Interest Only Multifamily Loans

[Ben Spiess]

I've been hearing on podcasts about Terms loans where for commercial multifamily loans the lender agrees to forego principal payments for a few years.  I.e., its interest only.  

How does someone get a loan like this?  What is the lender looking for?  What can a borrower offer to a lender to make attractive?

[David Thompson]

Ben,

The attractiveness of this type of loan for a value add syndicator is that in the first couple of years, significant effort and value is being created with renovations to the property and other operational efficiency improvements that take a few years to fully play out to optimize the NOI. Syndicators want to reward their investors in a more steady flow of quarterly distributions on these properties so lower cost loans (not having to pay principal early on) enables the investor to get some cash flow while the rents move up during this renovation and repositioning period. There is some risk of course in a rising interest rate environment so it's not uncommon to purchase a hedge with the lender that allows an option to lock at a fixed predetermined rate within some specific time during the loan term just in case interest rates accelerate higher than expected. Many of these loans do offer an annual opportunity to lock as well without the cost of purchasing the hedge but you are exposed a bit more.