15M Freddie Loan Advice?

[Jonathan Bombaci]

We’re working to take down a $20M, 132 unit asset in Northern MA (between Boston and Nashua). This is my biggest loan to date and this came from a new lender relationship. Is there anything here that looks questionable? Has anyone done a Freddie loan like this before, any lessons learned?

[Brian Burke]

Thanks for the shoutout, @Jay Hinrichs!

@Jonathan Bombaci, Those terms look pretty typical.  My only question is "what is your business plan?"  If you plan to keep this property for 10 years, this is a great loan.  

But if your plan is to renovate the property and resell it in 3-5 years this loan might kill your plan.  The canary in the coal mine here is the "yield maintenance."  If you sell in 3 years your "prepayment penalty" (which is what yield maintenance is) would likely be between $3 million and $5 million for a loan of this size.  You read that right--on top of paying back the principal balance you'd have to pay millions in penalty for the early repayment.  Essentially, in the simplest terms, what you are doing here is guaranteeing that the bondholders of this loan will get their interest for the entire 10 year term, whether you pay it off early or not.

And no, you cannot negotiate this out.  The only way to avoid this is to switch to a floating rate loan.  By doing so, you are taking on the risk of interest rate movement, and eliminating the risk of having to pay yield maintenance one day.  It's up to you which risk is more tolerable.

What's most important is to make sure that your financing structure fits your business plan.  A mismatch can derail your whole investment thesis.