Multifamily Loans: The Five-Unit Minimum and the Full-Kitchen Rule

A building qualifies as multifamily on our Small Balance Commercial program when it has five or more residential units and — since a change effective 07/10/2026 — every one of those units has a full and legal kitchen. Four units is not a smaller multifamily deal; it is a different program. And a room sharing a kitchen down the hall is not a unit at all, whatever the rent roll calls it.

A borrower buys a "7-unit" building, orders the appraisal, and finds out at underwriting that the appraiser counted five kitchens. The two "units" on the third floor are bedrooms sharing a kitchenette. The file is a 5-unit deal at best, and the rent those rooms were carrying does not exist for our purposes.

This page explains what counts as a unit, what the July 2026 change actually did — it loosened one thing and tightened another — and where the line sits between a true multifamily building and a rooming house, which is on the ineligible property type list.

The two thresholds, stated plainly

The eligible property type list is explicit:

Appendix A, which exists to define the property types the parameters list, says it a second way:

> Multi-Family structures contain five or more dwelling units that must have full kitchens with common areas and facilities such as entrances, a lobby, elevators, stairs, a mechanical space, walks and/or grounds.

Two things are worth pulling out of the Appendix A sentence before we move on.

First, the wording differs from the Program Parameters wording. Appendix A says "full kitchens." Program Parameters says "full and legal kitchens." The word "legal" is the newer of the two — it arrived in the 07/10/2026 change, where the Appendix A kitchen language dates to 03/06/2025. Where two passages in the same document disagree, the newer and stricter one is the one to plan around: assume the kitchen has to be both complete and legal, not merely present.

Second, that sentence lists common areas and facilities — entrances, a lobby, elevators, stairs, mechanical space, walks, grounds. Read that as description, not a checklist you satisfy item by item; no building has all of them. It is not a requirement that your five-unit walk-up have a lobby and an elevator. It is what a multifamily structure looks like: individually kitchened dwelling units sharing building infrastructure.

What changed on 07/10/2026

The change log carries the answer in one line. Quoted exactly:

> Removed minimum sq ft and added all units must have full and legal kitchens*

That single entry does two opposite things at once, and most people only hear about one of them.

The removal is a genuine loosening. The prior rule came in on 03/06/2025 and read, in the change log:

> Added a min 400 sq ft for residential units

That minimum is gone. There is no residential unit square footage floor in the current guideline — grep the 8/3/2026 document and the only surviving mentions of the 400 square foot rule are in the change log entries that added and then removed it. Appendix A reinforces the direction of travel on the value side too: "There is no minimum value on a per unit basis for the multi-family buildings, but there must be a minimum of 5 total units."

So a building of small studios is no longer disqualified by unit size, and a building of low-value units is not disqualified by per-unit value. Both used to knock out urban infill and older stock with pre-war layouts.

The addition is the tightening. Every unit must have a full and legal kitchen. What used to be measured with a tape measure is now decided by whether there is a kitchen in the unit and whether it is legal.

Why the kitchen decides what a unit is

Five is a count. Kitchens are what you count.

Before July 2026, a room could arguably be a unit if it was over 400 square feet and rented separately. Now the test is structural: a dwelling unit is a space someone lives in independently, and the marker of independence in this guideline is the kitchen. Not bathrooms. Not separate entrances. Not separate metering.

That inverts how a lot of rent rolls are built. Owners of converted properties count doors, or they count leases. Underwriting counts kitchens. When those two numbers differ, the lower one is the unit count you are financing against.

The practical consequences run in a specific order:

1. The unit count is recalculated from the appraisal, not from the rent roll you supplied.

2. If the recalculated count is below five, the property is not multifamily on this program. Properties of 1 to 4 units are directed to our separate 1-4 unit guidelines, which is a different product with different terms — not a version of this one.

3. Income attached to non-units drops out. Where a portion of the structure is illegal or unpermitted, the guideline is direct: "Illegal, or unpermitted units should not be included as revenue or in value and we cannot proceed unless the illegal portion of the structure is removed or permitted." That is a hard stop, not a haircut. We have a separate page on how unpermitted space is handled in valuation.

4. The value falls with the income. A price built on nine rents does not survive a valuation built on five.

Multifamily versus rooming house

"Single Rooming House (SRO)" appears on the ineligible property types list. It is not a tier, not a case-by-case, not a pricing adjustment. It is ineligible.

The reason the distinction gets blurry is that a rooming house and a small multifamily building can look identical from the street and can generate similar gross rent. The guideline separates them on three axes, and a property has to clear all three.

Kitchens. The rooming house model is rooms with a shared kitchen. That produces zero qualifying units, however many rooms it has. This is the axis the July 2026 change sharpened.

Tenancy duration and intent. Appendix A requires that "Units must be rented on a non-transient basis such that tenants shall consider their unit to be their permanent residence," and states that properties offering weekly or monthly housing are an ineligible property type. Weekly housing is the classic rooming house rent cycle. Note that the guideline names monthly housing here as well — the point is housing offered on a short, rolling, transient basis rather than a residence, and it is worth being careful about how the offering is described in marketing and in leases.

What the lease is written against. The student housing entry on the ineligible list is the clearest statement of this axis: "Traditional Student Housing (may be eligible in some cases as Multi-Family; rent must be per unit rather than per bed, leases must be annual)." Per-bed rent is rooming house economics. Per-unit annual leases are multifamily economics. Same building, different paperwork, different answer.

Two adjacent entries on the ineligible list reinforce where the edges are. "Assisted Living" is ineligible. "Hospitality (Flagged/Unflagged/Bed & Breakfast)" is ineligible. A building drifting toward short stays and shared facilities is drifting toward those categories, not toward Tier I.

Short-term rental units are deemed vacant

This one matters more than its single sentence suggests. Appendix A, under both Multi-Family and Mixed-Use:

Deemed vacant does two things. It removes the income from the analysis, and it counts against occupancy. And occupancy has a threshold with teeth.

Every program column in the parameters carries a 75% minimum occupancy and a stabilization requirement: "The subject property needs to meet the 75% stabilization requirement for the proceeding 90 days prior to application." The glossary states it the same way — at application, the property must have maintained at least 75% occupancy for the preceding 90 days.

Run the arithmetic on a small building. The following is an illustration using invented unit counts, not a guideline example.

In a fully leased five-unit building, one unit running on a short-term platform puts you at 80% — still above the line. A second one puts you at 60%, and the file is not stabilized. On the smallest eligible multifamily building, the short-term rental tolerance is exactly one unit. That is not a rule stated anywhere in the guideline; it is what the stated rules produce when the building only has five units to work with.

Two related points. The stabilization test looks backward 90 days from application, so converting a short-term unit to an annual lease the week you apply does not repair the trailing period. The guideline does allow that once the 75% test is met, "new leases commencing after the application date are not required to be stabilized for 90-days," and it provides a renovation exception where a detailed capex schedule confirmed by the appraisal shows work in the last 30 to 60 days. Neither rescues a building that ran short-term through the look-back.

And the guideline does not define the threshold at which a unit is "utilized for Airbnb purposes" — how many nights, what share of the year, whether a listing that took no bookings counts. It is silent. Bring the facts and let underwriting rule.

What counts, and what does not

That last row is a small mercy people miss. The glossary defines Overhead Units as "Typically non-revenue producing units within a multifamily project such as management occupied units, employee occupied units or model units," and says such units "are not counted in the overall property vacancy rate and are considered to be occupied." A superintendent's apartment does not drag occupancy down the way a short-term rental unit does.

The five-unit line has consequences beyond eligibility

Hitting five units gets you into Tier I. It also switches on rules that apply only to Tier I multifamily and to small-unit-count properties.

Self-management radius. For commercial property, a self-managing borrower must live within 200 miles. For Tier I multifamily and Tier I mixed-use, the guideline cuts that to 50 miles, plus the minimum investor experience. There is an override: we may allow self-management regardless of property type or location where the borrower verifies five-plus years of ownership or investor experience with property of like kind, size and geographic area.

Who the borrower can be. Loans are made to for-profit legal entities wholly owned by US citizens or permanent resident aliens. The guideline separately prohibits loans to individuals in New Jersey where the property is Mixed-Use or Multi-Family of six units or fewer, in New York generally, and elsewhere for individuals with fewer than five residential properties.

Whether you can live there. The guideline states that we will not lend to an individual or entity where the borrower or guarantor resides in the residential component of a Multi-Family or Mixed-Use property of six units or fewer in New York and New Jersey, or of a Multi-Family or five-unit-or-fewer Mixed-Use property in all other states. The sentence is compressed and its treatment of multifamily outside NY and NJ is not cleanly bounded by a unit count on its face. If you intend to occupy a unit in the building you are financing, raise it at application rather than at closing.

Zoning is a separate gate

Passing both unit tests does not clear zoning. The guideline requires that "The subject property must be commercially zoned (e.g., retail, office, multi-family, or industrial). Properties zoned residential or agricultural are prohibited." Legal and legal non-conforming uses are acceptable; illegal uses are not. Where an area has no zoning, compliance is met if the appraiser states the property is compatible with the market area. We will not lend on a property subject to a zoning change.

Whether a specific kitchen is legal in your jurisdiction, and whether a conversion was properly permitted, are questions for your building department and your attorney. We can tell you what the program requires, not what your city will certify.

Where the mixed-use line sits

If the building has a commercial component, the unit count is not the only thing being measured — the split between residential and commercial rental income determines the tier. That calculation and its edge cases are covered separately in our page on [how the mixed-use tier is set by the rental income split](/blog/mixed-use-loan-tier-based-on-rental-income-split). The kitchen requirement follows you there: mixed-use residential units must have full and legal kitchens too.

What this page does not do

This page is not an approval, a quote, a rate, or a commitment. It explains two eligibility thresholds in our Small Balance Commercial program guidelines effective 8/3/2026 and the July 2026 change that reshaped them.

It does not set your LTV. Maximum allowable LTVs by property type, tier and credit program live in the current pricing matrix, not in the guideline text this page draws on, so no LTV figure is quoted here.

It does not price your loan, or address DSCR calculation, cash flow analysis, FICO tiers, reserves, or documentation programs.

It does not cover the 1-4 unit product. A property that lands below five qualifying units is governed by separate guidelines, and nothing here carries over to them.

It does not tell you whether a kitchen is legal, whether a conversion was permitted, or how your municipality classifies your property. Those go to your building department and your attorney; tax and entity structuring go to your accountant.

It does not define how much short-term rental activity makes a unit "utilized for Airbnb purposes." The guideline is silent on that threshold and this page does not invent one.

Finally, it does not settle contiguity, bulk condominium eligibility, or unusual parcel configurations. Those are judgment calls reserved to review.

Guideline SBC 08/03/2026 · Reviewed August 31, 2026

Published August 31, 2026 · Updated August 31, 2026