Harvest Real Estate Law

Assumable Multifamily Loans: What Investors Need to Know

By Brandt Hollander, Partner, and Lee Kaplan, Associate
(Editor’s Note: This article was originally published here by Multi-Housing News.)

For those grappling with high borrowing rates, this strategy presents an intriguing alternative, observe Brandt Hollander and Lee Kaplan of Harvest LLP.

With interest rates surging to historic highs and lenders pulling back on issuing new loans, it is no secret that deal volume is down significantly in the commercial real estate space. One option enterprising investors seeking opportunities in this difficult environment might consider is acquiring multifamily properties with assumable low-interest debt.

Loan agreements governing most types of commercial real estate loans generally do not permit the new purchaser of a property to assume the existing loan previously taken out by the seller of the property.  More specifically, commercial loan agreements typically provide that approval of such a requested assignment may be given or withheld by the lender in the lender's "sole and absolute discretion." However, many multifamily loans – particularly certain loans issued by Fannie Mae and Freddie Mac – and conduit or CMBS loans are "assumable."

This means that the loan agreements provide the lenders with more limited discretion to prohibit a requested assignment to a qualified buyer than is the case in a typical commercial loan. While the terms and conditions of various assignment provisions vary, the ability to assume existing, low-interest debt may make multifamily properties encumbered with existing, assumable loans a particularly attractive option for investors navigating today's high interest rates.

Yet, even with so called "assumable loans" where lender discretion to deny a requested assignment is limited, actually completing an assignment may still be no easy feat for potential purchasers. Assumption provisions in loan agreements vary in complexity and the discretion they afford lenders in approving or rejecting a requested assignment, but lenders can generally still underwrite potential assignees with an eye towards ensuring the new borrower has sufficient financial wherewithal to assume the obligations under the loan. As a result, despite what many buyers expect, there is no timing advantage to assuming an existing loan relative to obtaining a new one in many cases. 

It will be interesting to observe the attitude of lenders towards requested assignments in the coming months. Faced with portfolios of troubled loans, it is possible that lenders may come to view requested assignments more positively than they may otherwise in a rising interest rate environment. Particularly with well capitalized buyers, Lenders may view requests for assignment as an opportunity to upgrade project sponsorship – potentially with an associated influx of equity capital – and stabilize an otherwise risky loan. For lenders with overwhelmed workout departments, such a request could be a solution to one of many concurrent problems and a chance to focus their efforts on other non-performing loans in their portfolio. 

Potential Sticking Points

In addition to satisfying the lender's requirements, a buyer seeking to assume an existing loan may encounter certain sticking points with the seller. Buyers and sellers frequently wrangle over the scope of representations and warranties to be provided by sellers with respect to existing loans, which buyers rely on in evaluating the obligations they are stepping into. In addition to representations and warranties, many buyers request an indemnity from the seller against any obligations arising under the loan documents prior to the buyer's assumption. This is a request that many sellers, anxious to close their books and move on from the property, are reluctant to agree to. Another frequent point of contention relates to whether the successful assumption of the loan is a condition to closing. Buyers, sensitive to the difficulty of navigating the assumption process, frequently push for such a provision, which allows a buyer to walk away from the deal if the lender refuses to approve the assignment – but sellers, sensitive to the fact that the lender's approval is out of their hands, frequently push back. 

Given the various hurdles to a successful loan assumption, and the general decrease in sales activity in recent months, the prevalence of multifamily loan assumptions has been limited. However, brokers have begun to tout assumable low-interest debt as an asset to entice potential buyers, and significant recent transactions in Maryland and Illinois suggest that the practice may be poised to gain in popularity. Multifamily deals with assumable debt may emerge as a bright spot for investors in an otherwise difficult environment.

Brandt Hollander is a Partner in the Boston offices of Harvest LLP, a premier commercial real estate firm. Lee Kaplan is an Associate at Harvest LLP in its Los Angeles offices.