How Multifamily Developers Are Moving Up the Capital Stack

Project sponsors are finding an array of financing options today, according to Mark Perkowski of Draper and Kramer.

Mark Perkowski

National and regional banks—already conservative in their underwriting—have become even more constrained on leverage since the COVID-19 pandemic began. These lenders are currently topping out at 65 percent of cost, leaving it up to developers, already squeezed by rising material prices, supply chain disruptions and labor shortages, to look elsewhere to complete their capital stack.

While many of the available financing options are not new, they are attracting renewed interest among developers who remain bullish on the market and eager to get new projects off the ground. A partner familiar with navigating the challenges can be indispensable in sourcing the financing.

FHA/HUD 221(d)(4) Program

Issued by approved FHA lenders, these non-recourse loans can be used to finance the development of various multifamily projects, with no floor or cap on loan amounts. HUD/FHA financing has always been the go-to option for high leverage construction loans at low rates. HUD will provide 85 percent of construction costs (and more if the property has an affordability component). Today’s all-in coupon is approximately 3.50 percent, including required MIP.   

The catch: a rigorous application process that requires a long runway. The best-case timeframe is probably nine months, and backlogs in some parts of the country are so great that some loans are taking as long as two years to close.

Mezzanine Financing or Preferred Equity

One option is for borrowers to layer mezzanine financing or preferred equity on top of a senior construction lender. Although the cost of secondary debt is expensive—with rates in the low double digits—the rates from senior lenders are historically low, often 4.0 percent or less. When they combine the two, borrowers can finance 80 percent to 85 percent of the construction cost at a blended average interest rate of 5.50 percent to 6.0 percent. 


Commercial Property Assessed Clean Energy financing has been receiving more attention as of late. It provides funding towards energy-related items such as HVAC, boilers and LED lights. Developers can access up to 25 percent of a property’s stabilized value, which is repaid via a special property assessment.  Traditional banks are allowing total leverage of 80 percent to 85 percent and some private lenders are allowing up to 90 percent. Rates are much less than typical secondary financing with 20- to 30-year fixed rate coupons in the 5’s. 

Debt Funds and Private Capital Sources

Another option is to fund the entire capital stack using debt funds or other sources of private capital. These lenders offer quick access to cash and less stringent underwriting standards in exchange for a higher interest rate, typically 7.0 percent or higher.  Often, the loans are non-recourse except for a completion guarantee and can be used for projects that traditional banks will deny, such as hotel or condo construction. 

High LTC Recourse Lenders

Although tough to find, there are still some traditional lenders that are willing to fund pre-COVID leverage. Many small local banks are willing to lend 75 percent or even 80 percent of total construction cost, especially for experienced developers. This strategy often requires combining several banks to fund a normal-sized construction loan, but when done successfully, it can deliver the best terms.  

Draper and Kramer recently issued terms from this capital source that provided the developer 10 percent more in proceeds than it could secure from any of their relationship banks that had traditionally been the go-to source for construction funds. 


Even if regional and national banks are tightening their purse strings, developers can find other sources of capital to pursue their growth plans. By consulting a partner who is well-versed in navigating commercial financing challenges, developers can successfully diversify their capital stack and position their projects at the forefront of an economic recovery that is expected to gain momentum going into the second half of the year.

Mark Perkowski is vice president in the Commercial Finance Group of Draper and Kramer Inc. 

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