The Department of Housing and Urban Development (HUD) Section 8 Housing Assistance Program involves the U.S. government making payments to landlords in order to subsidize rents for nearly 5 million low-income households across the United States. Properties utilizing market-rate Section 8 vouchers are eligible for the Optigo Small Balance Loan program. The advantages of using Section 8 for Freddie Mac Small Balance Loans include:

• Very competitive interest rates
• Loans are non-recourse
• Certain mixed-use properties are eligible
• Up to 80% LTV allowance
• Streamlined application process
• 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

For more information, please visit https://apartment.loans/freddie-mac-apartment-loans/ and https://www.multifamily.loans/freddie-mac-hud-section-8-financing and https://www.multifamily.loans/freddie-mac-small-balance-apartment-loans.

In regards to the Optigo Small Balance Loan program, properties utilizing the Section 8 program are only eligible under certain circumstances. While Section 8 Housing Assistance Payment (HAP) properties are not permitted, properties utilizing market-rate Section 8 vouchers are eligible.

The requirements for obtaining a Freddie Mac Small Balance Loan with Section 8 include:

• The property must utilize market-rate Section 8 vouchers, not Section 8 Housing Assistance Payment (HAP) properties.
• The loan must be in a Top Market or Standard Market.
• The property must underwrite a vacancy of at least 5% and an expense ratio of at least 30%.
• The loan must have a minimum DSCR of 1.25x.
• The borrower must form a Single Asset Entity (SAE).

The HUD Section 8 Program offers several advantages for commercial real estate financing. The major upsides of the Section 8 program include:

• Regular Payments from HUD: One of the major drawbacks for landlords, especially those who own properties in lower-income areas, is the challenge of getting payments on time. Section 8 landlords, however, need not to worry about this issue, since the U.S. government will pay either 70% or 100% of a tenant’s rent (depending on their income level and the specific program). Furthermore, rents don’t remain static-- in order to incentivize landlords to keep participating in the program, HUD will typically provide a rent increase of between 5-8% each year.
• Reduced Vacancy Issues: After getting approved for the Section 8 program, landlords are able to access a verified waiting list of Section 8 tenants in their area. Additionally, they can list their property on websites-- which enables tenants to actually reach out to them in order to rent out their units. In fact, there is usually a long waitlist for Section 8, so landlords typically don’t have to worry about a lack of interest. As a landlord, this means that marketing expenses are virtually zero, which can be a massive advantage, especially in today’s market. This is particularly true if there are a lot of vacancies in your area and market-rate apartment complexes are competing for tenants.
• Reduced Capital Expenditures: While the property must still be kept reasonably well-maintained while renting to Section 8 tenants, landlords generally don’t need to make the more common large capital investments in upgrading the property’s aesthetic nature. Unnecessary things like fancy landscaping, brand-new appliances, and new flooring tend to be incredibly expensive-- but, since the Section 8 program brings tenants to the property, landlords will not need to invest in these things in order to keep the units rented.

In addition, Freddie Mac-insured loans for Section 8 properties offer several advantages, including:

• Very competitive interest rates
• Loans are non-recourse
• Certain mixed-use properties are eligible

Section 8 does not directly help small business owners secure financing. However, the Freddie Mac Small Balance Loan program does allow for properties utilizing market-rate Section 8 vouchers to be eligible for financing. This loan program offers 10- to 30-year loan terms for LIHTC properties, and five- to 15-year loan terms for non-LIHTC properties. Plus, these loans have maximum LTV allowances of up to 90% and minimum DSCR requirements of as low as 1.15x (for LIHTC properties), and up to 80% maximum LTV allowances and as low as 1.20x DSCR (for non-LIHTC properties.) For more information, check out Freddie Mac’s official HUD Section 8 Financing Product Sheet.

Alternatively, the SBA 7(a) loan program can help entrepreneurs with owner-occupied commercial real estate. This loan program offers up to $5 million in financing with terms up to 25 years. It also offers competitive interest rates and flexible terms. For more information, check out the SBA 7(a) Loan blog post.

The risks associated with using Section 8 for Freddie Mac Small Balance Loans include:

• Requires significant third-party reports, including a Freddie Mac Multifamily Appraisal, a Property Condition Report, and a Phase I Environmental Assessment
• Freddie Mac requires an application fee of $4,500 for Top Markets and $8,500 for Standard Markets
• Leverage and DSCR requirements become significantly stricter in small and very small markets (1.30x and 1.40x DSCR, respectively, and between 70-75% LTV)
• Certain limits on subordinate financing
• Replacement reserves of up to $300/unit are often required

Source: What are the Pros and Cons of the Freddie Mac SBL Program?

Source: Freddie Mac HUD Section 8 Financing

Source: Section 8 in Relation to Freddie Mac Small Balance Loans