Loans for the Moderate Rehabilitation of Conventional Multifamily Developments insured by Freddie Mac
Sometimes, in order to increase its marketability and profitability, a multifamily property needs to undergo significant renovation. For investors looking to finance such a renovation, the Freddie Mac moderate rehab loan is an ideal solution. Freddie Mac’s moderate rehab loans are specifically designed for conventional properties that are planning to make between $25,000 and $60,000 in renovations per unit, with at least $7,500 per unit spent on interior improvements.
The Freddie Mac Moderate Rehab Loan Program offers flexible loan terms and amortizations, as well as LTV allowances up to 80% of the property's as-is value. More impressively, eligible borrowers may qualify for up to 36 months of interest-only payments during the rehabilitation. During the renovation, loan proceeds are advanced monthly as requested rather than accruing interest on unused funds, which altogether makes the moderate rehab loan one of the best financing options available, providing the capital you need to renovate your property at the lowest cost possible.
Freddie Mac Moderate Rehab Loan Highlights
Designed to offer a source of liquidity flexible enough to meet the rehabilitation needs that many borrowers have, the Freddie Mac moderate rehab loan program caters to well-capitalized sponsors who have had successful rehabilitation projects of similar scope under their belts. Some noteworthy features include:
- Funding of $25,000 to $60,000 in renovations per unit with a minimum of $7,500 per unit designated specifically for interior work
- Allows for a wide variation in borrower term and structure needs, with either a float-to-float or float-to-fixed interest rate structure.
- Funds up to the lesser of 80% of the “as-is” value or acquisition cost
- The rehabilitation phase is set up as a floating rate, while the permanent phase post renovations can be either fixed or floating.
- Periodic draws of unfunded loan proceeds (as opposed to an escrow) go towards reimbursing the sponsor for up to 80% of the renovation cost.
Freddie Mac Moderate Rehab Loan Sample Terms
- Size: Varies, based on LTV and DSCR requirements
- Use: Moderate rehabilitation of conventional multifamily properties
- Terms: Varies, typically float-to-fixed-rate structure. Various combinations of floating and fixed-rate structures can be considered on an individual basis. Loans are interest-only during rehabilitation.
- Interest-Rate Cap: Required if the loan is not converted to fixed-rate.
- Amortization: Varies
- Maximum LTV:
- 80% of the as-is value (supported by acquisition price, if a recent acquisition)
- Unfunded loan proceeds are periodically drawn to reimburse sponsor for up to 80% of the renovation costs on a monthly or quarterly basis, as work is finished (just like construction financing)
- The 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 the 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 complete within 36 months.
- Periodic Draws:
- Draws can 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
- Highly competitive interest rates
- Up to 80% LTV for eligible properties
- Loans are interest-only during the rehabilitation phase
- 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 details 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