Freddie Mac Lease-Up Loans

Freddie Mac Lease-Up Financing for Newly Constructed Properties

If you've just built, or are considering purchasing a new multifamily development, getting your property through the lease-up period can be a significant challenge. Fortunately, Freddie Mac has designed a loan specifically to help investors succeed during lease-up; the Freddie Mac Lease-Up Loan.

Freddie Mac Lease-Up Loans allow for both the acquisition and refinancing of newly constructed multifamily properties, offer fixed and variable-rate options, and have a 12-month interest-only period, making them ideal for properties that don't yet have a strong stream of rental income. Plus, these loans are non-recourse, offer LTV allowances of up to 75%, and, like many other Freddie Mac Multifamily loans, permit eligible mixed-used properties. 

To learn more, check out Freddie Mac’s official Lease-Up Loan Product Sheet or keep reading below for an in-depth explanation of the Freddie Mac Lease-Up Loan program.

Sample Freddie Mac Terms for Lease-Up Loans in 2024

Size:  Varies, typically similar to Freddie Mac Fixed-Rate Loans or Floating-Rate Loans 

Use:  Acquisition or refinance of newly constructed multifamily properties 

Terms:  5-10 years (Up to 30 years if loan not purchased for securitization)

Amortization:  Up to 30 years, interest-only loans available

Maximum LTV/Minimum DSCR:  

• Refinances:

  • Conventional and Targeted Affordable: 75%/1.30x

  • Seniors Housing with Independent Living: 70%/1.35x

  • Seniors Housing with Assisted Living: 70%/1.45x

• Acquisitions:

  • Conventional and Targeted Affordable: 70%/1.30x

  • Seniors Housing with Independent Living: 70%/1.35x

  • Seniors Housing with Assisted Living: 70%/1.45x

Minimum Cash Equity Requirement:

• Refinances:

  • Conventional and Targeted Affordable: 15%

  • Seniors Housing Independent or Assisted Living: 20%

• Acquisitions:

  • Conventional and Targeted Affordable: 25%

  • Seniors Housing Independent or Assisted Living: 25%

Recourse:  Non-recourse with standard “bad boy” carve-outs

Eligible Borrowers:  Must have experience with new construction/lease-up properties, should also have strong financial capacity and a good credit history. 

Eligible Properties:  Conventional, Targeted Affordable, or Seniors Housing properties. No Student Housing or Manufactured Housing Communities allowed. Stabilization is expected within 12 months of closing. 

Prepayment Options: Yield maintenance until securitization, 2-year lock-out period following securitization, defeasance allowed after securitization. Yield maintenance for securitized loans is permitted for an additional fee. No pre-payment premiums required in the last 90 days of the loan. 

Rate Lock Requirements:  Must have at least 50% of units occupied, 60% of units leased, and 60% or more Certificates of Occupancy issued 

Closing Requirements

Refinances

• 1.05x DSCR
• 65% of units must be occupied
• 75% of units must be leased
• 100% of units must have Certificates of Occupancy issued (Conventional and Targeted Affordable)
• 90% of units must have Certificates of Occupancy issued (Seniors Housing with Independent Living and/or Assisted Living)
• Assisted Living properties must have all required licenses authorizing operations

Acquisitions

• 1.0x DSCR
• 65% of units must be occupied
• 75% of units must be leased
• 100% of units must have Certificates of Occupancy issued (Conventional and Targeted Affordable)
• 90% of units must have Certificates of Occupancy issued (Seniors Housing with Independent Living and/or Assisted Living)
• Assisted Living properties must have all required licenses authorizing operations

Lease-Up Credit Enhancements

• Freddie Mac requires all a Lease-Up Credit Enhancement for all Lease-Up Loans

• The Lease-Up Credit Enhancement must be:

  • At least 5% of the unpaid principal balance

  • At least 10% of the unpaid principal balance if the Lease-Up Credit Enhancement is a guaranty (these are also subject to additional conditions)

• The Lease-Up Credit Enhancement will be released once the property has reached the required amortizing DSCR (typically 1.25x) for at least 3 months (and has met other conditions set forward by Freddie Mac)

• If the property cannot meet the DSCR requirement within 1 year, the loan will be resized and the payments recast (using the Lease-Up Credit Enhancement)

Advantages

• Loans are non-recourse

• LTVs of up to 75% allowed

• Eligible mixed-use properties supported

• Permits borrowers to get a rate lock before a property has reached stabilization

• Additional loan flexibility may be available on an individual basis, especially for premiere sponsors and markets (Seniors Housing not eligible)

• Some loans for premiere sponsors/markets may not require Lease-Up Credit Enhancement

Disadvantages

• Appraisals must include both the as-is and stabilized value of the property

• Some lenders may not fund Seniors Housing Lease-Up Loans

• Some lenders may mandate an up to 30% Cash Equity Requirement

• Properties must be at least 90% occupied and achieve a 1.25x amortizing DSCR at stabilization (over a 3-month consecutive period)

• Lease-Up Credit Enhancement required until properties reach the required amortizing DSCR (also typically 1.25x) for at least 3 months

Case Study: Leasing Up a New Phoenix Community

In sunny Phoenix, Arizona, a seasoned real estate developer, BrightSands Development LLC, recently completed the construction of a state-of-the-art multifamily property. The property, an 18-unit building boasting modern amenities and energy-efficient designs, was valued at $7 million. Even though the property was an enticing prospect for renters, the lease-up process was proving to be a challenge, as is often the case with newly built properties.

Recognizing these challenges, BrightSands Development turned to Freddie Mac's Lease-Up Loan program. They viewed this program as an ideal financial solution, providing both acquisition and refinancing options for their newly constructed property while it navigated the lease-up phase.

The Lease-Up Loan's 12-month interest-only period was particularly appealing, as it offered BrightSands Development the necessary financial flexibility to weather the initial period of lower rental income. Furthermore, the non-recourse nature of the loan and the allowance of up to 75% LTV made it an attractive financing option.

With their extensive experience in new construction and lease-up properties, as well as their strong financial standing, BrightSands Development LLC was an eligible borrower under the Lease-Up Loan program's requirements. By accessing the Lease-Up Loan, they were able to successfully navigate the challenging lease-up phase and ensure the long-term success of their multifamily property in Phoenix.

This case demonstrates how Freddie Mac's Lease-Up Loan can be a significant financial tool for developers in secondary markets. It showcases how the program is designed to support developers through the often tricky lease-up period, offering flexibility and beneficial terms.

This is a fictional case study provided for illustrative purposes.