How to Get Financing to Build New Apartment Buildings from the Ground Up

For real estate investors and developers looking to add multifamily assets to their portfolios, securing financing to build brand new apartments can be a challenging but rewarding endeavor. Constructing an apartment building from scratch allows you to customize the design, unit mix, amenities and more to your exact specifications. But it requires major capital to cover land acquisition, construction costs, and carrying costs before the building starts generating revenue

Obtaining a loan to build apartments takes some savvy navigation of both public and private lending options. In this comprehensive guide we’ll explore top financing sources for new multifamily construction projects loan terms to expect, and tips for securing the best rates and terms. Let’s get started!

Overview of Construction Loans for New Apartments

• Construction loans provide interim financing to build new multifamily properties
• Offered by banks, agencies like Fannie Mae, FHA, and specialized lenders
• Typically 75-85% loan-to-cost (LTC), up to $100M+ for large projects
• Floating rates from 4-7%, interest-only payments during construction
• Takeout financing like permanent mortgages required at completion

Before diving into specific loan programs, it’s helpful to understand exactly what construction loans entail at a high level when financing new apartment projects

Construction loans provide short-term financing that covers all costs during the building phase – land, materials, labor, architecture and engineering fees, carrying costs, etc. Loans are sized based on a percentage of total project costs, called the loan-to-cost ratio or LTC.

Typical LTC ratios range from 75-85% for new multifamily construction. So if your total project budget is $10 million, you could qualify for a construction loan around $7.5-$8.5 million. You’ll need to cover the remaining costs out-of-pocket or via equity partners.

Interest rates on construction loans float with the markets, generally ranging from 4-7% today. You only make interest payments during the construction period, which keeps payments low during this cash-flow negative phase.

At completion, permanent financing (like a long-term mortgage) must be arranged to pay off the construction loan. This is known as takeout financing.

Now let’s explore top construction loan programs for building new apartments from the ground up.

Fannie Mae Multifamily Construction Loans

Fannie Mae offers flexible construction financing for market-rate and affordable apartments via their Delegated Underwriting and Servicing (DUS®) lenders. Here are some key features:

• Up to 80% LTC, 85% for affordable housing
• Maximum loan amount up to $200 million
• Floating rates starting around 4%, 40 year terms
• Only interest-only payments during construction
• No prepayment penalties

Fannie Mae programs are one of the most popular options for larger multifamily projects, given their non-recourse terms and ability to secure long-term permanent mortgages through them as well.

You’ll need to work with a DUS lender to access Fannie Mae construction financing. But it provides an excellent one-stop-shop for both building new apartments and securing long-term financing without refinancing.

FHA 221(d)(4) Apartment Construction Loans

FHA’s 221(d)(4) loan is a top choice for affordable housing projects. Benefits include:

• Up to 85% LTC for market-rate, 90% for affordable
• Up to 40 year fully amortizing terms, non-recourse
• Low fixed interest rates around 4%
• Only available for properties with 5+ units
• Can be used for new construction or substantial rehabilitation

The 221(d)(4) is part of HUD’s Multifamily Accelerated Processing (MAP) program, which offers streamlined processing for qualified borrowers. MAP lenders underwrite these loans.

Qualifying for 221(d)(4) construction financing takes strong financials and development experience. But in return you get excellent long term permanent financing options to stabilize the property after construction.

Local & Regional Bank Construction Loans

Your local community bank or regional bank may offer construction loans for new apartment projects, typically on a shorter 3-5 year term.

Advantages of local bank financing include:

• More flexibility on borrower requirements than agency loans
• May accept lower DSCRs (debt service coverage ratio)
• Ability to extend/refinance term if needed
• Quicker closing timelines

Loan amounts are lower, usually up to $10 million. Rates are slightly higher than agency loans but may haveRelationship-based lending can help secure approvals and better terms.

The right multifamily construction loan can be secured through local/regional banks on a case by case basis.

Private/Hard Money Construction Loans

For borrowers who don’t meet agency or bank lending criteria, private capital construction loans are an alternative.

• Offered by private lenders, hedge funds, REITs
• Up to 90% LTC ratios, interest rates from 7-12%+
• Much quicker approvals than banks
• Higher costs but flexible qualifying

These loans carry higher rates and fees, and often require payoff from refinancing or sale within 2 years. But they can fund projects more quickly for those with experience but perhaps recent credit or financial difficulties.

Tips for Securing the Best Apartment Construction Financing

• Seek loans early – identify potential lenders 12+ months before target construction start
• Get prequalified – this signals readiness to lenders and can speed up approvals
• Know your numbers – detailed construction budget and operating projections are musts
• Highlight experience – lenders want to see successful project track records
• Have takeout financing plan – identify options to payoff construction loan

Allow plenty of time for securing construction financing – ideally start the process at least a year before you want to break ground. Spend time upfront getting prequalified with multiple lenders and have detailed budgets, schedules, permits, etc. ready to go.

The stronger your existing portfolio and multifamily experience, the better terms you can get from lenders who want proven operators. Have contingencies ready for cost overruns or delays to show lenders you’re ready for potential hurdles.

And never break ground until both construction and permanent financing are secured! Takeout financing falling through is a huge risk.

Wrapping Up

Financing new apartment construction takes patience and coordination of both short-term construction loans and permanent financing. But with proper planning and preparation, your dream multifamily development can become a reality.

Fannie Mae, FHA, local banks, and private lenders all offer construction loan programs to suit different project sizes, borrower qualifications, and goals. Rates range from 4-12% generally, with agency and bank financing offering the best long term solutions.

Follow these tips to secure financing at the optimal terms for your project. Then you can start building your ideal income-producing apartments and watch your vision come to life!