Does the Freddie Mac SBL Program Offer Interest-Only Loans?
Interest-Only Freddie Mac Small Balance Loans
Freddie Mac’s Optigo Small Balance Loan program offers partial and full-term interest only (I/O) loans to eligible borrowers. In fact, nearly all Small Balance Loans come with a standard interest-only period at the beginning of the loan, which is based upon the loan’s fixed-rate period. For 5-year fixed rate loans and 5/15 hybrid ARMs, the I/O period is 1 year, for 7-year fixed rate loans and 7/13 hybrid ARMs, the I/O period is 2 years, and for 10-year fixed rate loans and 10/10 hybrid ARMs, the I/O period is 3 years.
However, for properties in Small and Very Small Markets, partial term I/O loans are only available for loans with 7-year fixed-rate periods (1 year I/O period) and loans with 10-year fixed rate periods (2-year I/O period). I/O years may be added or subtracted for 4 basis points (0.4%) addition to or subtraction from the overall interest rate.
Full Term Interest-Only Small Balance Loans
In addition to the 1-3 year I/O periods that come standard with the Optigo SBL program, borrowers can opt for full-term interest-only financing, though this comes with additional restrictions. Terms for full-term interest-only loans vary by market size, and are listed below:
- Top Markets: 80% LTV, 1.35x DSCR
- Standard Markets: 65% LTV, 1.40x DSCR
- Small Markets: 60% LTV, 1.40x DSCR
- Small Markets: 60% LTV, 1.50x DSCR
What are the requirements for a Freddie Mac SBL loan?
The requirements for a Freddie Mac SBL loan include collateral, undergoing a rigorous assessment, B-piece purchase, loss sharing, repurchasing of delinquent SBLs and origination of at least $50 million per quarter. Additionally, the minimum loan amount for a Freddie Mac SBL Link Loan is $2 million, regardless of the number of units. For loans under $1 million, they must be in a Top Market or Standard Market, and additional requirements include 10-15 bps added to loans in Top Markets, 15-20 bps added to loans in Standard Markets, stricter leverage requirements, seller/servicers may not market Small Balance Loans less than $1 million, and Freddie Mac generally requires 3 additional business days for commitments and inspections.
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What are the benefits of an interest-only loan?
The greatest benefit of an interest-only loan is that it conserves cash flow in the short term. This can be helpful if you are looking to reinvest that cash into other property acquisitions or improvements. Additionally, because you are only paying the interest on the loan, your monthly payments will be lower than if you were paying both principal and interest. This can free up additional cash flow each month.
The most important benefit of interest-only loans in commercial real estate is the fact that they allow a property or business to have significantly more cash flow during the interest-only period. Since a borrower doesn't have to worry about paying off the principal for a few years, they have a lot more flexibility. This often means they can reinvest any profits they might have back into the business. Plus, in multifamily real estate developments, an interest-only period takes a lot of the pressure off a developer to have an extremely high occupancy rate from the start.
What types of properties are eligible for a Freddie Mac SBL loan?
Eligible Property Types for the Freddie Mac SBL Program include multifamily and apartment properties with five or more units. This includes:
- Properties with commercial space that does not comprise more than 25% of the property’s gross income
- Independent living properties for seniors without resident services
- LIHTC (Low Income Housing Tax Credits), with land restrictions in the extended use period or the final 24 months of the initial restriction period (to qualify, eligible LIHTC properties must have 75 units or less and get special Freddie Mac approval)
- Other regulatory restrictions that limit income/rent (funds must be disbursed)
- Tax abatement properties
- Tenant-based housing voucher properties
- Buildings can have local rent subsidies for 10% or less units, as long as tenant eligibility certification is not required
- Cooperatives (must be located in New York City or Long Island)
In contrast, properties that are ineligible for the SBL program include:
- LIHTC properties with more than 24 months left on their Land Use Restrictive Agreement
- Tax-exempt bonds Interest Reduction Payments (IRPs)
- Properties with a greater than 50% concentration of student or military housing
- Properties with Section 8 contractors or other project-based HAP contracts
- Master lease HTC (Historic Tax Credit) properties
What is the maximum loan amount for a Freddie Mac SBL loan?
The maximum loan amount for a Freddie Mac SBL loan is $7.5 million, as stated in the Freddie Mac Small Balance Loans Between $6 Million to $7.5 Million: What You Need to Know article.
What is the minimum loan amount for a Freddie Mac SBL loan?
The minimum loan amount for a Freddie Mac SBL loan is $2 million, regardless of the number of units.
Freddie Mac Small Balance Loans Under $1 Million: What You Need to Know (https://apartment.loans/posts/freddie-mac-small-balance-loans-under-1-million-what-you-need-to-know)
Freddie Mac Small Balance Loans Between $6 Million to $7.5 Million: What You Need to Know (https://apartment.loans/posts/freddie-mac-small-balance-loans-between-6-million-to-7-5-million-what-you-need-to-know)
The Benefits of Interest-Only Financing
Whether for a few years or an entire loan term, interest-only loans have significant benefits for commercial real estate borrowers. Most importantly, interest-only loans significantly reduce monthly mortgage payments, increasing cash flow, and allowing borrowers to use their savings to invest in other commercial properties (or other profitable, non-real estate investments.) However, interest-only loans greatly slow down the rate at which a borrower develops additional equity in a property, as all equity gains will be based on the market appreciation of the property, rather than the repayment of the loan principal.