Multifamily borrowers looking for small loans have to look a little harder these days.

This is especially true for loans of less than $1 million. Regional and local banks are still active in the sub-$1 million space, though less than in the past. And many Fannie Mae shops have upped their minimum deal size to more than $1.5 million, especially since Fannie Mae closed its Micro Loan Program in early 2009.

There are a dozen Fannie Mae small loan lenders, and all of them technically have the ability to go down to $500,000. But few have the inclination, due to the diminishing returns of processing a sub-$1 million loan. After all, if it takes the same amount of documentation, reporting, and due diligence to process a $10 million loan, and many shops figure it’s not worth the time and effort to go low.

Some of the lenders active in this space include Arbor Commercial Mortgage and Alliant Capital, which opened its small loan division in the last summer. “I look at loans that small as almost like doing a public service,” says Jerry Anderson, an executive vice president and principal of Alliant Capital’s small loan program, which is based in Anaheim, Calif. “There aren’t a lot of places borrowers can go for a loan that small. So, if it doesn’t impact our ability to be of service to all our clients, why shouldn’t we do it?”

Borrowers would do well to court a Fannie Mae loan, which offers several key competitive advantages, including the lowest rates on the market, very low fees, loan assumability, and non-recourse terms.

Banks vs. Fannie

The advantages of going the bank route include a quicker approval process than a Fannie Mae loan. Banks also have a healthy appetite for smaller deals, unlike many Fannie Mae shops. But there are several disadvantages to calling your local banker for a sub-$1 million loan.

Banks often require some level of recourse, and their rates are higher than what Fannie Mae lenders can offer. Fannie Mae is offering 10-year small loans at below 6 percent, as of early December, while most banks are well over the 6 percent mark.

What’s more, banks prefer shorter-term loans and generally won’t do straight-up 10-year deals. “To the extent you wanted to secure long-term financing, regional and community banks are likely not the best source for you,” says Dan McIntyre, a director in the Washington, D.C., office of mortgage banking firm Holliday Fenoglio Fowler. “And if I’m a borrower today, whether I’m a long- or short-term holder, I’m trying to get as long-term financing as I can.”

Another key consideration is that banks typically don’t do assumable loans. Banks are much more relationship-driven, so they’re making a loan to a borrower, not an asset. But Fannie Mae’s loans are assumable, which is another competitive advantage. “If you can offer non-recourse debt that has significant term on it to a buyer three years from now at today’s rates, that should aid a future sales process and preserve or potentially enhance value down the road,” McIntyre says. “Create a financial asset to go along with a real estate asset.”

Fannie’s Feasible Fees

Since small loan borrowers are more cost-sensitive than larger borrowers, one main consideration is the application fee, which many Fannie Mae shops offer at $4,500.

One of Washington Mutual’s competitive advantages is a low application fee that would be refunded after the deal closed. And Anderson, who once ran WaMu’s Fannie Mae platform, took some of that company’s practices with him. Meanwhile, Alliant opened its shop touting an application fee of $4,500, which the company will give back to the borrower when the loan closes. The company also won’t charge legal or appraisal fees. Centerline Capital also opened a small loan shop in late summer 2009, touting a similar fee strategy. A week or so after those two companies opened shop, Arbor announced that it, too, would reduce its application fee to $4,500, down from $7,500.

Fannie Mae’s application fee covers all third-party reports, such as the appraisal, engineering and environmental reports and lender legal fees. In high-priced markets, that figure is well below what most other lenders could offer. “Here in Washington, D.C., it could cost $4,500 just to get the appraisal,” McIntyre says. “It really is a pretty big competitive advantage that Fannie Mae’s small loan program has.”