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Conventional Forward Commitment Pilot
Freddie Mac offers forward financing for the new construction or substantial rehabilitation of multifamily conventional, nonsubsidized properties. Borrowers who choose a Freddie Mac Forward Commitment realize many benefits.
- Elimination of interest-rate risk, since the interest rate for the permanent financing is locked before construction begins
- Certainty of the availability of permanent financing, as long as performance targets are met
- Flexible terms tailored to meet the needs of the individual transaction, including the option to borrow additional proceeds at maturity
Freddie Mac's Forward Commitment Pilot serves the differing needs of borrowers in markets across the United States by making both forward rate-lock and funded forward financing alternatives available.
Forward Rate-Lock: The permanent mortgage interest rate is locked at construction start for the term of the construction period. Funds are advanced to the borrower when the mortgage is converted to a permanent loan.
Funded Forward: The permanent mortgage interest rate is set before the construction begins and Freddie Mac advances funds prior to construction. As a condition of advancing funds, Freddie Mac requires one of two types of collateral during the construction and lease-up phases:
- Letter of Credit: Freddie Mac advances funds to the construction lender during the property's construction. The construction lender provides a letter of credit from an issuer with a rating of A- or better. Funds can be disbursed to the construction lending in up to eight draws.
- Guaranteed Investment Contract (GIC): The borrower secures a construction loan from a bank of its choice, subject to Freddie Mac's approval. Freddie Mac advances funds into a GIC during the property's construction. The GIC provider must be rated A or better for loans of 10 million or less and AA or better for loans greater than $10 million.
Eligible Transactions
- Loans from $5 million to $20 million
- Larger loans up to $30 million will be considered on a case-by-case basis
Eligible Properties
- To-be built or substantially rehabilitated garden, mid-rise or high-rise nonsubsidized properties (Special underwriting criteria apply to high-rise properties with more than nine stories)
- A property qualifies for a substantial rehabilitation if:
- Rehabilitation cost is at least $15,000 per unit or
- Based on a projection at the time of loan commitment, the project's debt service coverage falls below 1.1x at anytime during the rehabilitation and stabilization phase
Eligible Borrowers: Limited liability companies, partnerships (general or limited), or corporations, which must have:
- A proven track record in the type of new construction or substantial rehabilitation proposed
- Sufficient liquidity to complete the construction project, achieve conversion and manage any other portfolio obligations, with a minimum liquidity of 5% to 10% of the project value and net worth of at lease 1x the loan amount
- Minimum cash equity investment of at least 10% of project cost
Eligible Seller/Servicers: Program Plus (R) Seller Servicers
Underwriting Parameters
- Minimum DCR: 1.25x
- Maximum LTV: 80%
- Maximum Loan to Cost: 90%
Loan Terms
- Forward Commitment terms of 12, 18, 24, or 36 months are available
- Two six-month extensions may be available
- The permanent mortgage can have a minimum term of 10 years and a maximum term of 30 years. A 7-year term may be permitted on a case-by-case basis
Maximum Amortization Period: 30 years
Construction Period For the funded alternative:
- The construction lender must be acceptable to Freddie Mac and have lending experience in the market where the property is located
- Disbursements to the construction lending will be in a single draw, or in up to 8 draws, based on a predetermined schedule
- Loan structure will be interest-only on funds advanced during the construction period
Stabilization and Conversion
- Conversion to permanent loan will occur upon
- Completion of construction in accordance with final plans and specifications
- Stabilized occupancy of a minimum of 90% for 90 days and
- Achievement of underwritten debt service coverage
- Early conversion is permitted at a minimum occupancy of 90% based on provision of a Letter of Credit for the portion of the loan amount that cannot be supported at early conversion
- Additional proceeds may be available at conversion based on strong property performance and full re-underwriting
Permanent Loan: Like a mortgage funded through Freddie Mac's Conventional Cash product, the structure for the permanent loan can either be fully amortizing or interest-only.
Third-Party Reports
- A feasibility report and a pre-construction assessment prepared by consultants who meet Freddie Mac's qualifications are required as part of the full underwriting package
- An appraisal and environmental report are also required at full underwriting
Construction Monitoring: The Program Plus Seller/Servicer who originates the transaction will provide Freddie Mac with periodic third-party monitoring reports, based on a contract with an architectural/engineering consultant
- Construction lending and Seller/Service may use the same architectural/engineering consultant unless the consultant is an employee of the construction lender
- Where special issues arise, a special architectural/engineering consultant may be retained by Freddie Mac
- For high-rise properties, Freddie Mac will contract with its own architectural/engineering consultant
Retirement Reserves
- For new construction, replacement reserves are required in accordance with standard Conventional Cash Mortgages
- For substantial rehabilitation, reserves must be funded and must be appropriate for the after-rehabilitation condition of the property, at a minimum annual reserve amount of $200 per unit for garden apartments; higher for mid-rise and high-rise apartments
Fees
- Application Fee: The greater of $7,500 or 15 basis points
- Forward Commitment Fee: 2% of the permanent mortgage amount due at acceptance of the commitment, in either cash or acceptable Letter of Credit. The Forward Commitment Fee is refundable at conversion
- Yield Maintenance: Freddie Mac will collect yield maintenance for non-delivery of the permanent loan when Freddie mac would accept delivery at the committed loan amount, but the loan is not delivered by commitment expiration
- Delivery Assurance Note: A note secured by a lien for 5% of the permanent mortgage amount due will be recorded against the subject property, as a deposit against possible yield maintenance due to non-delivery. The delivery assurance note is returnable at conversion
- Conversion Fee: None
- Servicing Spread/Administration Fees: No servicing spread will be added to the loan rate during the construction period. However, administrative fees may be added at the discretion of the Seller/Service
Construction Lender Relationship: The construction lender will enter into a master financing agreement with Freddie Mac. Supplements to the master financing agreement will document individual transactions.
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