Fannie Mae, Freddie Mac and the Federal Housing Administration (FHA) have all been fine-tuning their mortgage programs over the years to improve efficiency and respond to market competition, but important differences remain between them that will affect where you go for financing on a specific development.

Three deals help illustrate the point. Each ended up with a different source of financing because of their developers’ specific needs. All three were handled by Reilly Mortgage Group. Reilly is based in McLean, Va., and has nine regional offices, including a new office in Portland, Ore

Deal 1: Seniors, rehab and a tornado

Finding the right match for the New Southern Senior Center in Jackson, Tenn., was straightforward, but nothing else about the deal was simple. The 84-unit building, originally built in 1928, had an existing FHA mortgage that resulted from a renovation in 1976, and it was completely occupied with Sec. 8 elderly tenants. The property had also received $540,000 of historic tax credit equity over the years, and the need to adhere to historic building guidelines associated with the tax credits necessarily added to the costs. FHA was able to handle all of that, and it is also the only one of the three agencies that offers combined construction and permanent loans.

When developer Pentad Group of Germantown, Tenn., began this project in 2003, the building needed a basic rehabilitation. FHA Sec. 221(d)(4) financing – for new construction or substantial rehab – was lined up and was about to be processed when the building got hit by a severe tornado. “It went in one end and out the other at 200 miles per hour,” said Alan Reese, vice president of Pentad. So what started out as a normal rehab ended up as a complete rehab, but at least the basic structure of the building was solid.

The tornado damage complicated matters by adding several million dollars of insurance-covered rebuilding on top of the FHA-financed basic rehab, but the deal got done. The $3.8 million loan has a term of 37 years, a debt-service-coverage ratio (DSCR) of 1.11x and a loan-to-cost ratio of 90%.

The rehab was completed in September 2005. At press time, the building was about 70% leased up.

“It took longer to do [than a normal rehab], but I would primarily attribute that to the complexity of trying to do a new substantial rehab coupled with a rehab renovation,” said Reese.

Deal 2: A fit for Fannie

Fannie Mae offered a larger loan than Freddie Mac did for Stuart Hill Apartments, and that was enough to get the deal. Stuart Hill, a 180-unit property located in Winchester, Va., got a $13 million loan with a 10-year term (with a fixed interest rate for the first nine years; in the 10th year the rate will float 250 basis points over the London InterBank Offered Rate), a DSCR of 1.25x and an 80% loan-to-value (LTV) ratio.

With no effective local competition, and with no concessions in the Winchester market, Fannie was comfortable moving ahead without waiting the standard three months, said Reilly Vice President Phil Morse, who originated the loan. “Fannie Mae [usually] requires three months worth of stabilized occupancy before they will fund [a project], but we were able to do that without waiting three months,” said Morse.

Though it was the first multifamily deal for the borrower, Stuart Hill Apartments, LLC, it benefited from a “very good management team that was well-known in the marketplace,” said Morse.

Deal 3: Freddie’s forward abilities

The 280-unit Cornerstone Villas in Glen Mills, Pa., is a luxury garden-style apartment property near Philadelphia. Developer PerCor got a $29 million construction takeout loan from Freddie Mac. The adjustable-rate mortgage had a beginning interest rate of 3.525% (and a cap of 6.57%), a 10-year term, a 30-year amortization, a DSCR of 1.25x and an LTV ratio of 80%.

The developer had not lined up permanent financing before starting construction. Freddie Mac was more aggressive than Fannie in pursuing deals that were already under construction and were beginning their lease-up, so the choice was clear, said Lamar Seats, senior vice president and head of production at Reilly.

The agency matchup

Project name Stuart Hill Apartments Cornerstone Villas New Southern Senior Center
Location Winchester, Va. Glen Mills, Pa. Jackson, Tenn.
Deal highlights Rate-locked in one week; construction loan takeout at property stabilization Construction loan takeout at property stabilization 100% Sec. 8 seniors development; substantial rehabilitation   
Number of units 180 280 84
Investor/loan type Fannie Mae, cash Freddie Mac, adjustable-rate mortgage Federal Housing Administration, 221(d)(4) loan 
Loan amount

$13 million

$29 million

$3.8 million

Loan term

10 years 10 years 37 years
Amortization 30 years 30 years Fully amortizing
Prepayment type/term Yield maintenance, 9 years One-year lockout; 1% penalty thereafter N/A
Loan parameters 80% loan-to-value (LTV) ratio; 1.25x debt-service -coverage ratio (DSCR)    80% LTV; 1.78x DSCR 90% loan-to-cost ratio; 1.11x DSCR
Interest rate 5.75% 3.525% 5.90%
Maximum interest rate 6.57%
Borrowing entity Stuart Hill Apartments, LLC PerCor New Southern Senior Center, LP   
Source: Reilly Mortgage Group