San Diego – With competition for large and mid-size loans at a fever pitch, more lenders are trying to tap into the small-loan market to expand their customer base.

Small-loan borrowers stand to benefit from tapping these new sources of finance beyond their traditional partners in local banks or private equity, but as speakers at Apartment Finance Today’s Developer Conference noted in March, the borrowers need to understand the different parameters of the various programs (see table belowfor detailed financing comparisons).

“Everybody has their own definition of a small deal,” noted R. Lee Harris, president of Cohen-Esrey Real Estate Services, Inc. In general, small loans are no larger than $3 million or $5 million, said Harris’ fellow panelists at a conference session on Finding the Right Financing for Your Small Loan. Though those borrowers may not get the same flexibility in their financing deals as larger borrowers receive, they may still benefit from a wider range of loan terms than they have previously been able to get.

A small loan brings a lender smaller profits, and the lender must still cover the costs for underwriting and servicing the loans. Some lenders have said they are looking forward to increasing standardization of small loans to enable them to handle the deals quickly and with a minimization of specialization.

Loan size will affect the terms of the deal. For example, multifamily loans of less than $3 million are not likely to get the interest-only financing that has become increasingly popular lately, said Gary Bechtel, managing director of corporate initiatives and strategies at Meridian Capital Group.

Also, the lower you get in the loan amount, the more you can expect to pay, said Chip Hudson, Greystone Servicing Corp.’s vice president for small Fannie Mae loans.

Developer Todd Sears, director of finance for Herman & Kittle Properties in Indianapolis, compared two different small loans this spring and said borrowers have to watch their pricing. “It’s not unusual at all to see an 8-basis point spread between two deals,” said Sears, adding that a 25 basis point spread is common. In fact, in the deals he compared, a $2 million loan had an interest rate 25 basis points higher than a $5 million loan.

The way to get the best interest rate with a small loan is to decrease your loan-to-value (LTV) ratio, said Hudson. "If you are not sensitive to loan amounts and you like low rates, your cheapest interest rate is at 50% LTV," he said.

John Barbie, a Fannine Mae small-loan expert with ARCS Commercial mortgage Co., L.P., agreed. "For an agency and also for the capital markets, the yield on any loan note is a reflection of its risk and profit" potential for the lender, he said.


Agency (Fannie Mae and Freddie Mac)


Department of Housing and Urban Development (primarily Sec. 221(d)(4) program)

Life Insurance Companies


Other (Banks, private capital, real estate investment trusts)

Maximum loan-to-value ratio






about 80%

Debt-service coverage ratio






1.15x to 1.25x

Interest rate calculation

Over corresponding-term Treasury

Over corresponding-term Treasury

Over 10-year Treasury

Over corresponding-term Treasury

Tax-exempt bonds: over the Bond Marketing Association rate

Taxable bonds: over the London InterBank Offered Rate


Amortization period

30 years, 5- to 30-year terms

Maximum 30 years, 15- to 20-year terms

35 to 40 years, fully amortizing

30 years, 20-year term

Up to 40 years, fully amortizing

Typically 30 years, 15- to 20-year terms

Prepay provision

Yield maintenance or defeasance

Yield maintenance or defeasance

Declining penalty, but loan is fully assumable at no additional cost

Yield maintenance

Varies; some have no penalty, others have lockout period

Banks: Declining penalty

Minimum loan size





$1.5 million

Some banks: $150,000

Processing time

30 to 60 days

45 to 60 days

4 to 6 months

45 to 90 days

120 days

Some banks: less than 30 days

Replacement reserves

$250 per unit

$150 per unit, can be waived

$200 to $300 per unit

$250 per unit

$250 per unit



$3,500 to $5,500

$10,000 to $12,000



About $200,000


“Brain damage” of process

Paperwork has been reduced lately


Has improved under the Multifamily Accelerated Processing program




Sources: John Barbie, Gary Bechtel, R. Lee Harris, Chip Hudson and Todd Sears