The Freddie Mac Small Balance Loan Program has long been the most coveted multifamily loan for stabilized properties in need of financing between $1 million and $6 million (and in some cases a little more), but is it the best product for your property? Statistically - not likely.
Why? Allow me to explain.
For your “down the fairway” type loans in major markets (think Los Angeles, Miami, Austin or one of the boroughs), Freddie Small Balance may be right for you if you are looking to max out your leverage and want that 30-year amortization.
To be quite honest, it’s a great product and touts a fixed rate up to 10 years with aggressive pricing and extremely flexibly prepayment options. What’s wrong with that? Nothing.
But there are other, and depending on your needs, better options.
It’s also worth noting that if you aren’t in a top metropolitan statistical area, Freddie isn’t for you. Spreads come out, leverage contracts and other options abound, but to be clear, there are other options anyway, and you should be cognizant of all of them.
Fannie Mae has an incredible Small Balance Loan product, for example, that works great in tertiary markets and boasts a non-recourse, self-amortizing option (30 years fixed and fully amortizing up to 80% loan-to-value ratio).
Fannie Delegated Underwriting and Servicing is another great Fannie option in which the government-sponsored enterprise shares risk with lenders and allows them autonomy in decision-making (that Freddie SBL doesn’t offer), which means “story deals” can get done (if the story is good enough).
Life companies offer lower leverage non-recourse debt (yes, for as little as $1 million or less) with the tightest spreads in the industry. If you are looking for self-amortizing debt and care more about interest rates and amortization than leverage; life company money may be the best option for your stabilized multifamily property.
It seems that the ugly duckling of multifamily finance may very well be Federal Housing Administration-insured debt, which is ironic because the Department of Housing and Urban Development happens to offer the most profoundly valuable suite products we have at our disposal.
Misconceptions abound, and the thing to remember is that the FHA (and Fannie Mae DUS) doesn’t really have a loan amount minimum - that is at the lender’s discretion.
So, you can get out there and procure a $3 million HUD 223(f) loan at 85% LTV, fixed and fully amortizing for 35 years (or a 40 year fixed rate, 87% LTC, non-recourse construction loan) and it doesn’t take 2 years to close anymore.
Guess what? It’s also built for market-rate financing. Sure, the FHA has great buckets for low-income housing tax credit deals, but it isn’t by any means exclusively in that space.
Commercial mortgage-backed securities are a great alternative to Freddie SBL when you can’t hit the GSE’s key principal net worth and liquidity requirements or you fall a little outside of their underwriting box.
It’s the same 10-year, non-recourse, fixed-rate debt with 30-year amortizations. These days CMBS lenders will price tighter in order to win some multifamily business since they have lost so much to Fannie and Freddie in this cycle.
All those nice things said, have a glass of wine when reading your application because those app fees can feel heavy (for small loans) and lender legal for securitizing debt on Wall Street isn’t cheap.
The point is that your “small” loan for $1 million to $6 million could be part of a CMBS deal, sit on a life insurance company’s balance sheet, benefit from Fannie and Freddie, or even land an FHA-insured loan.
This is the tip of the iceberg and a 30 basis point miscalculation (by choosing the wrong loan product) on a 10-year loan costs you 3% of your loan amount.
A 35-year fixed rate loan instead of a 10-year loan can save you unbelievable amounts of future interest rate risk while maintaining the ability to; (1) continue to recapitalize yourself with market-rate mezzanine debt (that Fannie, Freddie and others offer) and (2) sell your asset with in-place, assumable, better-than-market debt.
If you know what’s out there and what you can do with it, you can become exponentially more creative and flexible.
Walking into a local bank may have worked wonders as little as 5 years ago, but the opportunity cost of not dipping your toe into the warm, inviting waters of the 2019 multifamily capital markets is an expensive one.
When procuring your next loan, make sure you think about all the capital market options and get yourself some better debt.