Freddie Mac Lease-Up Financing
Freddie Mac Lease-Up Loans are available for both the acquisition and refinancing of newly built multifamily developments as a source of capital during the lease-up period of a property.
Loans for New, Pre-Stabilized Multifamily Properties Insured by Freddie Mac
Getting a recently constructed or recently acquired property through the lease-up period can be significantly challenging. Coming to the aid of investors who must navigate this challenge, Freddie Mac has designed the Lease-Up Loan specifically to help investors succeed during this period. The Freddie Mac Lease-Up Loan is perfect for both the acquisition and refinancing of newly constructed multifamily properties.
Freddie Mac Lease-up loans come with many of the attractive terms that Freddie Mac loans are known for. The Lease-up loan can be fixed or variable rate, is nonrecourse, comes with a loan-to-value allowance of up to 75%, and even permits the financing of eligible mixed-use properties. The feature that sets it apart from other financing options, however, is the 12-month interest-only period, which is what makes them ideal for properties that don't yet have a strong stream of rental income.
Freddie Mac Lease-up Financing Sample Terms
- Size: Varies based on debt service and leverage
- Use: Purchases and refinances of new multifamily construction
- Terms: 5-10 years (Terms can go up to 30 years for non-securitized loans)
- Amortization: Up to 30 years, optional I/O financing
- Recourse: Non-recourse with standard carve-outs
- Maximum LTV/Minimum DSCR:
- Refinances:
- Conventional and Targeted Affordable: 75%/1.30x
- Seniors Housing with Independent Living: 70%/1.35x
- Seniors Housing with Assisted Living: 70%/1.45x
- Purchases:
- Conventional and Targeted Affordable: 70%/1.30x
- Seniors Housing with Independent Living: 70%/1.35x
- Seniors Housing with Assisted Living: 70%/1.45x
- Minimum Equity Required:
- Refinances:
- Conventional and Targeted Affordable: 15%
- Seniors Housing Independent or Assisted Living: 20%
- Purchases:
- Conventional and Targeted Affordable: 25%
- Seniors Housing Independent or Assisted Living: 25%
- Prepayment Penalty: Borrowers may pay yield maintenance until the loan is securitized. After securitization, a 2-year lock-out period begins, after which borrowers may conduct defeasance. Borrowers can pay an additional upfront fee at closing to opt for yield maintenance. Pre-payment premiums are waived for the final 90 days of the loan.
- Rate Lock: Rate locks issued when the property reaches:
- 50% of unit occupancy
- 60% of the units leased
- 60%+ units have Certificates of Occupancy
- Eligible Borrowers/Properties:
- Borrowers should have significant experience with multifamily construction and lease-up scenarios. Good credit and reasonable net worth/liquidity also required.
- Conventional, Targeted Affordable, or Seniors Housing (Assisted Living/AL or Independent Living/IL) properties.
- Manufactured Housing Communities (MHCs) and Student Housing are not permitted.
- Properties should generally reach stabilization 1 year after closing (or before).
- Closing Requirements:
- Refinances:
- 1.05x DSCR
- 65% of units must be occupied
- 75% of units must be leased
- 100% of units must have Certificates of Occupancy issued (Conventional and Targeted Affordable)
- 90% of units must have Certificates of Occupancy issued (Seniors Housing with Independent Living and/or Assisted Living)
- Assisted Living properties must have all required licenses authorizing operations
- Purchases:
- 1.0x Debt Service Coverage Ratio
- 65% current occupancy/75% of units currently leased
- For Targeted Affordable or Conventional properties, all units must have a Certificate of Occupancy
- For Seniors Housing (AL or IL), 90% of units must have a Certificate of Occupancy
- Assisted Living (AL) developments need state licensing, insurance, and other necessary licensing and documentation
- Lease-Up Credit Enhancements: Required
- Lease-Up Credit Enhancement must be a minimum of:
- 5% of the unpaid principal balance (UPB)
- 10% of the unpaid principal balance (UPB) if the Lease-Up Credit Enhancement is a guaranty (other rules and conditions may also apply)
- These funds will be released when the property reaches the appropriate DSCR (usually 1.25x) for a minimum of 90 days and is otherwise in compliance with Freddie Mac rules and regulations
- If the debt service target cannot be met within 12 months, loan resizing will occur, with an associated recast of payments.
- Advantages:
- Loans are non-recourse
- LTVs of up to 75% allowed
- Eligible mixed-use properties supported
- Permits borrowers to get a rate lock before a property has reached stabilization
- Additional loan flexibility may be available on an individual basis, especially for premier sponsors and markets (Seniors Housing not eligible)
- Some loans for premiere sponsors/markets may not require Lease-Up Credit Enhancement
- Disadvantages:
- Appraisals must include both the as-is and stabilized value of the property
- Some lenders may not fund Seniors Housing Lease-Up Loans
- Some lenders may mandate an up to 30% Cash Equity Requirement
- Properties must be at least 90% occupied and achieve a 1.25x amortizing DSCR at stabilization (over a 3-month consecutive period)
- Lease-Up Credit Enhancement required until properties reach the required amortizing DSCR (also typically 1.25x) for at least 3 months