Freddie Mac Low-Income Housing Tax Credit
Moderate Rehabilitation
4% Tax Credit Tax-Exempt Bond Execution
(An affordable housing Forward Commitment execution)

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Contact Sheet
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Example Financing
Read about a recent transaction that used the Low-Income Housing Tax Credit Moderate Rehabilitation.

Freddie Mac offers financing for the moderate rehabilitation of affordable Low-Income Housing Tax Credit (LIHTC) multifamily properties funded entirely or in part by the sale of fixed- or variable-rate tax-exempt bonds.

Seller/servicers who are approved for this LIHTC Moderate Rehabilitation (Mod Rehab) execution can assist their borrowers in preserving affordable units. This LIHTC Mod Rehab execution offers benefits such as:

Greater cost efficiency than the current Forward Commitment.

Forward Commitment fees are not required.
A letter of credit (LOC) in the full amount of the bond proceeds is not required. Instead the LOC is sized only to the amount of the difference in bond proceeds between the "after-rehab" credit enhancement amount and an imputed "as-is" credit enhancement amount.

An easier execution than a Forward Commitment.
Maximizing up-front bond proceeds. Full bond credit enhancement proceeds based on the after-rehabilitation net operating income (NOI) and value are available at closing. No mezzanine or bridge financing is required.

Product Summary

The property must be financed with Low-Income Housing Tax Credits.
The Mod Rehab must be accomplished with the tenants remaining in place, with occupancy remaining at a minimum of break-even. Projected "after-rehab" rent increases must not exceed 15%.
Freddie Mac credit-enhanced bond proceeds allocated to rehabilitation are held in a "Mod Rehab" escrow, based on the terms of an LIHTC Mod Rehab escrow agreement that is administered by the seller/ servicer and generally follows the Guide requirements for a repair escrow.
Freddie Mac’s collateral consists of the "as-is" property, plus a letter of credit sized for the difference in credit enhancement amount between the "after-rehab" credit enhancement, and an imputed "as-is" credit enhancement amount calculated for the purpose of sizing the LOC.
The Mod Rehab work and any property stabilization should be accomplished within 24 months.
The scope of the Mod Rehab will not involve major building systems or structural components or trigger significant building code compliance.
The total Mod Rehab cost should not exceed the greater of $25,000 per unit or 30% of acquisition cost.
Items generally permitted as part of a Mod Rehab scope are outlined in the Eligible Properties section.

Eligible Transactions

4% Low-Income Housing Tax Credit transactions are eligible.
Credit enhancement of both fixed- and variable-rate bonds
Combination bond financing where tax-exempt bonds are combined with taxable bonds and taxable conventional mortgages

Eligible Properties

Garden, mid-rise or high-rise apartments undergoing Mod Rehab that have received an allocation for tax-exempt bond financing.

Scope of rehabilitation must be moderate and meet the following criteria:

Rehab work is non-invasive to the building’s structure
Scope does not involve major building systems or structural components or trigger significant building code compliance
Total cost should not exceed the greater of $25,000 per unit or 30% of acquisition cost
Items generally permitted as part of a Mod Rehab scope may include:

Interior finish upgrades (units and lobbies)
New kitchen and bathroom cabinets/ fixtures
Elevator cab finish upgrades
New boilers or significant parts replacement
New roofing
Brick pointing
Parking lot resurfacing

There should be no tenant displacement except for a minor number of days, although there may be a few units that are kept off the market to facilitate the Mod Rehab.
Projected occupancy during Mod Rehab must be no less than what the project needs to break even.
Projected after-rehab rent increases must not exceed 15%.

Eligible Borrowers/Sponsors

Borrowers must meet LIHTC and tax-exempt bond requirements.
Sponsor/developers must have adequate experience (at least 3 properties) with Mod Rehab in LIHTC properties where tenants remained in place during Mod Rehab. They should have experience in the local market.
If the owner is contracting for the work, the contractor or major subcontractors must have experience in this type of rehabilitation work.

Eligible Seller/Servicers

Only Multifamily seller/ servicers approved by Freddie Mac for this execution.

Bond Size

Minimum bond size is $5 million
Maximum bond size is $25 million, with larger transactions considered on a case-by-case basis.

Bond Term

Minimum of the remaining term of the tax credits plus three (3) years.
Maximum term of 30 years.
Mod Rehab period: The Mod Rehab period will be included in the bond term, and will not exceed 24 months. However, the Mod Rehab period may be extended by six months by Freddie Mac at its discretion.

Maximum Amortization

Amortization of up to a maximum of 30 years

Collateral

Collateral is a first lien on the project (or second lien with an intercreditor agreement).
Additional collateral in the form of a letter of credit from an acceptable bank.

Sizing: The LOC will equal the "after-rehab" portion of the bond proceeds plus 45 days interest. The "after-rehab" portion of the bond proceeds is the difference between the total Freddie Mac credit enhancement and an imputed "as-is" credit enhancement proceeds calculation that is based on "as-is" NOI and value.
Expiration Date: No sooner than 60 days past the term of the Mod Rehab period
In no event may the LOC be secured by a lien on the property.

LIHTC Mod Rehab Escrow Agreement

The seller/servicer will enter into an LIHTC Mod Rehab Escrow Agreement with Freddie Mac and the borrower, which will:

Hold the balance of the Freddie Mac credit-enhanced bond proceeds necessary to complete the Mod Rehab based on the Freddie Mac approved budget (other sources of Mod Rehab funds would include tax credit equity, and subordinate debt if applicable).
Be governed by the terms of a standard Freddie Mac LIHTC Mod Rehab Escrow Agreement that will be administered by the seller/ servicer and will incorporate provisions requiring completion of work in a workmanlike manner and in accordance with the approved Scope of Work. It will also contain standard representations and warranties typical for this type of escrow agreement.
Provide that each release from the escrow will be at no more than the ratio of the Freddie Mac credit-enhanced bond proceeds to the total Mod Rehab cost.
Provide that Freddie Mac or the seller will have the right to require that an architect/ engineer be retained by the seller at borrower expense at any time during the Mod Rehab period, if work is not proceeding generally on schedule, if there are material unanticipated construction issues, or if inadequate construction documentation is being provided.
Contain the seller responsibilities during the Mod Rehab period.
Contain the requirements for construction phase monitoring services.

Interest-Rate Hedge During the Credit Enhancement Period

Interest-rate cap or interest-rate swap required from acceptable provider for variable-rate transactions. Freddie Mac provides swap credit enhancement.

Interest-Rate Caps:

Consecutive 5-year caps with funds for subsequent 5-year caps escrowed starting after closing date over the term of the current cap
The cap must meet Freddie Mac requirements, be in place at bond closing and cover first 5 years of the loan term at a strike rate set at initial underwriting.

Interest-Rate Swaps:

Swap terms should meet Freddie Mac requirements.

Maximum Loan-to-Value (LTV)

For mortgages financed by variable-rate bonds, maximum LTV is the greater of 85% of market value or 80% of "adjusted value." "Adjusted value" is the market value of the property adjusted for the value attributable to the tax-exempt financing, by adjusting the capitalization rate.
For mortgages financed by fixed-rate bonds, maximum LTV is the lesser of 90% of market value or 85% of adjusted value
HUD Risk Sharing for fixed-rate bonds only: Maximum of 90% of adjusted value.

Minimum Debt Coverage Ratio (DCR)

1.20x
1.15x with HUD risk sharing for fixed-rate bonds

Subordinate Debt

Soft subordinate debt:

Debt service cannot exceed 75% of cash flow after payment of operating expenses, reserves, escrows and senior debt.
No loan-to-value test

Hard subordinate debt:

Combined debt service ratio may not be less than 1.10x
Combined LTV may not exceed 90%

Third-Party Reports and Documentation

Required

Appraisal
Environmental reports (Phase I and other reports as necessary)
Current physical needs assessment done by an independent third party retained by the seller and dated not more than six (6) months prior to its submission, which will:

Include an evaluation of existing conditions, immediate and near term needs, and recommended repairs and improvements over the life of the loan.
Estimate the cost of any work it suggests.
State whether the borrower’s scope of work addressed the property’s immediate and near-term needs and whether the costs given in borrower’s budget are appropriate.

Scope of Work sufficiently detailed for Freddie Mac to:

Determine whether the rehabilitation is moderate and qualifies for this product execution.
Determine whether a third-party engineer will be required during construction, and whether the mod rehab budget is properly sized.
Identify all areas of the existing project to be affected, including the quality and quantity of all materials and of the expected quality of work.

Schedule of Mod Rehab Work to be done
Sources and uses of funds
Resumes of development personnel and companies that will perform the work and copies of work contracts as appropriate
Only where required, Architectural/ Engineering Consultant’s Consulting Agreement (to include scope of services)

Release of Letter of Credit Upon Completion of Mod Rehab and Stabilization

Release of the letter of credit is contingent upon:

Completion of construction in accordance with the approved Scope of Work.
Lease-up at 90% occupancy for 90 days.
Achievement of debt service coverage equal to or greater than originally underwritten.
Achievement of underwritten NOI.
An appraisal or updated appraisal is not required for release of the LOC.

Construction Monitoring

Seller/servicer (or consulting architect/engineer if required) will monitor construction progress quarterly, on site, to evaluate:

Conformance to proposed scope.
Conformance to schedule.
Conformance to budget: The seller/ servicer will notify Freddie Mac of all budget changes having a material impact on the project. Freddie Mac will have the right to approve changes that exceed $50,000 per line item
Project quality.
Documentation evidencing completion of the Mod Rehab per the approved Scope of Work.

Servicing During the Mod Rehab Period

The seller/ servicer will administer the Mod Rehab Escrow and monitor property performance during the Mod Rehab period including:

Requiring annual assessments (AIE and ALI) of the borrower.
Administering draws, collecting quarterly rent rolls and operating statements, and providing certifications as to percentage of completion, NOI, and debt coverage with each draw.
Reviewing quarterly rent rolls and operating statements submitted by the borrower.
Simultaneously with each draw request, submitting to Freddie Mac a certification as to most recent occupancy and DCR. Where quarterly financials reveal that occupancy has fallen below break-even, seller shall notify Freddie Mac, and Freddie Mac may determine that the property should be placed on the Watchlist.

Replacement Reserves

A funded replacement reserve escrow is required if 40% or greater set-asides are in place. Freddie Mac will reassess reserves every 10 years.

Tax and Insurance Escrows