by Dan Rafter
You’re itching to build a multifamily development in downtown Minneapolis or Chicago. Or maybe you want to purchase an existing apartment complex in the center of Kansas City and make significant improvements to it.
What do you need to show to lenders to obtain financing?
It helps to have a record of success and a top location.
Joel Simmons, executive managing director with the Chicago office of Newmark Grubb Knight Frank, said that his company looks at a host of factors to determine who should or should not earn multifamily financing.
These factors vary a bit depending on whether the borrower is seeking funds to develop a new multifamily property or money to acquire an existing one. But Simmons said that when it comes to construction and permanent loans, Newmark Grubb Knight Frank looks closely at the borrower’s experience in the apartment sector.
“How many years have they been developing multifamily buildings?” Simmons said. “How successful have they been in this industry already? That’s the first thing we look at.”
Then there’s the location of a proposed project. Newmark Grubb Knight Frank looks at the demographics of the community in which an apartment project will rise and at what Simmons calls the “supply and demand generators.”
Newmark Grubb Knight Frank will look, too, at the amount of equity going into a deal and the number of new units that a new apartment project will bring to an area. The company wants to make sure that an area isn’t getting too many multifamily units.
Cap rates play an important role when it comes to providing financing to investors who want to acquire existing apartment buildings.
“On existing property, we are probably at the lowest cap rates we have seen in a very long time,” Simmons said. “From a lending standpoint, we are looking at using cap rates that are a little higher than what is happening in the marketplace today. Lenders don’t want to use the highest valuations. We want to use average valuations over time.”
Simmons said that today Newmark Grubb Knight Frank isn’t seeing cap rates higher than 5.5 percent in most locations. The company recently closed a multifamily financing deal with a cap rate of 3.5 percent in San Francisco and one with a cap rate of 4 percent in Los Angeles.
Simmons says that multifamily properties remain attractive to both investors and developers. Supply still hasn’t outpaced demand in this sector.
“Multifamily is still seeing rent growth,” he said. “There is still lots of demand for apartments. Lenders and investors love the diversification of the tenants. You have units rolling all the time. You can get rent bumps every year. It’s just a strong asset class.”