The Path to Funding Your Apartment Building Development

A new apartment building is usually paid for with two kinds of money: a construction loan that covers most of the cost while the building goes up, and equity from the developer and its partners that covers the rest. Once the building is finished and rented, the construction loan is repaid with a long-term mortgage, often called the take-out loan.

This guide is for developers and investors planning purpose-built rental housing. It explains how the capital stack fits together, which government-backed programs matter most in Canada and the U.S., and what lenders and investors ask to see. It is general information, not financial or legal advice.

How the capital stack fits together

Every development budget has to be fully funded before construction starts. Lenders want to see where each dollar comes from, and in what order each source is repaid if something goes wrong.

The usual layers of funding for a rental apartment development

Layer	Who provides it	Repaid	Typical role
Senior construction loan	Bank, credit union, insurer, or a government program such as CMHC or HUD	First	The largest share of cost, advanced in monthly draws as work is completed
Mezzanine debt or preferred equity	Private lenders and funds	After senior debt	Fills a gap between the senior loan and common equity, at a higher cost
Common equity	Developer, joint-venture partners, private investors	Last	Takes the first loss and receives the profit after everyone else is paid
Grants, rebates and incentives	Federal, provincial, state or municipal governments	Not repaid, if the conditions are met	Lowers the cost that has to be financed

Construction lenders generally lend against cost, not finished value. In the U.S., the federal banking agencies’ real estate lending guidelines set a supervisory loan-to-value limit of 80% for commercial and multifamily construction loans made by banks, and 65% for raw land.[5] Banks may set lower internal limits, and Canadian lenders set their own. The developer’s equity has to cover whatever the loan does not.

Canada: CMHC programs

For purpose-built rental housing, Canada Mortgage and Housing Corporation (CMHC) is the most important source of low-cost financing. Two programs do most of the work.

Apartment Construction Loan Program

The Apartment Construction Loan Program (formerly the Rental Construction Financing Initiative) lends directly to developers. CMHC describes it as low-cost funding during “the riskiest phase of development: construction through to stabilized operations.”[1] For standard rental housing, CMHC lists these terms:[2]

• a fixed interest rate locked in at the first advance;
• up to 100% loan-to-cost for residential space and up to 75% for non-residential space, depending on the strength of the application;
• up to a 50-year amortization;
• interest financed by the loan during construction, interest-only payments from occupancy until 12 consecutive months of stabilized income, then principal and interest;
• CMHC mortgage loan insurance built in, with the premium not paid by the borrower.

Projects need at least 5 rental units and a loan of at least $1 million, and non-residential space may not exceed 30% of floor area or cost. At least 20% of units must rent at or below 30% of the median total income of families in the market for at least 10 years, or rents must be set under an approved affordable housing program. At the end of the term, the borrower must arrange take-out financing with a CMHC-approved lender.[2]

MLI Select mortgage insurance

MLI Select is CMHC mortgage loan insurance for multi-unit buildings. The insurance lets an approved lender offer better terms; the stronger your commitments on affordability, energy efficiency and accessibility, the more flexibility you get.[3]

MLI Select for new construction: what each points level allows

Points	Loan-to-cost	Minimum DCR	Amortization	Recourse
50	Up to 95%	1.10 (standard rental)	Up to 40 years	Recourse
70	Up to 95%	1.10 (standard rental)	Up to 45 years	Recourse
100	Up to 95%	1.10 (standard rental)	Up to 50 years	Limited recourse

For new construction, 50 points can come from affordability alone if 10% of units are rented at or below 30% of median renter income for 10 years; 15% of units earns 70 points and 25% earns 100. Points for energy performance and accessibility can be combined with affordability, and a 20-year affordability commitment adds 30 points. Projects need at least 5 units.[3]

Tax relief on new rentals

Canada rebates 100% of the GST, or the federal part of the HST, on qualifying purpose-built rental buildings that began construction after September 13, 2023 and before 2031 and are substantially completed before 2036. At least 90% of the units must be held for long-term rental.[4] Nova Scotia has approved a matching rebate of the provincial part of the HST on the same terms.[8] On a large project the rebate changes the equity requirement materially, so it belongs in the pro forma from day one. Our guide to government incentives for hotel and apartment financing covers more programs.

United States: HUD 221(d)(4) and the agencies

In the U.S., the closest equivalent is FHA mortgage insurance under Section 221(d)(4), which covers the new construction or substantial rehabilitation of multifamily rental housing.[6] One insured loan covers construction and the permanent period, so there is no separate take-out. It is slower to close than a bank loan, because HUD reviews the project before committing.

In January 2025, HUD raised the maximum leverage and lowered the debt coverage requirement for these loans:[7]

HUD Section 221(d)(4): maximum loan-to-cost and minimum debt service coverage

Project type	Max loan-to-cost	Min DSCR
90% or more of units with rental assistance	90%	1.11
Affordable (LIHTC with a rent advantage to market)	90%	1.11
Market rate	87%	1.15

Fannie Mae and Freddie Mac also finance apartment buildings, but their standard loans are for completed, stabilized properties. Fannie Mae’s conventional term sheet, for example, requires stabilized occupancy (typically 90%) for 90 days before funding.[9] For U.S. developers they are a take-out source, not a construction lender.

Raising the equity

No program removes the need for equity. Even a 95% CMHC-insured loan leaves 5% of cost to fund, plus any overruns and any costs the lender will not count. Equity usually comes from:

• the developer’s own capital, including land already owned;
• joint-venture partners, often a capital partner who supplies most of the cash in exchange for a preferred return and a share of profit (see joint ventures in hotel and apartment projects);
• private investors in a limited partnership. Selling units in a project is a securities offering in both Canada and the U.S., so it needs a prospectus exemption in Canada or a registration exemption in the U.S. Speak to a securities lawyer first.

Investors look at the same things a lender does, plus how and when they get their money back.

What lenders and investors expect to see

1. Site control and zoning

   Ownership of or an option on the land, and approved or clearly achievable zoning and permits.

2. A full budget

   Land, hard costs, soft costs, financing costs, contingency and lease-up reserves, priced by a cost consultant or contractor.

3. A market study

   Comparable rents, vacancy and absorption, from an independent source if possible.

4. A pro forma and stress test

   Net operating income, debt coverage at the lender’s test rate, and what happens if rents are lower or the lease-up is slower.

5. The team and track record

   Builder, architect, property manager and the developer’s completed projects.

6. An exit plan

   Who provides the take-out loan, or whether the building will be sold once stabilized.

Sources

1. Unlock opportunities with the Apartment Construction Loan Program — Canada Mortgage and Housing Corporation. Checked 2026-10-12.
2. Apartment Construction Loan Program: Standard Rental Housing — Canada Mortgage and Housing Corporation. Checked 2026-10-12.
3. MLI Select — Canada Mortgage and Housing Corporation. Checked 2026-10-12.
4. GST/HST purpose-built rental housing rebate (PBRH rebate) — Canada Revenue Agency. Checked 2026-10-12.
5. Interagency Guidelines for Real Estate Lending Policies (12 CFR Appendix C to Subpart K of Part 208) — Legal Information Institute, Cornell Law School (text of the U.S. regulation). Checked 2026-10-12.
6. Mortgage Insurance Rental and Cooperative Housing for Moderate Income Families and Elderly, Market Interest Rate (Section 221(d)(4)) — U.S. Office of Management and Budget, Federal Program Inventory. Checked 2026-10-12.
7. Mortgagee Letter 2025-03: Multifamily Changes in Debt Service Coverage Ratios and Loan to Value/Loan to Cost Ratios — U.S. Department of Housing and Urban Development, January 8, 2025. Checked 2026-10-12.
8. Notice: Purpose-built Rental Housing Rebate — Nova Scotia Department of Finance and Treasury Board, July 30, 2025. Checked 2026-10-12.
9. Multifamily Term Sheet: Conventional Properties — Fannie Mae, 2026. Checked 2026-10-12.