If you're an apartment investor, a professional who works with multifamily investors, this is a loan program you may want to have on your radar.
byTrevor Calton
President of Evergreen Capital Advisors and founder of Real Estate Finance Academy
Advantages of the Freddie Mac SBL Multifamily Loan
Over the decades, I have done a lot of different agency loans. The Freddie Mac Small Balance Loan is a great loan for apartment investors and here's why.
Loan Amounts Up to $7.5 million
First let's talk about the loan amount. The Freddie Mac SBL is good for loans up to seven and a half million dollars. Some small markets or very small markets, might have limit of 6 million, but the SBL can technically go up to seven and a half million, with an exception in any market.
Up to 100 Units (or more)
As far as the number of units goes, there are no unit limitations, up to $6 million. of loan amount And for loans between six and seven and a half million, you can go up to 100 units with the SBL, or potentially more with an exception from the lender.
Loan Purpose
The Freddie SBL is specifically a purchase or a refinance loan, so it's for acquisitions or refinancing out existing debt. It's not available for mezzanine debt or for construction loans.
Property Types
The property type for the SBL is limited to multi-family. It's specifically designed for apartments. However, there is one exception, which would be a mixed-use property that has multifamily and then perhaps retail on the ground floor. But that has to be granted an exception by the lender, and typically can't make up more than 20% of the total income for the whole property.
Interest-Only Options Available
And what's really nice about the SBL is that interest-only terms are available, which can be an advantage in a market where rates have just skyrocketed. If the investor wants to conserve cash flow and keep their payment low and they're not too worried about principle paydown, they can get interest only terms for three or as many as five years on the SBL.
30-Year Amortization
Another nice feature is the amortization. The Freddie Mac SBL is a 30-year amortizing loan. The exception to that being, if an interest only portion was used during the loan, say three years of interest only, then once the loan started amortizing, it would be amortized over 27 years instead of 30. So the period of interest only payments comes out of the original 30 year amortization.
Loan Term
The loan term is one of the advantages to the SBL. It's typically a 20-year loan, and the lenders will offer five years, seven years, or 10 years of a fixed interest rate, and then the loan becomes a variable rate after that. So the SBL is technically what we call a hybrid loan.
Prepayment Penalty Options
Another nice aspect of the SBL is the Prepayment Penalty structure. You actually have two options. You can do a yield maintenance prepayment penalty, or in exchange for a slightly higher interest rate, you can do a step-down declining penalty.
Debt Service Coverage
The debt service coverage requirement for the SBL is pretty generous. In the top markets, it's a 1.2 debt service coverage ratio. Small markets have a 1.3 debt service coverage ratio, and in very small markets it would be a 1.4.
Loan-to-Value
And provided the debt service coverage is there, the loan can be up to 80% loan-to-value.
Non-Recourse Another nice thing about the SBL is that it's a non-recourse loan, so there's no personal guarantee required. Which means that in the worst-case scenario, if things went south and the lender had to foreclose on the property, the borrower wouldn't be personally liable for any deficiency if the property was sold and the lender was not paid back what they are owed.
The one exception to that being "Bad-boy Carve Outs". In the case of say, fraud, or misappropriation of funds or, any instance where the borrower is being a "bad boy", there are carve outs in the non-recourse clause that make the loan become recourse. Provided that everybody's playing by the rules, this is a non-recourse loan.
Net Worth
There is a net worth requirement for the SBL and the borrowers net worth, or the combined net worth of all the borrowers, needs to be at least equal to the loan amount.
Liquidity Requirement
And there's also a liquidity requirement. The borrowers have to have at least nine months worth of payments in the bank prior to closing in the form of cash or other liquid assets.
That's so the lender knows that the borrower has cash on hand to make their payments. If there is an early dip in the cash flow, the borrower's not going to default right out of the gate.
FICO Score
The credit score requirement is a FICO score of 650 or better, so that's pretty nice. If you have a credit score lower than 650, I would recommend you'd work on that before going out and buying more apartments.
Rate Lock Option
Another nice aspect of the SBL is typically comes with a rate lock. So once the borrower signs the term sheet, submits their deposit, and they order the appraisal and get the ball rolling on the loan application, the interest rate that was quoted is locked.
But this is not true of all Freddie Mac lenders. Freddie Mac does allow the rate to be locked prior to closing, but that's actually something that only certain lenders offer.
Occupancy
And finally, the occupancy requirement to close the SBL is 90%. So as long as the property doesn't have more than 10% vacancy at the time of closing, then there's no problem.
Disadvantages of the Freddie Mac SBL
So what are the drawbacks?
Paperwork Intensive
The first thing is, there's more paperwork involved. Because this is an agency loan, and it's government guaranteed, there are additional agency requirements that go above and beyond what your traditional bank loan would require. And that's mainly around the non-recourse element. If the lender and Freddie Mac are only secured by the property itself, then they're going to want to make sure that all of their ducks are in a row in the event of default.
Now, for those of you that are organized and have a professional manager in place, and your books are all in order, usually it's not a big deal.
But the Freddie Mac SBL is not for the disorganized investor. They do require a lot of paperwork, a lot of signatures, a lot of crossing t's and dotting i's, so you need be ready to manage the paperwork process and be organized in order to close the SBL.
Limited Exceptions
These loans, just like many other commercial loans, eventually get securitized. So there are exceptions that can be made, but not wildly varying from the general guidelines that I'm outlining in this video.
Time to Close
Another drawback of the Freddie Mac SBL is the time to close. It's a little bit longer, usually just a few weeks longer than a traditional bank loan, but that is because it has to be underwritten by the lender, and then once the full underwriting package has been completed, then it is forwarded to Freddie Mac for a second underwriting.
So you can't get a Freddie Mac SBL in 45 days. Plan on about 35 business days, which is about seven weeks, plus any delays from the time that the term sheet is signed and the ball gets rolling to closing.
Evergreen Capital Can Help If you are getting ready to apply for a loan, also have some extras for you like forms and checklists to help you get started on your way.
We quote a lot of multifamily loans here at Evergreen Capital, and I would say that the Freddie Mac SBL is one of the more popular apartment loans out there. Yes, it's a little bit paperwork intensive on the front end, but we help guide you through the entire process, and overall, the rate and terms and overall cost savings for the life of the loan, beat out many of the other multi-family loan options out there.
If you're looking for a multi-family loan over $1 million, give us a call here at Evergreen Capital Advisors (877.325.4001) or email us we're happy to help. And for even more resources, our partners at Real Estate Finance Academy have a course on Crafting the Perfect Commercial Loan Application.
Trevor T. Calton is and President of Evergreen Capital Advisors and the founder of Real Estate Finance Academy. Since 1997, he has analyzed, acquired, or sold more than $5 billion of commercial real estate assets, financed over 500 commercial investment properties, and overseen the asset management of over 6000 units of multifamily housing.