Multifamily Housing Acquisitions: Emerging Trends in Debt Assumptions Combined With Preferred or Common Equity

Description

The rapid rise in interest rates over the past year has resulted in an extremely challenging commercial lending environment. While new money is hard to find, loan assumptions may provide the prospective debt commercial real estate buyers need to close deals. Multifamily investors are increasingly turning to the assumption of existing Freddie Mac senior mortgage debt (Freddie Debt) coupled with an infusion of preferred equity. Assumption of an existing Freddie Debt is attractive because the debt is typically a fixed rate that is several points below a new floating rate mortgage loan. Also, Freddie Debt typically has a maturity date that is at least 24-48 months after the expected closing date. This allows investors to gamble that in several years interest rates will be lower, facilitating either a refinancing opportunity, sale, or other exit strategy.

While the assumption of Freddie Debt seems like a good alternative for buyers who need leverage in the current market, there are many factors to consider in determining if it's the right fit for your client. The factors range from the additional time these deals typically take to sellers not being on board due to the increased complexity of the deal due to Freddie Mac's rigorous requirements regarding secondary financing sources such as preferred equity or other subordinate debt.

Whether an equity investment is classified as preferred equity or common equity has a consequential impact on how the assumption will be viewed and whether Freddie Mac will approve it. Although Freddie Mac allows a potential path for obtaining approval for preferred equity, approval of an assumption is extremely rare in these cases and the approval process is much more complicated. Thus, most investors and sellers prefer to pursue Freddie Debt assumptions combined with common equity, meaning equity where the investor is entitled to receive preferred distributions, payments, or returns only out of net cash flow from the property before any other investor receives any distributions, payments, or returns.

Listen as our authoritative panel discusses the nuances of Freddie Debt assumptions and the requirements with respect to preferred or common equity. The panel will take you through the process from drafting the initial term sheet to the operating agreement and other constituent investment documents to help ensure that the Freddie Debt assumption will not be delayed or rejected entirely.