Maximum LTV: 

• 80% of the as-is value (supported by acquisition price, if a recent acquisition)

• Unfunded loan proceeds are periodically drawn to reimburse the sponsor for up to 80% of the renovation costs on a monthly or quarterly basis, as work is finished (just like construction financing)

• Appraisal needs to demonstrate 80% as improved LTV (with fully funded renovation proceeds)

Minimum DSCR:  

• 1.20x interest-only “as-is”

• As improved underwritten net operating income per appraisal must reflect at least a 1.30x amortizing DSCR (and will be subject to appraisal support)

Recourse: Non-recourse with standard “bad boy” carve-outs

Prepayment Options: 2% prepayment penalty during rehab period; standard Freddie Mac prepay structures available thereafter

Seller/Servicers: Must be approved by Freddie Mac for conventional loans

Eligible Borrowers: Borrowers should be well-funded and experienced in the successful completion of similar rehab projects. 

Eligible Properties: 

• Conventional properties planning between $25,000 and $60,000 in repairs/renovations per unit, with at least $7,500 per unit designated for interior work

• Property DSCR must not go below 1.0x during the rehab process

• Seniors housing, student housing, manufactured housing communities, mezzanine financing, and preferred equity with hard pay are not eligible

Rehab Timeline:  All rehabilitation work must be completed within 36 months. 

Periodic Draws: 

• Draws will be executed monthly or quarterly

• The first draw requires a certificate from the servicer provided to Freddie Mac to confirm that the request is consistent with the loan agreement.

• Future draws also require certification/independent confirmation by Freddie Mac

• 5% of draws are retained and will be released when all construction work is finished

Advantages

• Very competitive interest rates

• Up to 80% LTV for some properties

• Loans are interest-only during rehab

Disadvantages

• Requires additional documentation including Freddie Mac Disbursement Agreement, Disbursement Servicing Agreement, Operating Deficit Agreement & Completion Guaranty for 80% of the approved budget and all work initiated, construction scope, budget, and schedule

• Requires a Property Condition Report, which needs to provide an opinion on whether the construction plan can be completed within the set budget and schedule

• Monitoring is required, involving quarterly progress reports and inspections of rent rolls and operating statements

Case Study: An Austin Value-Add

In the vibrant city of Austin, Texas, an experienced real estate investor named Tom recognized a golden opportunity. Tom had a keen eye for potential, and he found it in an old multifamily property. Despite being appraised at $12 million, the property had seen better days and was significantly underperforming in the current market.

Tom was not daunted by the project; he saw the potential that the building held. After careful calculation, he estimated that an investment of approximately $35,000 per unit, or $3.5 million in total, would be needed to modernize the 100-unit building.

Understanding the financial challenge, Tom turned to the Freddie Mac Moderate Rehab Loan program. The program's favorable terms, competitive interest rates, and the fact that the loans were interest-only during the rehabilitation period attracted Tom. The LTV allowance of up to 80% of the property's as-is value was a significant deciding factor for Tom.

Due to his financial capability and prior successful experience with similar rehab projects, Tom qualified as an eligible borrower under the Moderate Rehab Loan program. He diligently worked with Freddie Mac to ensure all the necessary documentation was provided, adhering to the periodic draws and monitoring processes.

Using the Freddie Mac Moderate Rehab Loan, Tom was able to turn a neglected property into an appealing living space equipped with modern amenities. The refurbishment significantly increased the rental income and overall property value, turning Tom's vision into a profitable reality.

Tom's story demonstrates how the Freddie Mac Moderate Rehab Loan program can be a vital resource for individual investors looking to revitalize older multifamily properties. By providing the necessary financing for substantial renovations, it allows investors to upgrade their properties, attract tenants, and ultimately improve their returns.

This is a fictional case study provided for illustrative purposes.

In this article:

1. Freddie Mac Moderate Rehab Financing for Multifamily Properties
2. Sample Freddie Mac Terms for Moderate Rehab Conventional Loans in 2024
3. Advantages
4. Disadvantages
5. Case Study: An Austin Value-Add
6. Get Financing