Can a Syndication Assume the Seller's Apartment Loan?
Yes, a syndication can often assume the seller's apartment loan, as long as the loan documents allow it and the lender approves the new borrower. Fannie Mae's term sheet says its loans are typically assumable, subject to review of the new borrower's financial capacity and experience. Your syndication LLC becomes the borrower, the lender reviews you, your key principals and guarantors, and you usually need more equity because the old loan is smaller than a new one would be.
Why assume a loan instead of getting a new one?
Two reasons come up most. If the existing loan has a lower rate than you could get today, keeping it can help the deal's cash flow. And the seller may avoid a prepayment premium, such as yield maintenance or defeasance, that would apply if the loan were paid off. See prepayment penalties explained. That saving can make a seller more flexible on price or terms.
The trade-offs are real. You inherit the loan's maturity date, its prepayment terms, its reserves and its covenants. You also inherit its balance, which may be too small for your plan.
Who does the lender review?
The lender reviews the new borrower much like a new loan applicant:
- The borrower entity. Agency lenders generally require a single-purpose entity. Freddie Mac's fixed-rate term sheet says the borrower "must typically be a Single Purpose Entity" (Freddie Mac fixed-rate term sheet). Form your deal's LLC so it can meet this. See how to form an LLC for a syndication.
- Key principals and guarantors. The people who control the borrower and sign the guaranty for "bad acts" carve-outs. Fannie Mae's term sheet notes non-recourse loans with standard carve-outs for "bad acts" such as fraud and bankruptcy (Fannie Mae conventional term sheet). A first-time sponsor often adds an experienced co-sponsor or key principal to meet this. See loan guarantors in a syndication.
- The property. The lender may order updated third-party reports and check reserves and repairs.
For a HUD-insured loan, the transfer needs HUD's consent through its own process, which takes its own review. See HUD 223(f) loans.
What does the process look like?
The order matters more than the dates, and each lender sets its own timeline.
- Ask for the loan documents early, before or right after the letter of intent: note, loan agreement, guaranty, reserves and any supplemental loans.
- Contact the servicer to confirm the loan is assumable, get the assumption application, the fee schedule and the list of required documents.
- Write the assumption into the purchase contract. Tie your due diligence and closing dates to lender approval, and set what happens to your earnest money if approval is denied. See earnest money and the letter of intent.
- Form the borrower LLC so it meets the lender's entity rules.
- Submit the application with financial statements, schedules of real estate owned and resumes for the key principals.
- Close after approval, with assumption documents, new guaranties and any transfer of reserves.
Ask the servicer for every fee in writing: an assumption fee, an application or processing fee, third-party report costs and lender legal costs. The loan documents set many of these.
How do you fill the equity gap?
The assumed balance is often lower than a new loan would be, because the seller's loan was sized years ago and has amortized.
A made-up example. The purchase price is $10,000,000. The seller's loan has a balance of $5,500,000. A new loan at 75% of value would be $7,500,000.
| Topic | Assume only | Assume plus supplemental | New loan |
|---|---|---|---|
| Senior loan | $5,500,000 | $5,500,000 | $7,500,000 |
| Supplemental loan | $0 | $2,000,000 | $0 |
| Total debt | $5,500,000 | $7,500,000 | $7,500,000 |
| Equity for the price | $4,500,000 | $2,500,000 | $2,500,000 |
The equity line is before closing costs, fees and reserves, which add to the raise in every case. See sources and uses.
A supplemental loan is a second loan from the same agency program behind the first one. Freddie Mac's supplemental term sheet says it must be placed at least 12 months after the first loan's origination or the most recent supplemental loan, cannot be placed in the last three years of the first loan's term, has a $1 million minimum, and is sized on the combined debt of both loans, for example 75% combined loan-to-value and a 1.25x combined debt coverage ratio for a 5- to 7-year remaining term. The eligible borrower is the original borrower or a "lender-approved transferee" (Freddie Mac supplemental term sheet). Ask the lender whether a supplemental can close at the same time as the assumption or only later. If only later, your raise has to cover the gap at closing.
Other ways to fill the gap include more equity, a seller note (if the senior loan allows it; see seller financing in a syndication) or preferred equity. Each adds cost or risk and must be disclosed.
What do you tell investors?
Put the loan's key terms in the offering documents: balance, rate, maturity, amortization, prepayment terms, reserves, any supplemental loan, and who guarantees what. Explain the risk if the lender does not approve the assumption in time, and what happens to investor funds if the deal does not close.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5 or more units from their friends and followers under Rule 506(b) or 506(c). It forms the deal's LLC, prepares the standard offering documents, files Form D and state notices, and holds investor funds in escrow at Enterprise Bank & Trust, an FDIC-insured bank, until closing. Fees are $1,500 at setup (non-refundable), $5,000 at closing (only if the deal closes) and $3,500 a year, with no percentage of the raise. DoorRaise does not arrange loans or negotiate assumptions.
Raise your apartment deal from the people who already follow you.
DoorRaise is built for apartment buildings with 5 or more units: one link for the deal, escrow until closing and a standard fee card.
See how it works for the steps.
FAQ
Are Fannie Mae and Freddie Mac loans assumable?
Fannie Mae's term sheet says its loans are typically assumable, subject to lender approval of the new borrower. Check the specific loan documents, since terms vary by loan.
Can a first-time sponsor assume an agency loan?
It depends on the lender's view of the key principals' experience and finances. One way to qualify is to add an experienced key principal.
Does an assumption avoid the prepayment premium?
Usually the loan is not paid off, so the prepayment premium does not apply. Assumption fees and costs apply instead.
Who pays the assumption fee?
The purchase contract decides. Negotiate it in the letter of intent.
Next step: read the apartment syndication timeline to fit the lender approval into your raise.
Sources
- Fannie Mae Multifamily, Conventional Properties term sheet
- Freddie Mac Multifamily, Optigo Fixed-Rate Loans term sheet
- Freddie Mac Multifamily, Optigo Supplemental Loan term sheet
- HUD, Multifamily Accelerated Processing (MAP) Guide
This article is general information, not legal, tax or investment advice. Talk to a securities attorney and your lender about your deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.