Comparing multifamily loan term sheets on total economics

Two multifamily term sheets can quote the same interest rate and provide materially different amounts of usable capital. They can also quote different rates while producing similar costs over the intended ownership period. The comparison needs a common transaction model, a common timeline, and a record of which provisions remain unconfirmed.

Begin with the borrower's decision. Is the financing intended to maximize acquisition funding, protect current distributions, support renovations, or preserve a sale in three years? Ranking proposals without identifying that objective produces precision about the wrong problem. A long-term holder and a near-term seller may reasonably prefer different structures for the same property.

Convert each proposal into a cash schedule

Use the same purchase price, existing debt payoff, closing date, operating forecast, capital budget, and sale date for every proposal. Record the initial advance separately from the legal commitment. Identify amounts held back for improvements or reserved for taxes, insurance, repairs, debt service, and hedges. A dollar of restricted cash cannot automatically replace a dollar of acquisition equity.

Official program sheets illustrate that reserves are part of the financing structure. Fannie Mae's conventional term sheet generally requires replacement, tax, and insurance escrows.^[1] Freddie Mac's fixed-rate sheet also addresses escrows and reserves.^[2] These product descriptions establish that such obligations can matter; the individual loan documents establish exact amounts, control, replenishment, and release.

Classify every closing use as an expense, a refundable deposit, restricted borrower cash, or debt principal. This avoids a common modeling error: treating escrow funding as an immediate permanent expense and then failing to return any remaining balance in the terminal cash flow. Whether an escrow ultimately returns, funds future costs, or supports lender recovery depends on the documents and events. Model the actual disposition rather than mechanically adding every closing payment to a fee percentage.

Next map recurring cash: interest, scheduled principal, reserve deposits, servicing charges if any, and hedging obligations. Show the outstanding balance monthly when improvements are funded over time. Applying interest to the entire commitment from day one can overstate expense on a delayed-draw facility; charging only the initial balance throughout the hold understates expense after advances. Ask how unused commitments are priced rather than assuming they are free.

Normalize the rate before comparing it

A quoted floating spread is incomplete without the benchmark, its observation convention, floor, reset frequency, and day count. SOFR Averages and forward-looking Term SOFR reflect different periods and reference sources; the ARRC's business-loan conventions explain these distinctions and are voluntary recommendations.^[3] An owner should therefore compare the actual contractual definitions, not just a label saying “SOFR.”

Day count also changes dollars. Freddie Mac's fixed-rate product sheet identifies Actual/360 as standard and a 30/360 option as available.^[2] For a hypothetical $60 million interest-only balance at a stated 6% rate, a 360-day calculation yields $3.6 million of interest for 360 accrued days. Actual/360 over 365 accrued days produces $3.65 million. That $50,000 difference does not establish which proposal is better; it establishes why annual cash expense should be calculated from the contract.

For a floating loan, run several rate paths. A level benchmark, a rising benchmark, and a falling benchmark answer different questions. Include the floor in a falling-rate case. Include a cap premium and the actual hedge payment mechanics in a rising-rate case. Fannie Mae's Structured ARM sheet includes a cap and replacement provisions; those requirements differ from simply assuming the coupon can never exceed today's rate.^[4]

Keep amortization separate from interest. Principal payments reduce cash distributions while also reducing the terminal payoff. Describing all scheduled debt service as “cost” can make an amortizing loan look artificially expensive if the analysis ignores its lower balance at sale. Present cash burden, financing expense, and equity proceeds as distinct outputs.

An illustrative three-year comparison

Assume a $100 million acquisition and $4 million of other planned closing uses before financing-specific charges. Compare two invented proposals over three years, with annual interest simplified to a flat rate times a constant interest-only balance. Neither proposal represents a current market quote.

Proposal A funds $65 million, charges a 1% origination fee, and requires a $2 million reserve. Its assumed rate is 6.25%. Proposal B funds $68 million, charges a 1.5% origination fee, and requires a $4 million reserve. Its assumed rate is 6%. For both, assume closing costs other than the modeled charges are already in the $104 million uses, reserves remain untouched and fully return at exit, and no hedge, day-count adjustment, tax, or other fee applies.

A's initial equity requirement is $104 million plus $650,000 plus $2 million less $65 million, or $41.65 million. B's is $104 million plus $1.02 million plus $4 million less $68 million, or $41.02 million. B offers $3 million more debt but reduces closing equity by only $630,000 under these assumptions.

A's annual interest is $4,062,500; B's is $4,080,000. Despite B's lower rate, its larger balance creates $17,500 more annual interest. Across three years, B's additional interest is $52,500. Its additional origination fee is $370,000, producing $422,500 of additional modeled expense before exit charges. B does preserve $630,000 more unrestricted equity at closing, and the sponsor may place real value on that liquidity. The model should show both facts rather than pretending one settles the decision.

Now assume A has a hypothetical $2 million contractual exit charge and B a $680,000 charge at the modeled sale date. Adding these changes the comparison: A's modeled fees, three-year interest, and exit charge total $14,837,500; B's total $13,940,000. B's advantage becomes $897,500. These are assumed dollar charges for teaching the comparison, not estimates of actual yield maintenance or defeasance. A real analysis must use the proposed formula and projected exit conditions.

Read the exit language early

An early payoff can involve a lockout, a percentage premium, yield maintenance, defeasance, a hedge termination amount, or combinations established by the documents. Freddie Mac's floating-rate product sheet offers different prepayment schedules.^[5] Its fixed-rate sheet describes securitization-dependent terms.^[2] Do not assume the word “agency” defines a single payoff cost.

Request illustrations for the intended sale date, a sale one year earlier, and a refinancing after the plan slips. Include partial repayments and ownership changes if the strategy could use them. An assumed open prepayment period matters only if the intended repayment qualifies and occurs within it. A sale forecast can move; the premium schedule will still govern the actual date.

For a swapped floating-rate loan, include the separate derivative. Chatham Financial's swap documentation training discusses potential termination payments and loan-linked termination events.^[6] Obtain a transaction-specific explanation of the hedge's payoff and collateral terms. Do not insert a zero into the model merely because the mortgage permits prepayment.

Give uncertainty its own column

Alongside each modeled amount, label it confirmed, indicative, assumed, or unresolved. Mark loan proceeds that depend on appraisal, lender cash-flow adjustments, credit approval, or remaining reports. Mark any flexibility described verbally but absent from the proposal. A lower expected financing cost cannot compensate mathematically for an unknown obligation until the obligation is specified.

Create a short issues list for each finalist: usable proceeds, rate conventions, downside cash requirements, repayment rights, consent conditions, and remaining approvals. Ask lenders to resolve the items that could change ranking before spending heavily on an exclusive execution. The best comparison ends with a decision and a documented reason, supported by the same assumptions for every loan.