Freddie following Fannie`s mezz program with its own version

Freddie following Fannie's mezz
program with its own version
High-Leverage Loan program helps borrowers
handle high cap rates, add value. By Brad Berton
Tucker Knight, director for
Holliday Fenoglio Fowler,
arranged nearly $20 million in
senior and mezz financing
secured by Houston's new 240unit Club at Copperleaf on
behalf of the developer.
22 APARTMENT FINANCE TODAY March 2006
With so many multifamily
investors seeking maximum
financial leverage in acquiring
properties, it's no surprise the
two biggest governmentsponsored enterprises
continue refining customized
mezzanine-type loan
programs to supplement
senior mortgages.
mortgage payments absorb higher and
higher proportions of rental collections.
"Investors who have to buy at these
low cap rates are running out of [debtservice] coverage," said Kiffe. So in some
cases debt-coverage requirements might
keep the Program Plus first-mortgage
loan-to-value ratio at just 72% or so
depending on property and pricing details.
In such circumstances, the CWCapital
second under the High-Leverage program
would allow the buyer to boost overall
leverage to 79% or 80%, Kiffe elaborated.
Though program details differ in
some regards, both GSEs can allow
borrowers to take overall debt levels up
to 85% loan-to-cost or loan-to-value.
Following Fannie Mae's rollout of its
DUS Plus program (as in Delegated
Underwriting and Servicing), which in
many cases provides for shorter-term
value-added financing, Freddie Mac is
negotiating its first senior-plusmezzanine transactions under its new
High-Leverage Loan program. Freddie
Mac has forged an arrangement to
acquire senior loans negotiated through
its Program plus originator network, and
CWCapital will purchase second-priority
mortgages amounting to as much as 10%
of capitalization.
The high-leverage program's core
product is largely targeted at borrowers
purchasing stabilized properties-in other
words, those able to demonstrate 90%
occupancy over the latest 90-day grace
period, said Mitchell Kiffe, Freddie's vice
president of multifamily flow-sourcing.
Chalk it up to today's very low
capitalization-rate environment, which at
traditional leverage levels means
Programs offer flexibility
Kiffe stressed that Freddie and
CWCapital also continue building in
program features applicable to
acquisition/rehabs as well, with borrowers
either selling the property on completion
or refinancing the secondary slice with a
Freddie supplemental loan. "We and
CWCapital intend to look at both
stabilized and value-added deals, so there
will be flexibility when it comes to
occupancy," said Kiffe.
While the High Leverage program
generally envisions simultaneous maturity
of the senior and junior loans,
administrators continue refining prepayment provisions to make it more
attractive to acquisition/rehab deals. That
might include a shorter yield-maintenance
period for the secondary loan than the
senior note, or it might allow repayment of
the second loan after just three years with
a modest exit fee, said Kiffe.
Freddie and CWCapital had not yet
announced pricing for the program's
secondary debt by press time, but Kiffe
said that rates will be set using a risk-
Mezz
program
based formula. For example, the rate on a
secondary slice amounting to 5% of loanto-value (LTV) behind an 80% LTV
Freddie first, secured by a solid stabilized
property, will likely end up in the range of
450 to 500 basis points over the
comparable-term Treasury rate, he
estimated. In early February that spread
amounted to a coupon rate of 9% to
9.5%.
But the second loan's rate for lowleverage packages could be as low as 275
to 300 basis points over Treasury. "I think
the all-in rate we'll be able to offer will be
one of the program's advantages" relative
to DUS Plus or programs teaming Wall
Street conduit loans with mezzanine
tranches, said Kiffe.
Choose the best option
With Fannie Mae's DUS Plus program
under a typical 80% loan-to-cost (LTC)
first ahead of a 5% LTC mezzanine loan,
the standard rate on the mezz portion
acquired by Fannie's partner RCG
Longview is 12.6%. But RCG Longview
Vice President David Valger stressed the
company's willingness to bargain a bit
and, where warranted, offer the mezz at
lower pricing than the published standard
rate.
Valger also noted that RCG Longview
officials and DUS Plus originators have
the flexibility to hammer out customized
"mutually acceptable" prepayment
structures. Rather than a yieldmaintenance prepayment provision used
with Freddie's standard High Leverage
structure and most conduit-plus-mezz
plans, the DUS Plus program's penalty is
based on a fixed percentage of the
principal balance, starting at 2% after a
one-year lockout.
Indeed, for many value-added players
especially; a mezz loan's prepayment
provisions can prove more meaningful
than the interest rate along - assuming the
leverage levels are comparable between
the loan options being considered, said
longtime mezzanine specialist Mitch
Clarfield, a director with Deutsche Banke
Berkshire Mortgage. With cap rates now
so low in strong markets such as the Los
22 APARTMENT FINANCE TODAY March 2006
Angeles vicinity, even experienced pros
have a tough time penciling out a
reasonable return if there is not a plan
for increasing rents, he added.
Along with the ability to refinance the
mezz with a Fannie supplemental loan
once the value-added program is
completed, the declining-balance prepayment fee was a key factor in a
Clarfield client's decision to choose the
DUS Plus program in acquiring
and improving the 184-unit Emerald
Hills Apartments in Monterey Park, Calif.
The private investor in fact expects to
refinance a $3 million preferred equity
tranche (arranged by Clarfield) within
about three years, to be followed a year or
two later by the mezz loan.
The borrower, whom Clarfield
declined to identify, is investing more
than $5,000 per unit for interior
improvements at the 1960s-vintage
property, whose previous owner had
already completed extensive exterior and
common-area upgrades. The $21 million
senior DUS loan factored to roughly 70%
LTC, with the $3.1 million mezz
component representing another 10%.
Clarfield helped secure the preferred
equity from LEM Mezzanine.
The prepay schedule also influenced
investor Pacific Property Co. to select a
DUS Plus deal for the acquisition and
renovation of the 136-unit Townsquare
community in Millbrae, south of San
Francisco. Pacific Property executives
appreciate the ability to retire the mezz as
soon as the second year at fixed penalties
rather than more onerous yieldmaintenance formulas, said Mitch
Thurston, the GMAC Commercial
Mortgage senior vice president who
arranged the financing.
"You do the math and you see that's
more attractive" than alternative
defeasance and yield-maintenance
programs for a borrower expecting to
add value and refinance the mezz with a
supple- mental loan within a relatively
short period, Thurston stressed.
The deal had a $16.5 million senior
mortgage and a $4 million mezz
component, representing nearly 85% of
the venture's expected costs; which
included the repositioning budget
approaching $13,000 per unit. "It's the
strategy that dictates which program is
right," said Thurston.
Those sentiments were echoed by
Tucker Knight, a Holliday Fenoglio
Fowler director who arranged nearly $20
million in senior and mezz financing that
was secured by Houston's new 240-unit
Club at Copperfield on behalf of the
developer, whose name was not
disclosed. The client's strategy involved
taking out the construction debt (and
some partner equity) with the best
blended cost of capital the developer
could get at 90% overall leverage, said
Knight.
Wall Street's willingness to offer
higher leverage won out in this case.
"You're generally going to get higher
[combined senior and mezz] proceeds
with a commercial mortgage-backed
security execution," said Knight. "It
seems a lot of borrowers are still going
after every last dollar today."
In fact, the deal from senior lender
Banc of America Securities (BofA) and
mezz lender Tremont Realty Capital
proved most attractive, highlighted by an
interest-only payment schedule for the
first five years and highly competitive
rates on both the senior and junior
components.
The 10-year senior loan was for
about $17.5 million, priced at 87 basis
points over the corresponding Treasury
yield, according to Knight. The interest
rate for Tremont's $2.3 million mezz
slice, also maturing in 10 years, is 12%.
Though the deal required Knight to
negotiate an intercreditor agreement
between BofA and Tremont, those rates
proved well worth the effort, he said.
The prepayment fees are higher than
with DUS Plus, but Knight and his
client still deemed it more attractive than
a traditional defeasance or yieldmaintenance schedule. The mezz slice is
locked out from prepayment for two
years, followed by a 4%-of-balance
penalty during the third and fourth
years, 3% during the fifth and zero
thereafter.