February 2025 - Hageman Capital

Financing is one of the most crucial aspects of any multifamily development project. The type of financing you choose will shape not only the feasibility of the project but also its profitability, sustainability, and long-term success. Fortunately, developers have a variety of financing options available to fund their projects, each with its own advantages and drawbacks depending on the size, scope, and location of the development.

In this post, we will explore several multifamily financing options, including traditional bank loans, government-backed loans, private equity, specialized tools like Tax Increment Financing (TIF), and bridge loans. Understanding these methods allows developers to select the most suitable option for their unique needs and financial goals.

Multifamily Financing Options

1. Traditional Bank Loans

Traditional bank loans remain one of the most commonly used methods for financing multifamily developments. These loans are offered by commercial banks and other financial institutions, with terms typically ranging from 10 to 30 years. The process involves securing a loan based on the projected income the property will generate, the developer’s creditworthiness, and the value of the property.

Banks require a solid business plan, a track record of successful developments, and proof that the property will generate sufficient cash flow to cover the loan payments. Typically, developers need to provide up-front equity of at least 20-30%, and interest rates are based on market conditions and the developer’s credit profile. While these loans provide long-term stability, they often involve stringent qualification criteria and can be difficult to secure for new developers without an established track record.

2. Federal Housing Administration (FHA) Loans

For developers focused on affordable housing, FHA loans are a highly attractive financing option. The Federal Housing Administration, part of the U.S. Department of Housing and Urban Development (HUD), offers loans designed to encourage the development of affordable multifamily housing. FHA loans come with favorable terms, including lower down payments (as low as 3.5%) and longer repayment periods compared to conventional loans.

The 221(d)(4) program from FHA is a popular choice for developers constructing new multifamily properties, as it allows developers to access both construction and permanent financing. While FHA loans provide lower upfront costs, they come with specific restrictions, particularly around rent pricing and eligibility criteria, which developers must meet.

3. Fannie Mae and Freddie Mac Loans

Both Fannie Mae and Freddie Mac are government-sponsored enterprises (GSEs) that offer multifamily loans to developers. These loans are popular due to their lower interest rates and longer terms compared to traditional bank loans. Fannie Mae and Freddie Mac loans are commonly used for the acquisition, refinancing, and rehabilitation of multifamily properties.

These loans offer flexibility with both fixed and variable-rate options and provide long-term stability. The downside is that these loans come with strict eligibility criteria, including high credit-worthy sponsors and a demonstrated history of successful property management. These loans are best suited for developers seeking to finance well-established properties or those looking for long-term, stable financing.

4. Tax Increment Financing (TIF)

Tax Increment Financing (TIF) is a unique financing tool that allows local governments to fund infrastructure and public improvements by capturing the increased property taxes generated by new development. The local government issues bonds to fund project costs such as roads, utilities, and public amenities, and the increased tax revenue generated from the development is used to pay back these bonds.

TIF is particularly useful in areas that require significant infrastructure investment before development can take place. For developers, it can be an appealing option because it enables projects that might not be financially viable otherwise. However, TIF is meant to be used for projects that would not occur without the new infrastructure/improvements, as required by the “but for” test in many states like Indiana. This ensures that TIF funds are used for projects that genuinely need the infrastructure investment to move forward.

5. Bridge Loans and CMBS Loans

For developers in need of short-term financing, bridge loans offer a solution. Bridge loans are temporary loans used to “bridge” the gap between the time a project begins and when long-term financing is secured. They are often used for acquisitions or renovations of multifamily properties, offering quick access to capital for developers. The main downside is that bridge loans typically come with higher interest rates and shorter repayment periods.

Commercial Mortgage-Backed Securities (CMBS) loans are another option for larger multifamily properties. These loans are backed by the property itself and are sold to investors as securities. CMBS loans offer access to large amounts of capital, but they come with stricter terms and can be more difficult to qualify for than traditional loans.

6. Private Equity and Joint Ventures

Private equity allows developers to raise capital from private investors in exchange for a share of the project’s ownership. This can be particularly useful for developers who lack sufficient capital to finance a large-scale project but want to retain control. Private equity investors are generally looking for a return on investment once the property is completed and generating income.

Similarly, joint ventures (JVs) allow developers to pool resources with other developers or investors. JVs enable both parties to share the risks and rewards of a project. This is often used for larger projects where the required capital exceeds what a single developer can provide.

Final Thoughts on Multifamily Financing

The array of financing options available for multifamily developments allows developers to tailor their approach depending on the size, location, and goals of their projects. Traditional bank loans, government-backed FHA loans, and Fannie Mae/Freddie Mac financing remain staples for many developers, while more specialized tools like TIF, bridge loans, and private equity provide flexibility for different project needs.

By carefully considering the advantages and limitations of each financing option, developers can make well-informed decisions that will position their multifamily projects for success in a competitive market. Whether leveraging tax incentives like TIF or accessing private capital, understanding your financing options is key to turning your development vision into a reality. Reach out to Hageman Capital today to find out how we can help you achieve your goals.

Tax Increment Financing (TIF) is a powerful tool for developers seeking to fund infrastructure and other eligible project costs by leveraging future increases in property tax revenues. However, to maximize the benefits of TIF financing, developers must carefully structure their development and financing agreements to ensure that TIF bonds remain marketable in the future. Poorly structured agreements often lead to the need for renegotiation with municipalities, delaying transactions and creating uncertainty for investors.

To help developers navigate this process, we outline key strategies to structure front-end agreements (agreements where the Developer is negotiating with the municipality) such as project agreements, development agreements, financing agreements, and bond ordinances—that facilitate the resale of TIF bonds without requiring renegotiation with the municipal entity. These agreements differ from back-end agreements (negotiated with bond purchaser), such as bond documents (e.g., trust indentures) and taxpayer agreements, which come into play once the incentive structure is secured.

Establish Clear and Comprehensive Development & Project Agreements

The foundation of a successful TIF structure is a well-defined front-end agreement between the developer and the municipality. This agreement should explicitly outline:

The scope of the project, both public improvements and private development
The timing and sequencing of construction milestones.
The financial commitments of both the developer and the municipality.
The specific sources and uses (especially what the dollars can be used for) of TIF revenue.
Any obligations regarding ongoing maintenance or public services.

Clarity in these terms minimizes ambiguities that could lead to disputes or the need for future renegotiations. A well-drafted development agreement also assures bond purchasers that the project’s TIF revenues are legally committed to repayment, strengthening investor confidence.

Secure Additional Collateral through Taxpayer or Minimum Service Agreements

Beyond projected tax increment revenues, bondholders prefer additional security to reduce investment risk. One of the most effective ways to provide this assurance is through a Taxpayer Agreement (in states like Indiana) or a Minimum Service Agreement (in states like Ohio). These agreements establish a legal obligation on the part of the developer (or another responsible party) to cover any revenue shortfalls in the TIF district.

A Taxpayer or Minimum Service Agreement may require the developer to make up any shortfall between actual TIF revenues and the amount needed to service bond payments. Additionally, these agreements collateralize the real estate by making any shortfall payments a tax lien, further securing the bonds for investors. Importantly, these agreements are often contemplated in front-end agreements, such as project agreements and development agreements, ensuring they are aligned with municipal approvals and financing expectations.

Ensure Assignability and Transferability of Agreements

Developers often focus on structuring TIF agreements for initial financing without considering how easily those agreements can be transferred or assigned to another party. If the agreement does not explicitly permit assignment, any future bondholder looking to purchase the bonds from the original developer may be required to seek municipal consent—potentially derailing a deal.

To avoid this hurdle, developers should ensure that all key agreements, including Taxpayer Agreements and Minimum Service Agreements, explicitly allow for assignment to future bondholders without requiring additional municipal approval. This provision facilitates smoother transactions and avoids delays that could otherwise require renegotiation.

Define Clear Repayment and Allocation Mechanisms

A well-structured financing agreement should clearly define how TIF revenues will be allocated and used for debt repayment. This includes:

Establishing clear waterfall provisions that dictate the priority of payments.
Addressing any subordination of debt to other financing sources.
Ensuring that revenues are allocated on a predictable and transparent schedule.
Avoiding ambiguous language that could lead to disputes over how funds are distributed.
Ensuring that if a developer makes a Taxpayer Agreement payment (supplemental payment), they have the ability to be repaid from future excess TIF revenue. This provision can be incorporated into the trust indenture as well.

By explicitly detailing how funds flow from the municipality to bondholders, developers can prevent uncertainties that may require contract amendments down the road.

Avoid Unnecessary Municipal Approvals in Key Terms

One common issue in TIF agreements is leaving too much required approval to the municipality regarding revenue disbursements or bond transfers. While municipalities often want to retain oversight, excessive discretionary capabilities can create uncertainty for bondholders and complicate the resale of TIF bonds.

To prevent these issues:

Specify clear, objective criteria for approving bond assignments rather than requiring broad municipal approval powers.
Avoid language that allows the municipality to delay or deny revenue distributions without cause.
Ensure that all financial obligations are legally binding rather than subject to periodic review or renewal by the municipality.

Structure Bond Ordinance to Allow for Ample Par Amount and Interest Rate Flexibility

The bond ordinance, a key front-end agreement, dictates bond sizing, terms, and issuance flexibility. Developers should ensure that their bond ordinance:

Allows for sufficient par amount for the TIF being generated by the project, preventing the need for future amendments or additional issuances. Remember, more increment being generated can result in needing a higher par amount.
Provides flexibility in setting the interest rate (i.e. make the allowable coupon high), so the bonds would not have to have a steep discount when being marketed. While a higher discount value won’t impact proceeds, if the par amount of the bonds is also a limiting factor, this could result in fewer bonds being issued than what the TIF can actually support.

By structuring the bond ordinance appropriately, developers can ensure that their TIF bonds remain attractive and marketable without requiring municipal renegotiation.

Engage Experienced Legal Advisors

Given the complexities involved in structuring TIF financing, it is critical to work with legal professionals who specialize in public finance and real estate development. Experienced legal advisors can:

Draft agreements that align with industry best practices.
Ensure compliance with municipal and state regulations.
Anticipate potential investor concerns and address them proactively.
Assist in negotiating terms that maximize the flexibility and marketability of TIF bonds.

By engaging the right legal professionals early in the process, developers can avoid costly mistakes and ensure their front-end agreements are structured for long-term success.

Tie Agreements Back to Long-Term Marketability

To facilitate the resale of TIF bonds, developers should proactively consider investor concerns when structuring project agreements, development agreements, and bond ordinances. Key factors that contribute to future marketability include:

Ensuring all agreements are assignable to future bondholders.
Developing well-defined repayment mechanisms that specify the order of payments, potential reserves, and repayment contingencies ensures that bondholders receive consistent and predictable returns. These mechanisms should also address scenarios where tax increment revenues fall short, specifying how any deficiencies will be covered, whether through taxpayer agreements, reserve accounts, or supplemental payments from developers.
Minimizing excessive municipal approvals that can lead to delays or uncertainties in bond repayment and transfers by establishing clear, objective criteria for approvals could create uncertainty for investors.
Providing additional collateral through Taxpayer Agreements or Minimum Service Agreements to strengthen investor confidence.

By addressing these factors upfront in front-end agreements, developers can enhance liquidity, making it easier to sell TIF bonds in the future without requiring renegotiation with the municipality.

Conclusion

Structuring a TIF financing and development agreement with long-term marketability in mind is essential for developers who plan to sell their TIF bonds in the future. By implementing Taxpayer Agreements or Minimum Service Agreements, ensuring assignability, structuring bond ordinances with flexibility, and eliminating unnecessary municipal discretion, developers can create financing structures that remain attractive to bond investors without requiring renegotiation.

Month: February 2025