In August, Freddie Mac launched a new mezzanine lending program that aims to make affordable housing projects financially viable. The initiative offers property owners favorable pricing and additional debt capital if they agree to keep rents for 80 percent of their units affordable to low- and moderate-income families—without federal, state or municipal subsidies—while limiting rent growth throughout the life of the loan. Rates will be verified annually and property owners who do not comply will have to pay a penalty fee until rents meet required levels.
The loan is originated simultaneously with a Freddie Mac first mortgage loan. The program requires the mezzanine loan-to-value ratio to be only 10 percent above the LTV of the first credit, while experienced nonprofits with a good credit score can go up to 15 percent. The combined LTV should not exceed 90 percent.
Kelli Carhart, vice president of production and sales at Freddie Mac Multifamily, takes us through the process that led to the initiative and highlights the main criteria borrowers must meet in order to qualify.
How did this initiative come about? What led to the launch of this program?
Carhart: We have been trying to put together a mezzanine financing program for at least two years, and we’re very pleased our regulator, the Federal Housing Finance Agency, granted us approval to do so. Our goal with this financing is to help change incentives for borrowers and provide an economic basis for private, profit-oriented developers to limit rent increases in exchange for favorable rates. We seek to provide a straightforward product that would expand upon what is being done at the local, state and municipal levels to preserve affordable rental housing.
What are your goals in regard to this program?
Carhart: Our goal is to make meaningful progress in helping mitigate the affordability crisis by providing economic incentives that encourage borrowers to voluntarily preserve rental affordability across the country.
How do you expect results of this initiative to look like a year from now?
Carhart: While it’s too early to speculate what next year will look like, the amount of interest we have experienced has been robust already. We have screened numerous deals and are close to putting several transactions under application.
The mezzanine lending market is on the rise, with the media talking about a boom in the sector. What are your thoughts on this?
Carhart: First, it’s worth pointing out that while multifamily supply has been reaching highs, the economy has remained in an overall housing shortage, for both single-family and multifamily, over the past decade. Overall housing stock supply remains well below pre-crisis levels. Moreover, our product targets workforce housing and the rent levels within this segment of the market are not being recreated.
In fact, we are seeing some depletion of this segment of the market as units are being repositioned or retired from the housing stock. But regardless of our point in the cycle, the purpose of this initiative helps protect tenants from steep hikes when the market accelerates. To qualify, operators must have 50 percent or more of the units affordable to households making the area median income or below. Borrowers must then agree to limit rent growth on 80 percent of units.
As additional background, Freddie Mac Multifamily’s recent mid-year outlook found that market fundamentals over the past few years have started to moderate, but remain healthy, with rents above inflation and vacancy rates increasing slowly.
What type of investors does this program target?
Carhart: This program targets what we call conventional investors, which are investors without an explicit affordability mandate. Our goal is to incentivize these potential borrowers to take notice of this program and seriously consider affordable housing as a viable investment. We anticipate that many of the borrowers who will utilize our program are ones that already own and operate workforce housing. Our program allows them to make it economically viable to support moderated rent growth. We want to make an impact within these markets with our product, so the borrower would need to have a longer-term horizon of ten years.
Image courtesy of Freddie Mac