CMBS and Agency Financing for REPE Acquisitions

Debt financing is half of every REPE deal — and the financing market determines how much leverage you can put on an asset, what it costs, and how flexible the terms are. CMBS (commercial mortgage-backed securities) and agency financing (Fannie Mae / Freddie Mac for multifamily) are the two largest sources of commercial real estate debt in the US. Understanding how they work, how they size loans, and when each is appropriate is essential REPE interview knowledge.

The commercial real estate debt landscape

| Lender Type | Typical Asset | LTV | Rate | Term | Best For | |------------|--------------|-----|------|------|----------| | Agency (Fannie/Freddie) | Multifamily (5+ units) | 65%–80% | Lowest | 5–30 years | Stabilized multifamily | | CMBS | All commercial types | 65%–75% | Low–moderate | 5–10 years | Stabilized, single-asset | | Bank (balance sheet) | All types | 60%–70% | Moderate | 3–7 years | Relationship lending, value-add | | Life company | Core assets | 55%–65% | Low | 10–15 years | Long-term hold, low leverage | | Debt fund / bridge | Transitional | 70%–80% | High | 1–3 years | Value-add, lease-up, construction | | Mezzanine | Gap financing | Adds 5%–15% LTV | Highest | Matches senior | Higher leverage needs |

In interviews, focus on agency (multifamily) and CMBS (general commercial) — the two most commonly referenced in REPE underwriting.

Agency financing (Fannie Mae / Freddie Mac)

Agency loans are available exclusively for multifamily properties with 5+ units. They're the cheapest, longest-term debt in the market because the agencies securitize loans with an implied government backing.

Key terms

LTV: 65%–80% (up to 80% for affordable/student/senior housing)
DSCR minimum: 1.20x–1.25x (can be lower with LTV adjustment)
Rate: Fixed, typically 5–10 year term with 25–30 year amortization
Prepayment: Yield maintenance or defeasance (expensive to exit early)
Recourse: Non-recourse with standard "bad boy" carve-outs
Assumability: Most agency loans are assumable (major exit advantage)

How agencies size loans

Agencies use the same constraints as any lender — take the minimum of:

Max Loan (LTV) = Max LTV × Value (or purchase price)
Max Loan (DSCR) = NOI ÷ (Min DSCR × Debt Constant)
Max Loan (Debt Yield) = NOI ÷ Min Debt Yield
Loan Amount = MIN(all three)

Agency programs have specific requirements:

• Property must be stabilized (95%+ occupancy for conventional)
• Minimum DSCR varies by program (1.20x for 80% LTV; 1.25x for 75% LTV)
• Replacement reserves required ($250–$350/unit/year)
• Property condition standards (no deferred maintenance)

Why agencies matter in REPE

Agency debt is the cheapest long-term financing for multifamily. A REPE sponsor buying a stabilized apartment complex will almost always seek agency financing because:

• Lowest rates available (spread over Treasuries is tight)
• Long amortization (25–30 years) minimizes debt service
• Assumability adds value at exit (buyer can assume the loan)
• Non-recourse protects equity from property-level losses

CMBS financing

CMBS loans are securitized — the lender originates the loan, then pools it with others and sells bonds backed by the pool. Available for all commercial property types (office, retail, industrial, hotel, multifamily).

Key terms

LTV: 65%–75% (max varies by asset class and market)
DSCR minimum: 1.25x–1.30x
Rate: Fixed, 5–10 year term with 25–30 year amortization
Prepayment: Defeasance (replace collateral with Treasuries — expensive)
Recourse: Non-recourse with bad boy carve-outs
Assumability: Sometimes assumable (with assumption fee)
Special servicer: Takes over if loan defaults (different from bank workout)

CMBS vs. agency: when to use which

| Factor | Agency | CMBS | |--------|--------|------| | Asset type | Multifamily only | All commercial | | Rate | Lower | Slightly higher | | LTV max | Up to 80% | Up to 75% | | Flexibility | Less (strict guidelines) | Less (strict guidelines) | | Assumability | Standard | Varies | | Best for | Stabilized multifamily | Stabilized office, retail, industrial, hotel |

For multifamily: agency first, CMBS as backup. For other asset types: CMBS or bank.

Debt constants and sizing math

The debt constant converts a DSCR requirement into a maximum loan size:

Debt Constant = Annual Debt Service ÷ Loan Amount
             = Interest Rate + Principal Amortization Rate

Example: 5.5% rate, 30-year amort → debt constant ≈ 6.8%
If NOI = $1M and min DSCR = 1.25x:
  Max Loan = $1M ÷ (1.25 × 0.068) = $11.76M

Interviewers ask you to do this math verbally. Know the formula and be ready to estimate debt constants for common rate/amortization combinations:

| Rate | 25-yr Amort | 30-yr Amort | |------|------------|------------| | 5.0% | 7.1% | 6.5% | | 5.5% | 7.4% | 6.8% | | 6.0% | 7.7% | 7.2% |

Bridge and construction financing

For value-add, lease-up, and development deals, permanent financing (agency/CMBS) isn't available until stabilization:

Bridge Loan:
  LTV/LTC: 70%–80%
  Rate: Floating (SOFR + 300–500 bps)
  Term: 1–3 years with extensions
  Interest-only during hold
  Prepayment: Minimal penalty

Construction Loan:
  LTC: 55%–70%
  Rate: Floating
  Term: 24–36 months
  Draw schedule (funded as costs incurred)
  Converts to permanent at stabilization (takeout)

The refi from bridge to permanent is a major return driver in value-add deals. Model it explicitly:

• Pay off bridge loan at stabilization
• Replace with permanent agency/CMBS at lower rate and potentially higher LTV
• Return equity to investors from refi proceeds

Prepayment and exit considerations

Agency and CMBS loans have expensive prepayment mechanisms:

Yield maintenance: penalty based on the difference between the loan rate and current Treasury rates. Can be very expensive if rates have fallen since origination.

Defeasance: replace the loan collateral with a portfolio of Treasury securities that replicate the remaining payments. Costs $50K–$200K+ in fees plus securities purchase.

Assumption: buyer takes over the existing loan (common with agency). The loan rate may be above or below market — above-market assumable loans can reduce the property's attractiveness to buyers.

Model prepayment/defeasance cost at exit if the loan won't be assumed. It reduces net sale proceeds.

Common interview questions

"How would you finance a stabilized multifamily acquisition?" Agency (Fannie/Freddie) first — lowest rate, longest amort, assumable. Size at 65%–75% LTV with 1.25x DSCR minimum. CMBS as backup if agency unavailable.

"What's the difference between CMBS and agency?" Agency is multifamily-only, government-backed securitization, lowest rates. CMBS covers all commercial types, securitized by private markets, slightly higher rates. Both are non-recourse with strict underwriting.

"What is a debt constant?" Annual debt service divided by loan amount — converts DSCR requirement into max loan size. Combines interest rate and amortization into one number.

"When would you use a bridge loan?" Value-add, lease-up, or transitional assets that don't qualify for permanent financing. Higher rate, shorter term, interest-only. Refi to permanent at stabilization.

"What is defeasance?" CMBS/agency prepayment mechanism — replace loan collateral with Treasuries to replicate remaining payments. Expensive but allows clean sale without paying off the loan.

The takeaway

Debt financing determines leverage, cost, and exit flexibility — three things that directly drive equity returns. REPE interviewers expect you to know agency vs. CMBS vs. bridge, size debt using LTV/DSCR/debt yield constraints, and model the refi from bridge to permanent on value-add deals. Get the financing section right and the returns build follows naturally.