loan type include:
- Higher interest rates: Bridge loans may charge 2% to 4% more than conventional loans.
- Short-term nature: The six-to-36-month term creates pressure to execute the business plan quickly.
- Additional fees: Bridge loans usually have origination, exit, and extension fees.
- Personal guarantees: Some lenders require sponsors to guarantee the loan personally.
- Prepayment penalties: Some bridge loans charge fees for early repayment.
- Added risk: The short loan term, higher leverage, higher interest rate, and higher fees dramatically increase risk to syndicate investors as well as sponsors. An adverse market cycle during the loan term leaves investors at a higher risk of total loss of investment versus other loan types with longer terms and lower leverage.
When syndications typically use bridge loans: Example scenario
A syndicator found a distressed 50-unit apartment complex needing major fixes. They chose a bridge loan to buy the property quickly in a competitive market and get enough capital to start renovations right away.
Within a year, they fixed up the property, filled more units, and stabilized rental income. Then they switched to a long-term loan with lower interest.
A bridge loan makes sense here because:
- The property needs fast action: Bridge loans close quickly, key in today’s competitive market.
- It funds both the purchase and repairs: The loan provides enough money to buy the complex and start renovations immediately.
- It’s short-term focused: Bridge loans work well for quick turnarounds and allow refinancing once the property stabilizes.
HUD (U.S. Department of Housing and Urban Development)
HUD financing refers to loan programs offered by the Department of Housing and Urban Development through the Federal Housing Administration (FHA). These programs provide long-term, fixed-rate financing for multifamily properties. HUD loans are government-insured, which allows approved lenders to offer better terms than conventional loans.
Types of HUD loans
There are several options available through HUD to finance projects, including:
- New construction or renovation of multifamily properties
- Purchasing or refinancing existing multifamily properties
- Nursing homes and assisted living centers
- Cooperative housing projects
- Supplemental financing for improvements or additions to existing HUD-insured properties
Loan terms and conditions
HUD loans offer long-term financing with fixed, low interest rates. They usually cover up to 85% to 90% of the property value and don’t require personal guarantees.
Pros
The advantages of HUD loans are:
- Low interest rates: HUD loans offer fixed rates, usually 0.5% to 1% lower than conventional loans.
- High leverage: Lenders can provide up to 85% to 90% LTV ratio.
- Long-term financing: With loan terms of 35 to 40 years, HUD loans provide stability and predictable payments.
- Non-recourse: The property secures the loan, not personal assets.
- Fully amortizing: There is no balloon payment at the end of the term, which provides more exit strategy flexibility for syndicators.
Cons
Drawbacks with HUD loans include:
- Lengthy approval process: HUD loans can take six to 12 months to close. The extended timeline may cause syndications to miss opportunities in fast-moving markets.
- Strict requirements: Properties must meet specific standards and undergo thorough inspections. These criteria can limit the types of projects eligible for HUD financing.
- Higher upfront costs: These loans have extra fees, including mortgage insurance, which increase the upfront costs for syndications.
- Prepayment restrictions: Most HUD loans have prepayment penalties that can make it costly to sell the property or refinance before the loan term ends.
- Ongoing compliance: HUD-financed properties must follow specific regulations and reporting requirements, which can create more paperwork and management tasks for the syndication team.
- Compliance costs: Most HUD loans require regular audits by an outside accounting firm, which tend to be expensive.
- Distribution restrictions: Most HUD loans limit the frequency of investor distributions, and all distributions may need to be approved by HUD.
When syndications typically use HUD loans: Example scenario
A syndicator looks to buy and renovate an aging 100-unit apartment complex in an urban renewal area. The project is large scale and long term, requiring a large amount of capital for both purchase and renovation. They’re seeking financing that offers stability over an extended period.
The syndicator leverages a HUD loan for this project because:
- The project scope matches the loan: HUD loans work well for large-scale, long-term multifamily renovations like this 100-unit property.
- It provides comprehensive funding: The loan covers both the purchase and extensive renovation costs, up to 85% of the project’s value.
- Long-term stability is key: With a 35-to-40-year fixed rate, it offers predictable financing for this extended project timeline.
- It supports urban renewal: HUD loans are well suited for properties in areas undergoing revitalization.
Banks
Traditional banks range from large national institutions to regional and community banks and credit unions that focus on specific geographic areas.
Loan products offered
You’ll find several options from traditional banks, like:
- Acquisition loans: Used to purchase existing properties
- Construction loans: For ground-up development projects
- Permanent loans: Long-term financing, often used to refinance after stabilization
- Lines of credit: Revolving credit facilities for multiple property acquisitions or improvements
Loan terms and conditions
Commercial bank loans can have fixed or variable interest rates. The loan has two key time periods:
- The loan term: This is when the loan must be fully repaid or refinanced, and is usually five to 10 years.
- The amortization period: Commercial loans use an amortization period of 25 to 30 years. This longer timeframe determines the monthly payments.
Because the loan term is shorter than the amortization period, a large amount remains unpaid at the end of the term. Most borrowers get a new loan or sell to cover this balance.
In today’s environment, banks lend up to 60% of the property’s value. Syndicators usually need to guarantee the loan personally, and there may be penalties for paying off the loan early. Banks charge fees for setting up the loan and require borrowers to pay for property appraisals and other closing costs.
Pros
Some reasons syndicators work with bank lenders are:
- Lower interest rates: Banks charge less interest than alternative lenders.
- Longer loan terms: Banks loan funding for five to 10 years, or even more.
Cons
Potential drawbacks of bank loans can include:
- Strict requirements: Banks have tough rules for lending money. They look closely at the property, the borrowers, and their experience. This can make it hard for newer or smaller syndications to get loans. Banks might also ask for personal guarantees, which many syndication leaders want to avoid or don’t qualify for.
- Longer approval process: Getting a bank loan can take several months. This slow process can be a problem in fast-moving real estate markets.
- Less flexibility: Bank loans may restrict property use and fund allocation. This can limit a syndication’s ability to renovate or adapt to market changes.
When syndications typically use bank loans: Example scenario
A syndicator discovers a stable 100-unit apartment complex with high occupancy and consistent cash flow. They decide to finance the acquisition using a bank loan. The loan provides 60% of the property’s value with a 10-year term and a 30-year amortization schedule.
The syndicator’s strong track record and the property’s financial stability lead to a lower interest rate. This financing enables the syndicator to implement minor upgrades and maintain steady returns for investors over the long term.
A bank loan makes sense here because:
- The property profile fits: Banks prefer lending on stable assets like this complex.
- It balances leverage and control: The 60% LTV ratio provides solid financing while leaving room for equity returns.
- The loan structure aligns with goals: The 10-year term and 30-year amortization support the syndicator’s plan for minor upgrades and long-term steady returns.
CMBS (Commercial Mortgage-Backed Securities)
A CMBS loan is packaged with other similar commercial loans and sold to investors as a bond.
How CMBS loans work
A syndicator negotiates a non-recourse loan from a CMBS lender with a fixed interest rate and a term of five to 10 years. This loan is then pooled with other commercial mortgages and securitized.
The securitization process creates a trust that issues bonds to investors. These bonds get divided into tranches, with varying risk levels and yields. The syndicator’s loan payments, along with those from other borrowers in the pool, flow through to bondholders.
Pros
CMBS loans offer the following benefits:
- Competitive terms: Non-recourse financing with attractive fixed rates and longer terms. This protects the syndicator’s personal assets and provides predictable, lower-cost financing over an extended period.
- Large-scale financing: CMBS financing offers higher loan amounts and LTV ratios than traditional loans.
Cons
Drawbacks of CMBS loans include:
- Inflexibility: These loans have strict underwriting, costly prepayment penalties, and limited ability to modify terms after securitization.
- Loss of control: Third-party loan servicing can complicate communications and reduce the developer’s direct control over the property’s finances.
- Complexity: CMBS loans involve more parties than traditional loans due to securitization. This can make the loan terms and relationships harder to understand and manage.
When syndications typically use CMBS loans: Example scenario
A real estate syndicator identified a $50 million office complex in a major metropolitan area. The property is 90% occupied, with long-term tenants and stable cash flow. The syndicator plans to raise $15 million from investors and seeks $35 million in debt financing.
A CMBS loan makes sense here because:
- The property scale matches: CMBS loans are common for large commercial assets like this $50 million office complex.
- It allows high leverage: The $35 million loan on a $50 million property aligns with CMBS’s typical LTV ratios.
- Stabilized asset: The 90% occupancy with long-term tenants meets CMBS lenders’ criteria for stable properties.
Life Insurance Companies
Syndicators can work with commercial mortgage brokers to secure loans from life insurance companies. They package the deal, showcasing the property’s potential and the syndicator’s track record. The broker then shops this package around to various life insurance companies, negotiating terms and rates.
Types of properties financed
Life insurance companies prefer high-quality, stabilized properties in prime locations with strong, long-term tenants. These companies avoid riskier or specialized properties like hospitals, senior living facilities, or undeveloped land. The types of properties they finance can include:
- Office buildings
- Retail centers
- Industrial properties
- Multifamily apartment complexes
Loan terms and conditions
Life insurance companies offer commercial real estate loans ranging from $5 million to over $100 million, with LTV ratios usually between 50% to 65%. They can provide competitive fixed interest rates for terms of 10 to 30 years, with amortization periods of 25 to 30 years. These loans are often non-recourse and require a DSCR of at least 1.25x.
Pros
Reasons syndicators like life insurance loans include:
- Competitive financing: Life insurance loans can provide lower interest rates and longer repayment terms compared to traditional bank loans.
- Reduced risk: These loans are usually non-recourse, limiting borrowers’ personal liability.
- Customizable solutions: Life insurers can provide more flexible terms and prepayment options than banks.
Cons
Potential drawbacks to be aware of are:
- Selective lending: Life insurance companies focus on high-quality properties and strong borrowers, limiting access for some investors.
- Higher equity requirements: With LTV ratios between 50% and 65%, borrowers need to invest more of their own capital.
- Costly prepayment: Substantial penalties for early repayment can reduce flexibility and potential profits if market conditions change.
- Mandatory reserves: Requirements for capital expenditure and leasing reserves can tie up additional funds throughout the loan term.
Scenarios where syndicators choose life insurance company financing
A syndicator is buying a fully leased multifamily apartment complex in a prime suburban area. They obtain a loan from a life insurance company because of its competitive fixed interest rate and long-term stability. The loan covers 65% of the property’s value, with a 25-year term.
A life insurance loan makes sense here because:
- The property quality aligns: Life insurers prefer stable, low-risk assets like this fully leased apartment complex in a prime location.
- It matches the long-term strategy: The 25-year term supports the syndicator’s plan for a long-term hold.
- The leverage is conservative: The 65% LTV ratio fits life insurers’ typically lower leverage requirements.
Final Thoughts
Real estate syndication relies on smart financing. The right lender can make or break a project. Each type of lender serves specific needs, from providing stability for long-term holds to offering quick capital for value-add opportunities.
Choosing the right lender for each deal helps syndicators boost returns and reduce risks. This calculated approach to financing can include additional strategies like pairing variable-rate loans with interest rate caps to reduce risk. Strategic financing approaches help investors find great opportunities in any market condition.