Developers seeking financing for the moderate rehabilitation of their properties have a new tool at their disposal, at least if the property received any low-income housing tax credit (LIHTC) funding.

Freddie Mac announced its Low-Income Housing Tax Credit Moderate Rehabilitation loan execution, called LIHTC Mod Rehab, in late February. An enhancement to the company’s Multifamily Affordable Forward Commitment Product, the new program provides upfront financing for moderate rehab of properties. That makes it “a less costly and more efficient execution with no interim financing,” said Mike May, Freddie Mac’s senior vice president of multifamily sourcing. No mezzanine or bridge financing is required because the full proceeds are available at closing and are based on the post-rehab net operating income and value.

The loan sizes under the program can range from a minimum of $1 million (for properties funded with 9 percent LIHTCs) or $5 million (for properties funded with 4 percent LIHTCs and tax-exempt bonds) to a maximum of $25 million. The loans are structured with a minimum term of the remaining term of the tax credits plus three years; the maximum term is 30 years. The maximum amortization is also 30 years. (For more details, see sidebar.)

Borrowers will save in a couple ways, according to Kimball Griffith, director of structured and affordable sourcing for Freddie Mac. First, they get a lower spread over the interest rate index, which results in a lower final interest rate, because the lender can fund the loan immediately instead of waiting. “We’re not having to take a risk on interest-rate movement over the course of the forward periods,” he said. Second, borrowers save bank costs or other lender costs that would be associated with obtaining a letter of credit [LOC] for the full loan. The Mod Rehab program requires a much smaller LOC, albeit one backed by hard collateral.

Borrowers also will benefit from the streamlined process, according to PNC MultiFamily Finance Senior Vice President Mark Ragsdale. “It’s not a forward at all,” he said. “It gives you an in-between option between doing a full-fledged construction forward structure and doing an open-ended construction loan and seeking a permanent loan later.”

By not needing a separate construction lender, “it basically takes one player out of the process,” Ragsdale added. “You … save a lot of time and money, as far as coming up with construction loan fees.” That change also removes the need for a lawyer representing the construction lender, if it’s a bond deal.

Tailoring the program

Freddie Mac developed the new program after feedback from its network of seller/servicers indicated strong support for a moderate rehab product.

“At the time, we had two general products for this property type,” said Griffith. There were immediate fundings, “where you make the full loan, the property’s up and stabilized, and the work’s already done.” The agency also offered forward commitments for substantial rehab of a property, “in which case we’d be looking for a letter of credit for the full amount of the loan plus some interest, and we would be providing a spread lock if it was a bond deal or a rate lock if it was a 9 percent deal for funding in the future,” said Griffith. He added that the process for a loan deal that required relatively little work (which could be accomplished with the tenants remaining in place) didn’t fit well into those products and “the forward product itself is more expensive than an immediate-funding product because you’re not taking forward interest-rate risk, and you obviously are when you’re doing a forward deal.”

Allowable rehab items include:

  • Interior finish upgrades to units and lobbies,
  • New kitchen and bathroom cabinets and fixtures,
  • Elevator cab finish upgrades,
  • New boilers or significant parts replacement,
  • New roofing,
  • Brick pointing, and
  • Parking lot resurfacing.

In other words, projects that are not major, but also not minor and cosmetic. “We think the best kind of mod rehab is not cosmetic; it should extend useful life,” said Griffith. Therefore, Freddie allows the replacement or repair of items that, if left undone, “would cost substantially more … to fix later,” he added.
The Mod Rehab program includes a number of guidelines that serve largely to ensure that the developer is only doing moderate rehab and not substantial rehab. The 24-month time limit helps reign in longer-term, larger renovation projects. “If you take three-and-a-half years to get the property fixed, that doesn’t feel like moderate rehab,” said Griffith.

Tenant displacement is kept to a bare minimum to keep the property at an income level that is at least break even, and it makes sure the rehab that’s being done is not so intrusive that it will drive away existing tenants. Better yet, they’ll see the improvements happening and will be inclined to stay, according to Griffith.

The Mod Rehab program is available through Freddie Mac’s seller/servicers. See for a list.