Real Estate Lender · Jacksonville, FL · Member since 2015 · 86 posts · 51 votes
As a mortgage banker, I often get asked about the Freddie Mac Small Balance Loan Program for Multifamily Properties. Its a great program so here is an overview for people that are interested in learning more.
Freddie Mac likes to see some sponsorship experience in Multifamily as well as strong financial strength.
Prepayment Options: Standard Step Down or Yield Maintenance
A few things to note:
The sponsorship must have a minimum of 9 Months of Debt Service of liquidity and a net worth of at least the loan amount. Also, there are credit score requirements for the principals.
For an appraisal on a refi, they'll generally lean into the historical operations as their primary data points with support from comps on the income and expense side.
On an acquisition, they might lean a little bit more into a borrower budget if the operator has experience in the market, but they'll still look to comps for support. In a more rural area, they'll have fewer data points and, thus, less latitude to deviate.
In general, appraisers will get a little more aggressive in higher tier markets and for experienced operators.
Commercial Loan Officer · Southern Maine, ME · Member since 2009 · 782 posts · 415 votes
10y
One of my favorite programs. One of the nicest things about this program for a borrower is the fact the lender pays for all 3rd party reports which keeps the closing costs, and engagement fee, very low. Not to mention no lender origination fee and a streamlined loan process.
Thanks, good stuff. Few questions (1) amortization period (2) current rate for excellent credit (3) assumable and (4) can you provide specifics on the prepayment penalty?
What's the best way to bridge financing from the rehab period to this permanent financing (traditional...no private or hard money) and is their a stabilization period required for the raised rents?
Real Estate Lender · Jacksonville, FL · Member since 2015 · 86 posts · 51 votes
10y
Mike:
Yes it's an assumable loan an amortization is 30 years. There are several different products to choose from i.e. Fixed rate 5/30 7/30 10/30 or hybrids. Also full term I/O is available.
It's not a credit driven product for rates. Rates are set by Freddie, but their are things that can lower rate such as DSCR, Prepayment, Leverage.
Prepayment can be a standard step down (i.e. 54321 on a 5 year deal) soft step down ( 32111 on a 5 year deal) or YIeld Maintenance. There are pricing adjustments depending on the prepay option.
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
10y
@Brent Shryock Thanks, I am working through a potential transaction and this helps. Any thoughts on the best way to bridge from the rehab period to this permanent financing or is that a question you would recommend for bank financing (under $5M)?
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
10y
@Eric Schleif Thanks, I spoke with one yesterday...have not caught up with my bank yet...doing some due diligence first. You are confirming my understanding that it's a bank bridge, no agency bridge.
I'm curious to understand how the bankers feel if their client makes a habit of using them for the bridge and then using agency debt for the permanent financing. Feel free to provide feedback if you are familiar with that. I will also discuss it with the banks. There may be a trade off in keeping some bank debt to solidify that relationship.
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
10y
@Lawrence L. An agency loan example was identified in the OP...through FHLMC rather than through a bank. Agency loans have very favorable terms that are not feasible for banks to compete with...non-recourse, 30 year amortization, very low rates, assumable, etc...the product has varying terms.
A bridge loan would be used for a value add project to provide interest only terms through the value add period and then it converts to a permanent amortizing loan once that term is up and the property is at it's full value with rents raised and property stabilized...cash-out at that point can be feasible, lender permitting, for example if the funds are reinvested. The alternative is a traditional amortizing bank loan with a prepayment penalty, which is not as flexible or the best fit while the owner is spending money rehabbing the property, raising rents and raising the property value and who may want to tap into that equity at the stabilization period to use for the next project (and replenish rehab out of pocket costs).
The lenders can shoot holes in my attempt to explain a product that I am learning about...hopefully, I did not miss to bad.
Real Estate Lender · Jacksonville, FL · Member since 2015 · 86 posts · 51 votes
10y
@Mike Dymski I just got a quote for a client from a private portfolio source that was describing similar to what you are trying to accomplish. It was an acquisition loan on an asset that had high value add component with rehab.
Lender was willing to finance 80% LTC for a term of 3 years. It was an I/O product with 1% prepayment penalty and a lock out of 18-24 Months. Terms were in the 5.75-6.50 Range.
One of the things that lenders will need to see in any bridge type loan is success and track record of creating the new value in the asset. As you mentioned, the goal is to get a perm debt in place on the new NOI numbers.
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
10y
@Brent Shryock Thanks, banks in my area offer the product as well. We will see their appetite for me and this project. I will report back. Once again, thanks a bunch for your feedback and OP.
Commercial Mortgage Underwriter / Broker · New York City, NY · Member since 2016 · 193 posts · 75 votes
10y
@Mike Dymski Agency loans are great in many markets, but I wouldn't say in all markets. Bank loans routinely offer more competitive rates and terms in the larger markets like NYC metro, parts of CA, etc. There are also some regional banks that offering aggressive terms in secondary markets that are beating the agency quotes. When I was talking about a bridge to agency it would be through the same lender that is offering the Freddie/Fannie/HUD perm. They'll offer very attractive bridge rates, with one caveat...They'll have a large exit fee of something along the lines of 3 points that is waived only if use them for the perm takeout to agency. That way the lender won't get burned.
@Lawrence L. I'm assuming your questions regarding bridge and agency loans has been answered.
Who is the "same lender that is offering the agency perm"... a bank? So, I can get a bridge and agency loan through the bank? I was assuming an agency loan would come through a commercial mortgage broker. This is really helpful. I can get this all from my lenders but would prefer to walk into those conversations with some foundational knowledge.
Commercial Mortgage Underwriter / Broker · New York City, NY · Member since 2016 · 193 posts · 75 votes
10y
@Mike Dymski I can't see a local bank offering you a bridge to agency perm, but I am not an expert in your local market and it can't hurt to ask. Yes, a commercial mortgage broker would be able at assess if you can get a agency lender to offer a bridge to perm and open that door. But like I said in my original post, it depends heavily on the deal and the borrower. Smaller deals are harder to get lenders interested in offering a bridge to agency. Most of the lenders really don't make much money on the bridge deal in this scenario as they are using it as a tool to drive agency production.
Investor · Greenville, SC · Member since 2016 · 5k+ posts · 13k+ votes
10y
@Eric Schleif Thanks for the clarity. My commercial mortgage broker previously told me $5M and up for his non-bank sources to get them interested in bridge financing.
Commercial Mortgage Underwriter / Broker · New York City, NY · Member since 2016 · 193 posts · 75 votes
10y
@Mike Dymski Yeah you get better pricing on loans +$5MM. There are enough bridge guys out there lending less than that but at higher rates. I'm guessing your deal is in like the $1MM to $2MM range.
Commercial Mortgage Underwriter / Broker · New York City, NY · Member since 2016 · 193 posts · 75 votes
10y
@Mike Dymski Are you buying individual condos/coops in a building/complex? I am fairly certain the Freddie SBL program won't finance that type of asset.
Commercial Loan Officer · Southern Maine, ME · Member since 2009 · 782 posts · 415 votes
10y
Freddie SBL only finances stabilized properties. I've gotten some done with some minor CAPEX needed, but they required the work be completed inside of 90 days and the borrower funded the CAPEX each case. They won't finance a property that needs major work as it's a very vanilla loan program.
That being said, there are bridge lenders out there for properties less than 5MM the lower the loan amount the harder it is to secure interest. Personally, unless the property is in a large MSA I draw the line at 2MM. I know some banks now offer a bridge to perm loan structure, but they're unique to each market so I can't speak to the generalities of how what they offer.