RPP - Finance Right: Freddie Mac SBL
RPP - Finance Right: Freddie Mac SBL
Episode 4 of the Wheelbarrow Profits series: Rand Partners Podcast where we provide a quick hit of Multifamily education weekly! Jake Stenziano and Dylan Marma host this sub-series which is designed to educate you in a short period of time, whether on the subway, driving to work, or on a jog. We’ve created this series to give actionable content that is quick and to the point.
Jake Stenziano: All right, dude. You ready?
Dylan Marma: Ready.
Speaker 3: Welcome to the Wheelbarrow Profits podcast, Rand Partners edition.
Jake Stenziano: Hello, everybody. This is Jake Stenziano, host of the Rand Partners Podcast, your quick hit for multifamily education weekly. Today I'm joined with Mr. Rand Partners himself, the D-Dog, Dylan Marma. Dylan, how's it going?
Dylan Marma: Always making it happen, Jake.
Jake Stenziano: Hey, we got a good one for you today. We're continuing with the framework. Today we're talking finance right, and we're going to take a deep dive into something that we use all the time, the Freddie Mac Small Balance Loan program, Freddie Mac SBL. You may hear that getting thrown around a lot. This is a fantastic program. I think it was designed to compete head-on with the community banks, and over the last few years, it's really got some traction. I mean, we probably do four or five of these things a year, and it's just a really good program to allow people to scale deals that may not have been traditionally a conventional Fannie deal. I think the key to it is you can take a million to two-million-dollar deal now and get great nonrecourse financing for it, so you're not going to be maxing out your community bank and hitting with their loan requirements. So, I think the first thing that we want to touch on here is what is it going to take to get into one of these deals. Typically, we know that they're looking for a net worth requirement equal to the loan amount, so this can be pooled together amongst yourself and your partners, and liquidity up to nine months of principal and interest. Dylan, anything else in regards to these pieces or just the program before we get into the top headlines here?
Dylan Marma: Yeah. So, the Freddie Mac SBL program came out just a few years back, and since launching, it's taken a huge market share. It's an extremely attractive financing option for people that play in the space. With the smaller deal size, typically the program maxes out around six million dollars, in some cases up to 7.5 million. For a long time, the conventional loan would not finance in that deal size, so you were stuck looking for alternative options, usually having to take on recourse financing, usually at a higher interest rate. So, you're taking on these risks of your debt options in a smaller field, so since Freddie Mac launched the SBL program, it's became really the staple for this deal size, for something that's stabilized. Today we wanted to share with you just a few of the things to look for to make sure that your deal is right for the Freddie Mac SBL program. I know we've closed on a few of these, in terms of refinances, over the past couple months, and then with Rand Capital, the loan brokerage arm, we actually have two of these that will be closing next month, so we're seeing them left and right, and it's a very common tool in our business.
Jake Stenziano: Yeah. So, one thing for our group personally in-house that we were facing is there's these thresholds that you'll hit with community banks, and I think our bank can go up to somewhere between 10 and 15 million dollars, but if you're doing the volume that we do, you're going to hit that really quickly, so you're going to have to get maxed out, and keep going and developing these relationships with community banks, and you're getting recourse financing time and time again, so this gives you the ability to get that debt off your balance sheet, and actually have one-stop shop. You can continually go back to your broker and do deal after deal, after deal, nonrecourse, and really build a nice portfolio. The loan size, though, it between one million and seven-and-a-half million, but there's some kind of nuances in there because it's typically one to six, but isn't there something between the six and seven-and-a-half-million-dollar range to get you up, Dylan, at that point?
Dylan Marma: Yeah. So, if it's less than a hundred units, then often it will go up to 7.5 million.
Jake Stenziano: So, think about that. That's like your San Franciscos, your New Yorks, if you have some really high-price-per-door units that they're giving some leniency there. Right?
Dylan Marma: Right. So, a lot of the terms that we're going to cover today are really market-dependent. The debt coverage ratio is market-dependent. The loan-to-value can be market-dependent. So, again, this is stuff that you want to consult with your loan broker on to make sure that when you're looking at a new market, you can properly underwrite to the specific terms that are going to be best fitting for each deal.
Jake Stenziano: Yeah. So, probably most markets are, especially if you're in the Southeast, you're probably looking between that one and six-million-dollar mark, but check just to make sure. This is loan amount. This is not the value of the property, so keep that in mind. So, you're going to have to look at your loan-to-value when you're calculating this.
Dylan Marma: Correct.
Jake Stenziano: Yeah. Go ahead.
Dylan Marma: So, just wanted to make a minute to talk about the terms and the amortization. So, as far as terms are concerned, when you're looking although Freddie SBL, typical you have either a five, a seven, or a 10-year fixed rate loan, and you can also do up to a 20-year hybrid adjustable rate after your five, seven, or 10-year fixed rate burns off, and then in terms of amortization, it's almost always a 30-year amortization, and you also have the opportunity to receive some interest only, which we always love to take advantage of. So, if you have a five-year loan, you oftentimes can get a year of interest only. With seven years, you can get two years, 10 years, up to three years of interest only.
Jake Stenziano: Yeah, and what we... The most common deal that you're going to see here is a 10-year terms with a 30-year amortization, and then you're going to have to negotiate, okay, what is the prepayment? Are we going to do a step-down prepayment, or are we going to do something that is referred to as yield maintenance, which if you're going to do yield maintenance, you're really going to want to hold the property and know that you're holding it for the full 10 years so you don't get hit with an owner's prepayment. With the step-down, everything is connected with the prepayment that's going to effect the interest rate. The term is going to effect the interest rate. So, typical again is 10-year term, 30-year AM. If you're syndicating the deal, you're probably going to want to do a step-down, and the loan-to-value we've done up to 80%. Three deals ago it was 65%, and that was just based on where the deal was at takeover. It was a high-evaluate deal. If you're getting into something that's very stabilized, you're going to be able to do better. You're probably going to be able to get up closer to that 80% loan-to-value, but I think even on the website you're seeing they're advertising what, 75% LTV at this point?
Dylan Marma: Yeah. You see, it says on the website 75% of acquisitions, but we've definitely received on that 80%, so anything, a lot of this is going to be dependent on the market, and that you also have DCR constraints. So, the DCR, if you're in the top SBL market, you're at a 1.2 DCR. If you're in a standard market, more often than not we see a 1.25 debt coverage ratio requirement. If it's a smaller market, could be 1.3, and if it's a very small market, it can be up to 1.4 with the DCR, and on the very small and the small market, you also have the maximum LTV getting capped out at roughly 70%.
Jake Stenziano: Yeah. So, when it comes to the rates, this is going to be a big point of negotiation, and this is going to be something that you're going to work on with your broker. These are typically updated weekly. I think the rate sheets come out, something like that, on Tuesdays or whatever, so you're going to want to be continually checking these, seeing what the rates are. I think they typically flow around 200 basis points over 10 years or something like that, maybe a little bit less, just depending where things are, but that's going to be something you're going to want to check on frequently. The interest only is another one. If you get less interest only, you're probably going to get a better rate. If you go for-
Dylan Marma: Yeah. It's 10 basis points, 10 to 15 basis points for every year of interest only.
Jake Stenziano: Yeah, and if you're going for three years interest only, that's going to have an impact on your rate. So, all of this stuff is connected, so before you're having that conversation with your broker, you're going to want to try to understand what are my goals here, what are my objects, am I holding long-term, do I want to get the yield maintenance, am I going to hold it for five to six years and then sell it, so I want to get the step-down, and I maybe only need two years interest only. These things are all intertwined and connected, so you really got to understand what your priorities are, and what you're going to be doing with the deal over the next five to 10 years so you can structure your debt correctly.
Dylan Marma: Absolutely. So, one last point here I want to just touch on, which properties will not qualify for the Freddie SBL, and then we'll move onto the next section here. So, as far as ineligible properties, you have senior housing. You have student housing with greater than 50% concentration, military housing with greater than 50% concentration. You have [LayTech] properties with LURAs. A lot of the affordable housing properties will not qualify for this. Then the other thing you have to make sure of is that your property is stabilized on a trailing three-month average, so you have to see at least 90% occupancy to make sure that they're will to finance it with this. So, this is not for the heavy lifting deals that are low occupancy. You have to make sure you're buying a product that's somewhat stabilized in the first place.
Jake Stenziano: One thing that they've done recently is they've allowed for scattered site communities. Now, what is a scattered site? We own a fair amount of scattered site communities, and it's just been our structure. We may own a 50-unit over here, and then a few miles away we may own another 50-unit. So, what they're allowed you to do is pool these scattered site communities if they have the management stay under one roof, and then actually do a deal with the scattered site communities. We have a few of them that really run out of one management office. It's the same manager, essentially manage them as a larger complex, even though they may be a mile or two apart. That was huge for us because every time you got to do another loan, it's more paperwork, it's more bureaucracy, it's more cost, so the fact that they've allowed us to start doing these scattered sites has been fantastic, and we've really used that well. I think the key is that the Freddie Mac program really is targeting the community banks. They're going after them hard. It's nonrecourse. It's better rate. It's better amortizations, and I think it allows people in this one-to-six-million-dollar loan amount size really scale their business and build a multifamily business with some of these smaller properties, and I'm a big fan of it. We use it all the time, and it's done really well for us. Anything before we move on, D-Dog?
Dylan Marma: No, that's about it. I think if you want to make sure that you're getting a rate sheet every week, they should release a rate sheet so you can get those once a week. We actually have those available through Rand Capital. If you go to randcapllc.com, you can actually start the conversation there, and you'll be put on the mailing list to receive our weekly rate sheets.
Jake Stenziano: All right. Let's take a quick timeout to hear from our sponsor.
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Jake Stenziano: All right, and we're back. So, this is the fun part of the show here. We got our weekly question from the listeners. Who do we got today?
Dylan Marma: Oh, we got a good one here today. We have Mr. Bell. So, his question today is, "Can you explain your eviction policies and procedures?"
Jake Stenziano: Yeah. We keep it right down the fairway. There's law in every state that we work in, and I think the most important thing is the just always be on the right side of right here, and follow what the law says. So, if we look at Tennessee, for example, it's a 14-day eviction. So, there's a grace period between the 1st and the 5th. On the 6th, the resident will be given a notice, so they'll have 14 days to basically come through and get their debt cleared up, and if not, then after that 14 days, we will file for the actual eviction through... We use something called Nationwide Evict. It actually is a great scale system thing for those out there that are self-managing. I would look at this Nationwide Evict. It ties right in with our attorneys so that the attorneys that actually process the eviction, all we got to do is go on, type it up, they'll send it out, and they'll actually get it posted, and then from there it's very systematized and handled. We still have to have our community manager show up to court and go through the process, but it's fairly efficient, and that's part of the reason also we operate in the Southeast, be they're not... 90 days to evict someone, and they haven't given you money. I firmly believe in the pay-to-stay program where we're providing a service, and we need to be paid for it. It's the same thing if you go to the grocery store and you buy a gallon of milk. You need to give the $1.50 for the gallon of milk at time of purchase. We're actually held up as landlords having to wait a lot of times for this stuff when it is the responsibility of the resident to make sure that they're held accountable and paying their way. So, again, really just try to keep it right down the fairway, make sure we're following to the letter of the law, and then just allowing the system to handle it when it's gone past any reasonable accommodation.
Dylan Marma: You heard it straight from the operator.
Jake Stenziano: Straight from the operator.
Dylan Marma: But yet, same thing. It's just like with the loans, is everything is very market-specific, state-specific, so when we're looking at new markets in new states, we're always making sure to look at what the laws and the policies are for evictions, because we do want to primarily invest in what we consider to be landlord-friendly environments.
Jake Stenziano: Yep, and again, guys, this is not meant to be any type of legal advice. Make sure you contact your attorney and follow what they say, and typically these things will work themselves out. So, D-Dog, take us home.
Dylan Marma: All right, guys. Well, thanks for joining us here, today's call. As far as if you have questions and you want to get your questions answered, make sure to visit randpartnersllc.com. You can go and check out the podcast tab, and then you can go click on ask us anything, type in your question, let us know who you are, where you're from, and we'll be happy to follow up on future episodes.
Jake Stenziano: Thanks, everyone.
Dylan Marma: Take care, guys.