Freddie Mac Apartment Lending During Covid-19

Select Commercial participates in the Freddie Mac Small Balance Lending (SBL) program for multifamily properties.  The Freddie Mac program offers great low fixed rates for long term permanent financing on a nationwide basis.  Freddie Mac SBL loans are also non-recourse (no personal guarantee from the borrower).  Due to Covid-19, Freddie Mac has made several changes to their lending guidelines which affect loan approvals.  Some of the major changes are as follows:

  • Most loans today require that a reserve account be setup and money escrowed from closing to cover 12 months of principal and interest.  This reserve account will typically be held for 12 months and used to cover mortgage payments in the event that the building owner is unable to make payments due to an inability to collect rental payments from tenants.  With many tenants out of work and not earning an income, many landlords are experiencing cash shortfalls and difficulty paying back their loans.  The reserve account will be released after the government lifts Covid-19 restrictions.
  • Refinance loans with cash out are subject to restrictions in loan to value ratio and debt service requirement ratios.  Loans that were typically approved at 80% LTV are now being quoted at 75%.  Loans that were typically approved with a 1.25x DSCR are now being quoted at 1.30X.  These steps effectively serve to limit the amount of cash out on a loan refinance.
  • Many apartment properties contain commercial space on the ground floor.  Unless the commercial tenant is an essential service (grocery store, pharmacy, etc.) the commercial space is being underwritten as if it is vacant (the income will not count).  This affects the overall net operating income of the property and effectively limits loan size on these properties.

In addition to these changes imposed by Freddie Mac, many state and local governments are limiting the ability of landlords to evict tenants for non-payment of rent.  This has caused many properties to suffer economic vacancies and losses.  These eviction restrictions are causing a drop in value of the property and difficulty obtaining maximum loan amounts.  We are watching the market closely for new developments as the pandemic continues.

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How Have Hotel Loans Been Impacted By COVID-19

The entire world has been shaken up by the COVID-19 pandemic. As the number of worldwide cases approach 9 million and the number of deaths is closing in on 470,000, everyone around the globe is highly anxious for the day when life can just go back to normal. Likewise, the global economy has taken a huge hit over the past few months. In specific, the travel and hospitality industry has been decimated. Entering 2020, hospitality financing was business as usual. According to Taylor W. Grace, managing partner at MidCap Hotel Loans, “CMBS lending for hotels was extremely active, providing the best terms for acquisitions and refinances. The ability to finance PIPs and pull cash out of hotel assets also made CMBS a great financing option. For ground-up construction and value-add situations, debt via the SBA 504 program and from private equity bridge lenders was also readily available.

However, when COVID-19 hit, the entire landscape of the hospitality industry quickly changed. As this graph indicates, the leisure and hospitality industry has been impacted unlike any other industry. Many hotels have had to shut down and tons of employees have been let go or furloughed. Additionally, the American public seems very skeptical about the idea of traveling in the near term. The Harris Poll found, “only one in six (15%) Americans saying they’ll fly within a month after the government signals that COVID-19 is abating. Another 16 percent (31% combined) say they’ll fly within three months. Worryingly, only about half of Americans (49%) think they’ll be ready to fly at the six-month point.” With regards to the hospitality industry, the poll found that, “One fifth of Americans (21%) say they will stay in a hotel within a month of the curve flattening, twenty percent will  stay in a hotel within three months and sixty percent of respondents will visit a hotel within 6 months.

This data is not promising for commercial real estate investors focusing on the hospitality industry. Hotel and motel loans have lost favor with many of the traditional lenders. Local banks and CMBS lenders simply don’t want to assume the risk of lending on a property that appears to have low income potential for months to come. In fact, last month the CMBS delinquency rate recorded its largest month over month increase in the least three years, adding to the hesitation to lend on properties not currently generating income. However, while hotel financing with traditional lenders may have come to a halt, there are still some potential options for those who need a hotel loan right now. There are still some private and hard money lenders willing to provide hotel financing for strong borrowers with discounted opportunities. Additionally, the SBA is still lending on hotels. There are many advantages of pursuing a hotel loan through the SBA. While rates will be slightly higher than with a conventional bank, the SBA will finance between 85-90% of the acquisition price and 100% of the property improvement cost for furniture, fixtures and equipment (FF+E). Further, the SBA will allow longer terms and amortizations of up to 25 years. One potential downside to the SBA program is that it will not provide financing in order to refinance a prior SBA hotel loan. 

If you’re interested in a hotel loan, get in touch with us here. We’d love to help you find the best rates and terms available in the market today. For more info on our hotel financing programs check out our site. We can’t wait to work with you!

Covid-19 and the Commercial Real Estate Market

The Covid-19 pandemic has created havoc on Americans’ health and the health of their businesses. April 1st marked a major due date for rent payments for millions of businesses large and small, and reports from around the country indicate that many were facing great difficulty.

The President and state governors have been reporting daily on total Coronavirus cases and the current death toll, but there is no daily count of lost businesses. However, reports of unpaid April rent have greatly increased around the country, along with accounts of how landlords and tenants are trying to cope with the sudden collapse of a large portion of the American economy.

Most of all, they tell the story of the commercial real estate industry in turmoil, with businesses large and small feeling the pinch that some say could wreck the economy like the Great Recession of 2008. With many businesses shuttered, and homeowners out of work, landlords are having difficulty collecting rents and paying their mortgages and taxes.

Reports indicate that big-name companies like the Cheesecake Factory (NASDAQ: CAKE), Subway, and Mattress Firm (NASDAQ: MFRM) did not pay their April rent, affecting thousands of retail locations across the country.  The Staples office supplies chain is also among that number, although reports indicate that many of its stores remain open in a number of locations because it’s considered an essential business immune to virus-driven shutdown orders.

There are several government and private business efforts starting up to help suddenly cash-starved businesses survive the pandemic, most notably the Paycheck Protection Program now available through the U.S. Small Business Administration.

That money, in the form of loans that many expect to turn into grants, is only beginning to be distributed, and 75% of each forgivable loan must go to payroll. That leaves only 25% at most to go to rent.  While helpful, this program will only provide a short-term solution to businesses and landlords.  Depending on the length and severity of shutdown, Congress will probably need to more to ensure the survival of small businesses and the economy in general.

The American commercial real estate market, like the economy it helps support, is a complicated mix of financial and business relationships that is now being tested like we have never seen before. Some businesses will fail, and others will find a way to survive. We will be watching the market very closely in the weeks and months ahead.  Please visit our website at for current information.

How to Invest in an Apartment Building

Stephen A. Sobin

As a commercial mortgage broker with almost 35 years of lending experience, I am often approached by first time investors who are looking to buy an apartment building as an investment.  These new investors want to understand the steps involved in locating and purchasing their first building.  The following guide should be followed:

Check Your Credit – go online to one of the free credit reporting sites on the internet and run your credit report and credit scores.  Lenders expect to see borrowers with a good credit rating.  If any negative items appear on your credit, make every effort to clear up these items in advance.  If you have experienced past problems, be ready to explain these problems in a well written letter of explanation.

Locate an Experienced and Competent Real Estate Agent – make sure you find a real estate agent that specializes in apartment buildings.  Most agents that sell homes for a living have no experience selling apartment properties.  As a first timer, you need an agent that can help you through the details, as a commercial investment is much different than buying a home.  The agent should understand which neighborhoods are on the rise and which neighborhoods to avoid.

Get Full Disclosure – it is crucial that you obtain complete financial records on the property.  Do not rely on verbal statements.  You need to verify all income by looking at the leases and all expenses by looking at actual bills.  Most sellers overstate the income and understate the expenses.  Do your homework carefully.

Visit the Property – do not consider making an offer until you inspect the interior and exterior of the property carefully.  Is the property in good repair?  Is there any deferred maintenance?  Are the units actually occupied or is there apparent vacancy?  Is the neighborhood relatively safe and free of crime?  Are there other buildings in the nearby area that are in disrepair or suffering from high vacancy?

Make a Legitimate Offer – don’t be fooled by a high asking price.  Calculate the gross income and subtract expenses to come up with a net operating income.  The NOI needs to be adequate to cover a proposed mortgage, as well as, return a profit to the owner.  If the numbers don’t work, keep shopping.

Engage an Experienced Commercial Mortgage Broker – a commercial mortgage broker specializes in financing investment properties and will understand all of the nuances of a commercial mortgage loan.  It is crucial that you find a broker who is competent and experienced.  As a first-time buyer, the advice you receive will be invaluable.  A good broker will make sure you offer a fair price and do not overpay.  He will understand the market and negotiate the best terms available for your particular needs.

Be Prepared to Move On – many investment opportunities are not fairly priced.  Do not make the mistake of falling in love with a property.  This is an investment and you need to remember that the goal is to make a profit.  If the property does not make sense, move on and keep shopping.  Your commercial mortgage broker will assist you in this regard.

What are CAP rates (and why should I care)?

Commercial real estate owners and buyers are always confronted with the same question: “How do I determine the value of a commercial real estate property?”  Homeowners and homebuyers rely on the market data approach which simply looks at comparable sales in the market to determine value.  Commercial properties rely more heavily on the income approach or the income capitalization method to determining value.  The income approach requires an understanding of CAP rates or capitalization rates.

In order to begin the analysis, we need to determine the net operating income of the subject property.  The NOI is defined as the net cash flow of the property and is determined by taking the gross income and subtracting the operating expenses.  Gross income includes rents, common charges, parking income, and all other income sources.  Operating expenses are all of the costs associated with running the property, and include: vacancy allowance, management fees, real estate taxes, utilities, repairs and maintenance, etc.  The bottom line figure is the net operating income or net cash flow.  This NOI figure is what we will use to determine property value.

Investors have many options when it comes to investing their money.  They could deposit their funds in a bank account and these days earn 1-2% return on their money.  They could buy stocks and bonds with the hope of earning higher (but uncertain) returns.  Many choose to invest in real estate instead.  Let’s say an investor wants to earn a 5% return on his money and buys a property that generates annual NOI of $50,000.  That 5% return on investment is defined as the CAP rate.  In this case, the property would need to sell for $1,000,000 to yield $50,000/year at 5% return ($1,000,000 times 5% equals $50,000.  If the investor demanded a 6% return on his investment, the property would need to sell for $833,333 ($833,333 times 6% equals $50,000).  From this basic example you can see that a property value will change based on the rate that an investor will expect to earn on his investment.  In times when bank interest rates are high, real estate prices generally go down, as investors will expect to earn returns that exceed bank deposits.  When bank interest rates are low, real estate prices typically increase, as investors are willing to earn a lower return on their real estate investments.

Since September 2018, we have been seeing an increase in market interest rates.  If this continues and rates continue to rise, we could expect to see downward pressure on commercial real estate prices.

What to watch out for when considering a commercial property investment and what the “hot buttons” are for commercial mortgage lenders

I constantly receive phone calls and emails from borrowers who ask me what to watch out for when considering a commercial property investment and what the “hot buttons” are for commercial mortgage lenders.  Here are some thoughts:


These days, lenders look very closely at the borrower’s qualifications before extending credit.  The borrower should have good credit, with FICO scores of 680 and higher.  Lower credit scores may be acceptable with solid, written explanations.  If your credit contains any foreclosures, bankruptcies, judgements or short sales, be prepared to offer full disclosure upfront and have proof that everything has been settled.  Next, lenders will look at the borrower’s total net worth and liquidity.  They will expect to see a financial statement with net worth equal to the loan amount and at least six months of cash reserves to cover debt service.  If a borrower expects a commercial mortgage loan of $1,000,000 or more, they have to show the lender that they have the financial statement to back up the loan.  Equally important to the lender is experience.  Do you have experience owning and/or managing similar properties?  If not, are you willing to hire a professional management company to manage the property for you?  Lenders need to secure their investment and will not lend to a borrower that does not have a proven track record.  Last, a lender will look at the size of your down payment.  Gone are the days when banks and other lenders will offer 100% financing or other very low down payment loans.  Lenders will expect to see a owner that is vested in the project.


Next, a lender will look at the property.  They will expect to see a well run property in good condition.  They will look at the demographics of the neighborhood and local crime statistics.  Properties that are run down, poorly managed, or in very rural areas will be highly scrutinized.  These properties might require a short term bridge loan or private money loan until they will qualify for regular bank financing.  Another very important factor to consider is the past and current use of the property.  Properties that are, or could be, environmentally hazardous will require extensive environmental testing.  Properties like gas stations, dry cleaners, and industrial properties with onsite chemicals will be very hard to finance.  These days, retail properties with marijuana based tenants will almost certainly cause problems for a lender.  It is very important for a lender to review the tenant base and the types of businesses located at the property upfront.

Financial Numbers

After a lender is comfortable with the borrower and the property type, they will then delve into the numbers.  First, they will look at the rent roll to make sure that the vacancy and rental rates are acceptable.  They will look at how long the tenants have been in occupancy and how long the leases are.  Properties with constant turnover and poor leases will cause problems for a lender.  Next, a lender will look at 2-3 years of operating statements and look at the income, expenses, and net cash flow.  They will expect to see properties that have a proven ability to generate rental income, reasonable expense ratios, and net income that is sufficient to cover the mortgage payments.  They will calculate loan-to-value ratios, debt service coverage ratios, and debt yields.  Lenders have internal guidelines for all of these calculations that must be met.

Banks and other lenders got into lots of trouble during the last recession by making credit decisions too freely and without proper oversight.  Lenders today are required to be more careful so as to avoid the problems they encountered in the past.  At Select Commercial, we are well versed in preparing loan packages that make sense and address lenders’ concerns.  Let us know if we can help you!

Select Commercial Specializes in Small Balance Apartment Loans

Select Commercial Funding LLC is an apartment lending specialist in the origination of small balance apartment loans from $1,000,000 to $5,000,000.  We proudly originate loans nationwide and offer extremely competitive rates and terms.  Some of the features and benefits of our program include:

Lending Areas

Many lenders only wish to lend in large, urban areas within well populated cities.  Our program covers the entire country.  We lend in large markets, small markets, and even rural areas.  Most national lenders do not feel comfortable going into smaller markets with lower population densities.  We are well equipped to handle these requests.

Loan Terms

Most local banks prefer to lend short term, usually offering rates fixed for only 5 years at a time.  We offer fixed rates for five, seven and ten year terms.  In addition, we will amortize our loans for up to 30 years and often offer interest-only periods as well.  Local banks often amortize their loans for a maximum of 20 or 25 years which increases the monthly payments and negatively affects the property’s cash flow.  It is also very rare for a local bank to offer an interest-only loan.  Another huge benefit of our program is that we offer a hybrid/adjustable option.  After the initial five, seven, or ten year fixed rate period, we can convert the loan into an adjustable.  This option eliminates the balloon payment due at the end of the initial fixed rate period.

Loan-to-Value Ratio

Whereas most local banks will limit their LTV ratio to 70% or 75% maximum, we will consider requests up to 80% LTV.  On a purchase transaction, a lower down payment means a larger purchase and less cash tied up in the process.

Personal Guarantees

Almost all local banks require that the borrower sign a personal guarantee.  A huge benefit of our program is that we offer Non-Recourse financing (subject to standard carve-outs).  This allows companies, entities, investor groups and multiple parties to purchase a property without having to have every member sign personally.

Pre-Payment Penalties

Whereas many national lenders charge yield maintenance penalties which create huge penalties in the event of a sale or refinance, we offer easy stepdown penalties.  These penalties greatly reduce the cost if you decide to sell or refinance the property at a later date.  And, our loans are assumable.  If you do decide to sell, a qualified buyer can assume your loan at very attractive terms.

Documentation Requests

Another huge benefit of our program is that we do NOT require personal or corporate tax returns.  We will underwrite your loan using a rent roll and historical operating statements.  Our underwriting is common sense and fast.  We close most of our loans within 30-45 days from formal application.


Rate Locks

We do not charge an additional fee to lock your rate.  We automatically lock your rate for 35 business days from signup at no additional cost.  This gives us plenty of time to close your loan and offers you the protection against rate increases from signup to closing.

Low Third Party Costs

Other lenders collect very high upfront fees for third party costs, including: appraisal, environmental, engineering, credit, processing, legal, etc.  We offer a capped cost option.  We collect one smaller amount (as low as $5,000 total) and cover ALL third-party costs with that deposit.  This alone can save you thousands of dollars of processing and closing costs.

It is very simple to begin our process.  We will discuss your transaction with you upfront to determine if you and your property will qualify.  If you would like to discuss a potential transaction with us, please call our office at 516-596-8537.  You may visit our website at for more details.

How We Help Our Customers

Select Commercial specializes in commercial mortgage loans from $750,000 to $10 million and we lend nationwide.  Many people ask us why they should choose Select Commercial rather than their local bank.  In addition to great rates and terms, fast turnaround time and superior service, we have the ability to close loans that banks and other institutions often find difficult.  Here are some examples of loans that we have closed recently:

Albuquerque, New Mexico – our borrower owned an office/retail property with tenants that all had short term leases.  The borrower’s current bank was concerned that the tenants would not renew and the property would become vacant.  We were able to offer this borrower a 5 year fixed rate loan with a 5 year renewal option and a 25 year amortization.

Cape Coral, Florida – our borrower owned a small apartment complex in a small market.  The borrower lived in New York and local banks were uncomfortable lending to an out of state borrower.  We had no difficulty with this transaction.  We approved a refinance of a high rate loan and provided cash out as well for property improvements.

Brooklyn, New York – our borrower was looking to refinance a small apartment building, but had slow credit.  The local bank did not like the borrower’s credit score.  We liked the property and did not allow credit to get in the way of our approval.

Bensenville, Illinois – our borrower was purchasing an apartment complex and needed to close within 45 days.  His current bank could not work under that timing constraint.  We had no trouble closing quickly.

Byron, Georgia – our borrower owned a mobile home park and was looking for a 30 year fixed rate loan.  His local bank would only fix the rate for 5 years at a time.  We made a 30 year fixed rate loan at a great low rate.

Whatever your needs, Select Commercial has a loan program to suit your individual needs.  If you would like to review a loan scenario with us, please contact us today at 1-877-548-9454.

What Makes Us Different?

We often have people ask us why they should apply to Select Commercial rather than just going to their local bank for a commercial mortgage loan. Banks typically have one set of guidelines, and if your loan does not meet their guidelines they will probably not be able to accommodate your request. At Select Commercial, we have numerous loan programs to choose from and attempt to custom tailor a commercial mortgage loan that meets your individual needs. Many, if not most, of our successful loan approvals required us to overcome an obstacle that other lenders were not willing to do.

I would like to review a few of these situations that have recently been approved:

  • Our borrower owns an apartment property in Lowell Massachusetts. He was looking to refinance a high rate loan and obtain cash for property improvements. The property was older and needed renovation. The current property condition made the borrower’s bank nervous. We approved this loan at a rate that was lower than the bank. We also offered a long term fixed-rate loan and a long-term amortization. The term was also longer than the bank was offering.
  • An owner of a mixed-use property in Chicago Illinois approached us about refinancing his property. The owner had credit and income problems which his bank could not overcome. The borrower was also looking to minimize his monthly payment and was requesting an interest only loan. We were able to accommodate this borrower at a very attractive rate.
  • A co-op Corporation in New York City was looking to refinance the underlying loan on the cooperative building. Their current loan did not mature for six months and they did not want to pay a prepayment penalty. They were concerned that rates would rise if they waited for six months. We approved their loan and gave them an extended rate lock for six months. In addition, our rates and closing costs were lower than they could obtain on their own.
  • A borrower in Cleburne Texas owns a small un-flagged motel. They needed to pay off the seller who had taken back a mortgage upon purchase. Most lenders do not like loans in small towns and do not lend on motels that are not part of a major chain. We were able to prove this loan without a problem.
  • Another client of ours owns a student housing property in Gainesville Florida. They needed to refinance a very high rate loan and obtain cash to buy out partner. The former partner mismanaged the property resulting in lower than necessary income needed to qualify. We were able to look at pro forma income and approve a loan based on projections.

Most commercial mortgage transactions require that a lender be willing to listen to the story and try to find a way to overlook the negatives associated with the deal. Good lenders will look for a reason to approve a loan, instead of saying “NO”. At Select Commercial, we are constantly looking to find a way to approve his many loans as we can. Please contact us if you would like to discuss a commercial mortgage loan transaction with us.

Interest Rates Expected to Rise

The Federal Reserve is expected to start raising interest rates as the labor market tightens.  According to reports, these rate hikes could start as early as September.  Please see the following article from yesterday’s New York Times: