- What Freddie Mac is expected to allow borrowers to lock in terms for permanent loans prior to breaking ground
- Why The policy could encourage more construction lending by reducing risk associated with take-out financing
- What next The change is expected to be announced by yearend
Freddie Mac is expected to expand an offering that allows developers to lock in the terms of their construction take-out financing before breaking ground, Green Street News can reveal.
The agency has long provided the option – which functions akin to an extended rate lock – for properties with low-income housing tax-credit allotments, as well as for properties that do not have tax credits but that do have a significant affordable component. The change, expected by yearend, will allow developers of market-rate properties to lock in their terms years ahead of finishing construction.
Some agency pros said the move could spur more construction financing, since private-market lenders will have increased comfort that their loans will be paid off by agency debt.
“It should help liquidity in the market for construction financing. It allows banks and other construction lenders to be a little more aggressive … because it de-risks the construction loan,” said one lender.
Exact terms could not be learned, but sources anticipate the offering will look similar to what Freddie provides for affordable properties. Borrowers must pay origination fees for the Freddie forward commitment loan at the same time they pay the fees on their construction financing. Freddie also requires the borrower to put some money in escrow.
In exchange, Freddie commits to fund the loan as much as four years in advance, generally limiting size to a 1.25-to-1 debt-service coverage ratio on expected cashflow. For the existing offering, properties developed by for-profit entities generally must have at least 20% of their units be affordable to tenants earning no more than 80% of the area median income.
For properties that have been allocated low-income housing tax credits, the agency will offer more proceeds by using a minimum debt-service coverage ratio of 1.15 to 1.
The take-out financing is unfunded during the construction period, so the borrower does not incur any ongoing financing costs after the initial fees.
Sources said the forward commitments are practically never broken. The contracts include a significant breakage fee, and borrowers who back out are unlikely to be able to access Freddie financing in the future.
Because the loan size is determined by expected property performance, lenders said Freddie generally only offers the forward commitment loan to developers with proven track records.
