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Credit Policy Bulletin

November 30, 2015

Welcome to the first edition of the Multifamily Credit Policy Bulletin, which we’re publishing to help our customers stay abreast of credit policy changes that could affect loan transactions. The bulletin will also facilitate credit discussions between you, our customers, and your representatives at Freddie Mac.  In it, we cover changes to:

  • Commercial Income - Analyzing properties with commercial income based on the specific market, location, and tenancy.
  • Preferred Equity - Facilitating more consistent structures and analysis.
  • Carve-Out Guarantors - Better reflecting typical investment fund practices especially during their investment aggregation periods.

In addition, we've posted a commercial tenant improvements/leasing commissions (TI/LC) calculator to complement this update. The calculator can be found on the Seller/Servicer Originate and Underwrite pages of our site under References and Tools.

We hope you find this information useful and informative, and we always welcome feedback or questions that may arise.

Commercial Income

We’ve updated our underwriting approach to commercial income to improve the analysis of the income.  Properties with commercial income will be analyzed based on the specific market, location, and tenancy. The major changes of the policy update are:

  • Commercial Income concentration determined on the basis of Gross Potential Rent (GPR) instead of Net Rental Income (NRI). 
  • Vacancy still based upon the greatest of market, actual, or 10%.
    • Tenants need to be in place, operating, and paying rent to be included in NRI.
    • Concessions and Bad Debt should be included in commercial vacancy as necessary.
    • Reduction to vacancy may be warranted for credit tenants with long term leases.
  • Expense Reimbursements should be reflected in Other Income.
  • Percentage rent may now be underwritten so long as: 1) it has been paid consistently, 2) it is underwritten at the lower of the T-12 or the average of the preceding 3 years, as available, and 3) tenant viability is not in question.
  • Commercial Lease Analysis required only for leases that individually comprise 5% or more of GPR.
  • SNDAs required only if Legal determines they’re necessary, based on limited criteria set forth in the Freddie Mac Multifamily Guide.
  • Enhanced Tenant Improvements and Leasing Commissions analysis
    • Required to be underwritten if commercial GPR >5% of GPR
    • TI/LC Calculator is available with 5 key inputs
      • New & Renewal TI assumptions
      • New & Renewal LC assumptions
      • Market Rent
      • Renewal Probability
      • Lease Term
    • TI/LC assumptions based on market, recent leases, or appraiser’s estimate
  • Eligibility: Properties must be primarily residential in character.  Considerations include but are not limited to: percentage of GPR and net rentable area (NRA) that is commercial, property configuration, and whether and the extent to which the residential units serve low- and moderate-income families. GPR and NRA are generally limited to <50% with no minimum threshold.

Preferred Equity

Preferred equity policy has been updated to facilitate more consistent structures and analysis. 

  • For floating rate loans with preferred equity, the sizing will be determined based on a comparable fixed rate basis. 
  • In cases with accrued or deferred returns and a set redemption date (for terms of greater than 5 years, permissible outside the first and last 2 years of the loan term and 1 year following loan maturity), Freddie Mac will look for an exit leverage threshold of 85% based on the remaining UPB at time of redemption combined with all potential accrued or deferred returns at that time.
  • The Seller/Servicer’s counsel must provide Freddie Mac with the Buy-Sell Analysis if the preferred equity provider requests the Buy-Sell Rider.  Freddie Mac will review the Buy-Sell Analysis and determine if the preferred equity is hard pay or partial hard pay, and look for the following:
    • Potential equity contribution provided in stages
    • Return on equity paid in multiple components
    • Return on equity that changes during the term
    • Trigger events that occur as a result of actions of parties other than borrower
  • As preferred equity remains customized from loan to loan, Freddie Mac will continue to reserve the right to review and approve structures as appropriate. 

Fund Guarantors/Carve-Out Guarantors

Fund Guarantor requirements have been adjusted to better reflect typical investment fund practices especially during their investment aggregation periods. The major changes are as follows:

  • Fund Guarantors may include outstanding commitments in their net worth calculation so long as the total net worth is ≥ 2 times our regular requirement.
  • Liquidity may include the greater of unfunded commitments or unused capacity under lines of credit (collateralized by the unfunded commitments) in addition to standard liquid assets (cash and marketable securities).
  • The Term of Existence language has been updated to permit providing monthly financial statements acceptable to the Lender during the last 6 months of the Fund’s term in lieu of providing an extension, replacement guarantor, or LOC (10%).
  • Guarantor must still exercise one of the options prior to the expiration of the Fund’s term.
  • In order to facilitate the appropriate analysis, the Investment Fund Analysis has been updated in conjunction with these changes and is required as part of the Underwriting Submission Package.

Carve Out Guarantor change: Cross-collateralized pool liquidity and net worth requirements have been adjusted to allow the lesser of the aggregate requirements or 2 times the requirements based on the largest single loan in the pool, where the largest loan must be $30 million or greater.

Information provided is subject to change without notice. The Credit Policy Bulletin is not a substitute for the Multifamily Guide. Freddie Mac may apply different requirements or require different structures based on the circumstances of each loan.


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