The Industry's Most Competitive Small Apartment Loan Program

Freddie Mac has forever been the industry's most competitive source of financing for large multifamily loans, particularly loans north of $10MM, however, Fannie Mae always dominated the market under $10MM. In the last few years, Freddie Mac finally decided to get competitive in the small balance market, and their new product, the Freddie Mac Small Balance Loan, has been accepted with open arms.

One of the most substantial obstacles to originating small balance loans is the cost to the borrower. Third party reports and lender legal don't vary much with the loan size, leaving fixed origination costs for a $1MM loan very similar to those of a $10MM loan. Freddie Mac has effectively addressed all these issues with a streamlined small balance loan program with substantially compressed fixed costs and rates as competitive as those for large loans.

Loan Amount:  $750,000 minimum, $7.5 million maximum 

Loan Uses:  Acquisitions or refinances 

Loan Terms:  

  • 20-year hybrid ARM with initial 5, 7, or 10-year fixed-rate period, OR
  • 5, 7, or 10-year fixed-rate loan 
  • ARMs typically based on 6-month LIBOR with up to 1% rate adjustments every 6 months. Lifetime cap set 5% over starting rate. 

Amortization: Up to 30 years, partial interest-only options available, full-term interest-only options may also be available in certain circumstances. 

Interest Rates:

  • Top Markets: From 3.90% 5 years fixed, 4.35% 7 years fixed, 4.60% 10 years fixed.
  • Standard Markets: From 4.48% 5 years fixed, 4.70% 7 years fixed, 4.98% 10 years fixed.
  • Small / Very Small Markets: Add 20bps to Standard market pricing

Eligible Properties: 

  • Multifamily: 5+ unit market-rate multifamily properties. For loans larger than $6 million, properties with more than 100 units must be approved by Freddie Mac. 
  • Non-Contiguous Properties: Allowed if within same zip code and manageable as a single asset. 
  • Occupancy: 90% for past 90 days (exceptions down to 85% and down to 30 days for new construction). 85% occupancy may also apply to properties with 30+ units, or acquisitions with no history of serious crime, or that have been recently taken over by sophisticated management. 
  • Mixed Use: Available subject to no more than 40% non-residential income and no more than 40% of net rentable area.
  • Affordable: 
    • Low-Income Housing Tax Credit (LIHTC) properties with Land Use Restriction Agreements (LURAs) that are in either the final 24 months of the initial compliance period or the extended use period (investor must have exited are eligible
    • Properties with tenant-based housing vouchers, and properties with local rent subsidies for 10% or fewer units where the subsidy is not contingent on the owner’s initial or ongoing certification of tenant eligibility are also eligible. 
  • Ineligible: 
    • Seniors housing with residential services
    • Student housing (greater than 50% concentration)
    • Military housing (greater than 50% concentration)
    • Properties with Housing Assistance Program (HAP) Section 8 contracts and other project-based housing assistance payment contracts 
    • LIHTC properties with LURAs in compliance years 1-12
    • Tax-exempt bonds Interest Reduction Payments (IRPs)
    • Historic Tax Credit (HTC) properties with a master lease structure

Market Tiers Defined:

  • Top Markets: Certain Counties (but not all) in the following MSA’s: New York, Los Angeles, Chicago, Washington D.C., San Francisco, Miami, Boston, Seattle, San Diego, Minneapolis, Denver, Portland, San Jose and Stamford, CT.
  • Standard Markets: Typically greater than 60k rental population which includes most MSA’s of significant size.
  • Small Markets: Typically between 30k and 60k rental population.
  • Very Small Markets: Typically under 30k rental population.

Leverage / DSCR:

  • Top Markets: Max LTV 80% for purchases, 80% for refinances, 1.20x DSCR minimum. 
  • Standard Markets: Max LTV 80% for purchases, 80% for refinances, 1.25x DSCR minimum.
  • Small Markets: Max LTV 75% for purchases, 70% for refinances, 1.30x DSCR minimum.
  • Very Small Markets: Max LTV 75% for purchases, 70% for refinances, 1.40x DSCR minimum.

Prepayment Penalty: Step down or yield maintenance. Soft-step downs are also available. 

Interest Only: 

Typical maximum interest only periods include: 

  • 1 year for 5 year terms
  • 2 years for 7 year terms
  • 3 years for 10 year terms
  • 1 year available for 7 year loans
  • 2 years available for 10 year loans
  • No I/O available for 5 year loans in small or very small markets
  • Full-term interest only available under some conditions with Freddie Mac approval. 

Assumable:  Subject to 1% fee plus borrower due-diligence.

Rate Reductions:  Available for lower leverage and higher DSCRs. 

Application Fees:

  • $7,000 (covers 3rd Parties – Appraisal, Eng, Env, O&M’s)
  • 10 basis points – Freddie Mac processing fee

Recourse: Non-recourse with standard “bad boy” carve-outs (carve-out waiver available with minimum 1.40x DSCR and maximum 65% LTV)

Borrower Requirements:

  • 9 months principal and interest liquidity (before refi or after purchase). Retirement accounts not included.
  • Net worth equal to the loan amount.
  • Minimum 650 credit score.
  • No bankruptcies, foreclosures, deed-in-lieu, or defaults for 7 years.
  • At least one year multifamily or commercial real estate experience. 
  • Borrowers up to $6 million: Individuals (U.S. citizens only), limited liability companies, limited partnerships, Single Asset Entities, Special Purpose Entities, tenancies in common (with up to five unrelated members), and Trusts (irrevocable trusts and revocable trusts with an individual guarantor.)
  • Borrowers more than $6 million: Single Asset Entities. 

Documents Required for New Loan Submissions:

  • Personal financial statement and SREO for each guarantor (anyone with more than 20% interest).
  • Last 3 years operating statements.
  • Trailing 12 month, month-by-month operating statements.
  • Current rent roll.
  • Subject photos.
  • Property summary/description.

Portfolio Executions: 

Freddie Mac SBL Portfolio Executions provide benefits to borrowers who take out more than one SBL loan in top and standard markets. 

  • Benefits: Fewer forms, may achieve better pricing and larger loan size. May also achieve reduced transaction costs. 
  • Requirements:  Sellers must collect and hold a Good Faith Deposit on behalf of Freddie Mac, of 0.1% of the loan amount or $50,000, whichever is greater. This is refundable to the borrower upon closing. 

Advantages: 

  • Up to 80% LTV allowance 
  • Streamlined application process 
  • Loans are non-recourse
  • Interest-only options 
  • 30-year amortizations 
  • Variety of hybrid ARM and fixed-rate options available 
  • Loans are assumable with approval and 1% fee 
  • 60-120 day rate locks typically available 

Disadvantages: 

  • Requires third-party reports, including Appraisal, Phase I Environmental Assessment, and Engineering Report 
  • Typically requires replacement reserves of between $200 and $300 per unit 
  • Requires $7,000 application fee
  • Requires Freddie Mac processing fee of 0.1% of the loan amount
  • Subordinate debt not permitted