This Freddie Mac SBL Loan Lets you Exit in Year 3 at 0%
So you’ve identified a stable, value-add property with upside potential. Rents are below market and you plan to run it better to increase NOI. You want everything that agency loans like Fannie Mae and Freddie Mac have to offer. A non-recourse loan with a low fixed-rate on a 30-year amortization for a lower monthly payment. But you see an exit in years 3-5, after you’ve implemented your repositioning plan. Either a sale or cash-out refi in years 3-5. The only problem is that longer-term fixed-rate loan programs come with prepayment penalties. Penalties that make an early exit difficult and unattractive.
Introducing Freddie Mac SBL’s 5-Yr option with 3-1-0 Prepay.
Prepayment Penalties Associated with Fannie Mae & Freddie Mac Mortgages
Fannie Mae and Freddie Mac mortgages come with prepayment penalties. These penalties make it difficult for buyers to consider them as an option when they intend to exit (either sell or cash-out refi) in years 3-5.
A yield maintenance prepayment structure will offer you the lowest interest rate. But it’s based on a formula that most small balance owner-operators don't know. Even if you understand it, the actual penalty is not calculated easily. You have to call your lender for an estimate. It could take days to get an estimate. This option offers less flexibility and less certainty than a stepdown prepayment penalty.
While it comes with a small premium, the 3-1-0% program offers you more flexibility for an early exit. Whether it be a sale or cash out refi. Plus, you can estimate that amount yourself, without having to call your lender.
The Six Primary Small Balance Loan Programs Offered by Freddie Mac
Freddie Mac SBL offers six programs: 5-, 7- and 10-yr Fixed and 5-, 7- and 10-yr Hybrid. Each of these programs has different prepayment structures. Either yield maintenance (YM) or two alternatives of a stepdown prepayment (i.e. 5-4-3-2-1%). The 5-year program offers one more alternative – the 3-1-0% option.
The 5-year program offers yield maintenance as one option. Then three stepdown prepayment alternatives. Option #1 offers 5-4-3-2-1%; Option #2 offers 3-2-1-1-1%; and Option #3 offers 3-1-0-0-0%. Each option comes with a premium in interest rate to price-in for prepayment flexibility.
The 5-Year Fixed 3-1-0 Program is a 5-year fixed rate with 3-1-0% prepayment penalty. So your prepayment penalty is 3% in year one; 1% in year two; and 0% in year three and thereafter!
Example: Buyer acquired a property in an infill location of Houston. The cash flow only supported 70% of purchase price although we could conceptually lend 80%. The issue was that the rents were below market. So we structured a 5-yr fixed with 3-1-0% prepay so that he can refinance (or sale) in year three without any penalty. His other options would have been bridge or bank debt. But the property was stable at 90%+ occupancy. He got a non-recourse loan at a better rate then other options and a loan on a 30-yr amortization schedule.
*************************
So if you’re looking for a simpler and more favorable alternative to bank loans, schedule a time to speak with me Tony’s calendar. Or Private Message me here on LinkedIn to discuss how together we can work to successfully finance your next multifamily transaction.
*************************
About Tony Talamas: Based in Texas, Tony is a direct, multifamily lender. Tony works directly with independent owner-operators and apartment syndicators to finance multifamily properties. He successfully finances multifamily properties throughout Texas and occasionally nationwide. Whether it’s an acquisition or a cash-out refinance, his focus as a direct lender is to provide non-recourse solutions offered by Fannie Mae and Freddie Mac. He guides his clients to the closing table smoothly and efficiently. He enjoys advising his clients on the process, discussing underwriting analysis and exploring loan options to match their investment objectives. His clients are either experienced independent owner-operators, syndicators or very sophisticated first-timers. Each of them expects certainty of execution.