Bridge to Resyndication Loan
By Timothy Leonhard
5 min read
Over the better part of the past decade, given the extraordinary demand and competition for multifamily investment, many existing affordable housing properties nearing the end of their initial 15-year compliance period have been sold to “conventional buyers” whose goal is to drive high returns rather than be long term owner/operators of affordable housing. As such, at the end of an asset’s extended use rent restriction period, many of these properties will be converted to market rate housing and will be lost as affordable housing stock forever. Conventional buyers have a significant advantage over long-term affordable housing owner/operators given their ability to close on acquisitions in a very short period of time, usually 45 to 60 days.
Freddie Mac and Oak Grove Capital both recognized the need for efficient short-term financing which would allow dedicated affordable housing owner/operators to quickly and competitively acquire existing LIHTC properties at or near the end of their 15-year compliance periods, yet allow borrowers the time to position those properties for preservation via a resyndication transaction using Low-Income Housing Tax Credits and long-term fixed-rate tax-exempt financing.
In response to this market need, Freddie Mac and Oak Grove Capital recently developed and closed the first, Freddie Mac Bridge to Resyndication Loan (the “Bridge Loan”) for The Parks at Fig Garden, an existing 366-unit affordable housing property in Fresno, CA. The borrower used the Bridge Loan, which has a taxable ARM loan structure, to acquire the Property. Simultaneously with closing, Oak Grove Capital executed an 18-month forward interest rate lock on a Freddie Mac Tax-Exempt Loan (the “TEL”). By combining the high leverage Bridge Loan with an extended forward interest rate lock for a TEL, affordable owner/operators are able to compete with conventional buyers by purchasing properties quickly, while at the same time locking the interest rate on the ultimate resyndication loan thus eliminating interest rate risk.
The Bridge Loan of $14.45 million was sized to 85% of the property purchase price, has an 18-month interest only term and an interest rate at closing of 2.49% (2.30% over 30-day LIBOR). No interest rate cap was required on the floating rate loan. The TEL interest rate lock was in an amount not to exceed $18.54 million, with an all-in rate of 4.42%. Upon closing of the TEL, the loan will have a 16-year term with an initial 24-months of interest only, and a 35-year amortization period. Additionally, the TEL interest rate lock offered the flexibility of a downward resizing without penalty, should certain loan sizing assumptions change between the time of initial closing and the closing of the TEL.
This product went from an idea borne during a short conversation to a real product and an actual closing in about 90 days, which is extraordinary. By creating this new product with Freddie Mac, Oak Grove facilitated the preservation of 366 units of much-needed affordable housing in California. The property’s sponsor will provide a fully-renovated property and meaningful resident services which will greatly enhance the lives of the property’s residents. Additionally, the property renovation will significantly extend the useful life of the asset and will serve as a catalyst to stabilize the surrounding area and could lead to new investment to the neighborhood.
The unique structure of this Bridge Loan coupled with permanent interest rate lock protection provided important benefits to the sponsor, Community Housing Works (“CHW”). Among these are increased cash flows during the period prior to resyndication, due to the very low interest rate associated with the floating-rate, interest only bridge loan execution, as well as much higher leverage at 85% LTV, as compared to most other financing sources in the marketplace. Additionally, the forward interest rate lock on the TEL provided a very competitive, low interest rate, eliminated the borrower’s interest rate risk and had significantly lower transaction costs as compared to a traditional credit-enhanced tax-exempt bond execution.
David Gatzke, Vice President of Acquisitions with CHW, was the lead on the Buyer’s side of the transaction. “The Parks at Fig Garden was our second complicated Preservation transaction with Freddie Mac and Oak Grove. As was the case in our first deal, they brought tremendous experience to the table and invested a significant amount of time in understanding our goals as the borrower. They then worked tirelessly to help us achieve those goals, while utilizing a brand new product and executing in a very short timeframe,” said Gatzke.
The transaction also drew the attention and praise from the highest levels at Freddie Mac Multifamily, given their unwavering commitment to affordable housing. “It is great to see the ingenuity, innovation and focus that Freddie Mac Targeted Affordable Housing Team and Oak Grove bring to the affordable housing space and we are grateful for our partnership with Oak Grove,” said David Brickman, Executive Vice President and Head of Freddie Mac Multifamily. “We are looking forward to the second, third, and twenty seventh creative Bridge Loan closings with Oak Grove.”
