A new loan from Freddie Mac provides affordable senior housing developers a cheaper alternative for financing new construction and renovation projects, with one company realizing cost savings of up to 40% through the new product.
Launched at the end of last month, Freddie Mac’s Direct Purchase of Tax-Exempt Loans initiative aims to keep rental housing affordable for lower income families and individuals while also driving cost-effective financing for tax-exempt multifamily and senior housing properties.
The loan also provides a cost-effective way to refinance and rehabilitate older projects financed under the Department of Housing and Urban Development’s (HUD) 202 program, particularly those that may have been built 40-50 years ago, says Frank Baldasare, senior vice president with Walker & Dunlop.
“[The Direct Purchase of Tax-Exempt Loans] initiative also increases the quality of living for residents, whereas if you were using another type of financing structure that would translate into less money that can go toward the rehabilitation,” he said.
Last week, Walker & Dunlop announced the closing of the first loan through the Freddie Mac initiative, originated as a $14,280,000 loan for The Lakewoods, an affordable senior housing community located in Dayton, Ohio, for Millennia Housing Development, Ltd.
A Cleveland-based company that acquires, preserves and rehabilitates multi-family residential properties across eight states, Millennia used the Freddie Mac loan to accomplish a variety of renovation projects for The Lakewood, including replacing all appliances, repainting, renovating the community’s parking lot and enhancing its aging mechanical systems.
Freddie Mac’s Direct Purchase of Tax-Exempt Loans was introduced after The Lakewoods had been initially underwritten, however, Baldasare, who completed training sessions on the new product in May, recognized that the loan would better benefit the community than more traditional short-term tax-exempt bond financing.
The Direct Purchase eliminates many of the costs associated with traditional tax-exempt bond financing, including fees paid to bond underwriters, their accompanying legal counsel and ratings agencies—savings that equate to about 40% of the cost of issuances, Baldasare said.
“Though you still have a bond counsel involved with the Direct Purchase, the cost is much less,” he added.
Developed with 4% Low-Income Housing Tax Credits, The Lakewoods is one of 12 properties in the country awarded with HUD’s Senior Preservation Rental Assistance Contracts (SPRAC) program.
Under the Section 202 Supportive Housing for the Elderly Act of 2010, HUD is authorized to provide SPRACs with 20-year terms with the intent of preventing the displacement of senior residents living in HUD 202 communities and to further maintain affordability in the case of refinancing or recapitalization.
A maturation date of October 1 put pressure on The Lakewoods to work quickly to refinance its mortgage, or risk some serious repercussions.
“Without some type of rental assistance, The Lakewoods would have had to convert to market rate, which would have displaced many of its elderly residents,” Baldasare said.
Because a HUD loan would have taken six to eight months, Walker & Dunlop didn’t have time to follow through on that execution. It was then that the company realized it could use Freddie Mac’s Direct Purchase option to close within the time constraints that would comply with community’s SPRAC award.
While Walker & Dunlop is the first lender to execute Freddie Mac’s Direct Purchase of Tax-Exempt Loans only a few weeks into the new product’s availability, the company is confident the strategy will become a more conventional senior housing financing method.
“The way it’s going to preserve senior housing is that it is now a very cost-efficient way to get 4% tax-exempt equity to renovate a facility,” Baldasare said. “There’s now a cost-effective and time-efficient way to refinance and rehabilitate properties under the 202 program.”
Written by Jason Oliva