# How to Secure a Supplemental Multifamily Loan

A supplemental loan is a type of loan that is subordinate to the senior indebtedness and is secured at least 12 months after the origination of the first agency loan or the most recent supplemental. In other words, a supplemental loan is additional funding that is available 12 months after closing on an apartment deal.

A supplemental loan is not the same as a refinance. The supplemental loan is a second loan secured in addition to your existing loan while a refinance is the process of replacing your existing loan with an entirely new loan.

The benefits of securing a supplemental loan compared to a refinance are the lower cost, certainty of execution, faster processing time, and ability to obtain multiple supplemental loans each year.

In apartment syndication, the supplemental loan is typically utilized to return a portion of the limited partners’ initial equity investment without refinancing into a new loan or selling the property.

A supplemental loan must be secured from the same debt provider as the original loan. If the original loan was provided by Fannie Mae, the supplemental loan must come from Fannie Mae, and the same applies to Freddie Mac.

## Supplemental Loan Terms

Here is an overview of the general terms for the Fannie Mae and Freddie Mac supplemental loans:

Fannie Mae | Freddie Mac | |

Loan term | 5-30 years | 5-30 years |

Loan size | Minimum $750,000 | Minimum $1 million |

Amortization | Up to 30 years | Up to 30 years |

Interest rate | 100 to 125 bps above standard pricing | 100 to 125 bps above standard pricing |

LTV | Up to 75% | Up to 80% |

DSCR | Minimum 1.30 (1st and supp. combined) | Minimum 1.25 (1st and supp. combined) |

Recourse | Non-recourse w/ standard carveouts | Non-recourse w/ standard carveouts |

Timing | 45 to 60 days from application | 45 to 60 days from application |

Costs | -$10,000 application fee -1% of loan amount origination fee -$8,000 to $12,000 legal fees | -$15,000 lender application fee -Greater of $2,000 or 0.1% of loan amount Freddie Mac application fee -1% of loan amount origination fee -$8,000 to $12,000 legal fees |

## How to Secure a Supplemental Loan?

If securing a supplemental loan is a part of the terms on your initial loan, you can request one any time after your original loan has been seasoned for 12 months.

Reach out to the mortgage broker or the lender who provided the original loan and ask them what they need in order to size out a supplemental loan. Typically, they will request:

- A trailing 12-month (T-12) operating statement
- The year-end operating statement for the most recent full year
- A current rent roll
- A list of the capital expenditures invested into the property since acquisition.

Then, they will perform an appraisal and a physical needs assessment (which is essentially a property conditional assessment) in order to determine the size of the supplemental loan.

You also want to ask your mortgage broker or lender how many supplemental loans are permitted, because you may be able to get more than one (as long as you wait 12 months between loans).

## Example Supplemental Loan

If you plan on securing a supplemental loan for an apartment deal, you must include that assumption in your initial underwriting. Once the loan is secured, your debt service will increase, which will reduce the overall cash flow.

To estimate the maximum supplemental loan and debt service, you need to know the following:

- Supplemental loan year
- Projected net operating income at supplemental
- Projected capitalization rate at supplemental
- Balance of first loan (plus other supplementals) at supplemental
- Supplemental loan length
- Supplemental loan amortization schedule
- Supplemental interest rate
- Supplemental max loan-to-value (LTV)
- Closing costs

For example, the initial Fannie Mae loan amount is $22,000,000 with three years of interest-only payments at 4.94%. The plan is to take out a supplemental loan at the end of year two, so the loan balance remains at $22,000,000 (since only the interest was paid for the first three years). After inputting all of the underwriting assumptions, the projected net operating income at the end of year two is $1,828,101. The in-place capitalization rate (i.e. the rate based on the purchase price and net operating income at purchase) is 5.5%. To be conservative, we assume a cap rate of 5.75% at year 2. The property with a net operating income of $1,828,101 and a capitalization rate of 6% is valued at $31,793,061.

Since the initial loan was secured from Fannie Mae loan, the maximum LTV is 75%. In other words, Fannie Mae will fund a maximum of 75% of the property value, which, for our example, is $23,844,796 at the end of year two. Since the loan balance on the initial loan is $22,000,000 and assuming $220,000 in closing costs, the **maximum supplemental loan available is $1,624,796**.

To determine the additional debt service from the supplemental loan, you need to know the expected loan terms. Based on the Fannie Mae supplemental loan terms, we can expect a 30-year amortized, 5-year loan at 5.04% interest (4.94% + 100 bps). Apply these loan terms to a $1,624,796 loan and the **annual debt service of $106,178**.

If the plan is to refinance the property, the process to calculate the new loan amount is similar to that of calculating the maximum supplemental loan. A smart underwriter will create two scenarios, one in which a supplemental loan is secured and one in which the property is refinanced, and compare the return projections and risk levels of each.

**Want to learn how to build an apartment syndication empire? Purchase the world’s first and only comprehensive book on the exact step-by-step process for completing your first apartment syndication: Best Ever Apartment Syndication Book**