Freddie Mac Affordable Forward Commitment
4% Tax Credit Tax-Exempt Bond Execution

Freddie Mac offers financing for the new construction or substantial rehabilitation of affordable multifamily properties funded entirely or in part by the sale of fixed- or variable-rate tax-exempt bonds. Borrowers who choose a Freddie Mac Forward Commitment realize many benefits.  They can: 

• Minimize interest rate risk, since the credit enhancement fee for the permanent financing is locked before construction begins.
• Know that permanent financing will be available, as long as performance targets are met.
• Choose either a funded or unfunded forward execution.
• Provide credit enhancement during the construction period and limit financing costs during construction.
• Have terms tailored to meet the needs of the individual transaction.

Freddie Mac's Forward Commitment execution serves the differing needs of borrowers in markets across the United States by making both funded and unfunded forward financing alternatives available.

Funded Forward: Credit enhancement fees for both the construction and permanent mortgage are locked when Freddie Mac issues the forward commitment. As a condition of issuing its credit enhancement, Freddie Mac requires collateral during the construction and lease-up phase in the form of a letter of credit or other collateral acceptable to Freddie Mac.

Unfunded Forward: The credit enhancement fee for the permanent mortgage is locked when Freddie Mac issues the forward commitment. When the project has stabilized and meets the conversion criteria set forth in the commitment, Freddie Mac will issue its credit enhancement.

In addition, the tax-exempt bond execution offers the advantages of Freddie Mac's Bond Credit Enhancement, including a AAA/Aaa rating and the ability to create responsive deal structures.

Eligible Transactions

• Construction and permanent financing for loans from $3 million to $25 million; larger loans will be considered on a case-by-case basis.
• Credit enhancement available for both fixed- and floating-rate bonds.
• Combination bond financing including taxable bonds and taxable conventional mortgages permitted at Freddie Mac’s discretion.

Eligible Properties

To-be-built or substantially rehabilitated garden, mid-rise or high-rise apartments that have received an allocation for tax-exempt bond financing

Eligible Borrowers

Limited partnerships, or limited liability companies.

Eligible Seller/Servicers

Freddie Mac-approved Multifamily seller/servicers.

Loan Term

• Forward commitment term of 12, 18, 24, 30, or 36 months
• If necessary, provided there is no default, a one-time 6-month extension of conversion is available at no cost.  A subsequent 6-month extension may be approved by Freddie Mac conditioned upon the payment of an extension fee.
• Permanent term: 18 to 30 years beyond the construction period.  A shorter term or rate reset for fixed-rate bonds is available to reflect the remaining life of the tax credit period.

Maximum Amortization

Amortization of up to a maximum of 30 years

Collateral for Forwards

• For a funded forward, construction loan period collateral is a letter of credit from an acceptable bank and a first lien on the project (or second lien with an intercreditor agreement).
• Permanent loan period collateral is a first lien on the project (or second lien with an intercreditor agreement)
• No collateral is required for an unfunded forward during the construction period.

Construction Financing Agreement

The construction lender will enter into a Construction Phase Financing Agreement with Freddie Mac.

Interest-Rate Hedge During the Permanent Credit Enhancement Period

Interest-rate cap or interest-rate swap required from acceptable provider for floating-rate transactions.  Freddie Mac provides swap credit enhancement.

Interest-Rate Caps:

• Consecutive 5-year caps with funds for subsequent 5-year caps escrowed starting after closing date over the term of the current cap
• Typical interest-rate cap is 300 basis points over the index rate with a floor on the index rate of 2.5%
• Cap can be purchased at any time up to conversion and must cover first 5 years of permanent loan term at a strike rate set at initial underwriting

Interest-Rate Swaps:

• Swap term should be at least fifteen years in length.
• Forward swaps are permitted for creditworthy borrowers

Credit Enhancement

• Funded forwards: Freddie Mac credit enhancement in place when tax-exempt bonds are issued.
• Unfunded forwards:  Freddie Mac credit enhancement is put in place upon conversion.

Maximum LTV

• For mortgages financed by variable-rate bonds, maximum LTV is the greater of 85% of market value or 80% of adjusted value.  The market value of the property may be adjusted for the value attributable to the tax-exempt financing, by adjusting the capitalization rate.  
• For mortgages financed by fixed-rate bonds, maximum LTV is the lesser of 90% of market value or 85% of adjusted value.
• HUD Risk Sharing for fixed-rate bonds only: 90% of adjusted value for mortgages financed with fixed-rate bonds.

Minimum DCR

• 1.20x with tax credits
• 1.25x without tax credits
• 1.15x with HUD risk sharing for fixed rate bonds

Subordinate Debt

• Soft subordinate debt:
• Debt service cannot exceed 75% of cash flow after payment of operating expenses, reserves, escrows and senior debt
• No loan-to-value test
• Hard subordinate debt:
• Combined debt service ratio may not be less than 1.10x
• Combined LTV may not exceed 90%

Third-Party Reports and Documentation

Required:

• Appraisal
• Environmental reports (Phase I and other reports as necessary.)
• Market Feasibility study
• Architectural/ Engineer’s Pre- Construction Report
• Proposed Construction Documentation: plans, specifications, project budget, project schedule
• Architectural/ Engineering Consultant’s Consulting Agreement (to include scope of services).
• Additional Substantial Rehabilitation report:  Existing Conditions (engineering) report to include an evaluation of existing conditions, recommended repairs and improvements over the loan life, and projected cost of improvements

Stabilization and Conversion

Conversion to permanent loan upon:

• Completion of construction in accordance with approved final plans and specifications
• Lease-up at 90% occupancy for 90 days
• Achievement of debt service coverage equal to or greater than originally underwritten
• If the achieved net operating income (NOI) is less than that underwritten, Freddie Mac may at its discretion, resize to a smaller principal amount, provided that the (i) capital structure (sources and uses) is viable at the reduced loan amount, (ii) sufficient funds exist to meet all remaining capital and operating needs of the property, and (iii) stabilized NOI supports the resized smaller principal amount.
• An appraisal or updated appraisal is not required at conversion.

Construction Monitoring

• Funded forwards:
  
  Seller/servicer will provide Freddie Mac with periodic third-party monitoring reports submitted by the architectural/engineering consultant.
  • Construction lender and seller/servicer 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.
• Unfunded forwards:
  • No architectural/engineering consultant has to be retained.  Seller/servicer to provide Freddie Mac with periodic monitoring.

Replacement Reserves

Funded replacement reserve escrow required if 40% or greater set-asides are in place. Freddie Mac will reassess reserves every 10 years.

Tax and Insurance Escrows

Required

Application Fee

The greater of $3,000 or 0.1% of the maximum loan amount

Other Fees

• Funded forwards: 
  • Refundable forward commitment fee (upon conversion): 1% of the maximum loan amount
• Unfunded forwards: 
  • Refundable forward commitment fee (upon conversion) of 2% of the proposed credit enhancement amount
  • Additional standby fee of fifteen basis points (.15%) of the proposed credit enhancement amount per annum, for each year (or partial year, prorated) of the construction phase until conversion. The Standby Fee must be paid in a lump sum and transmitted to Freddie Mac on or before the closing.