Understanding construction loan takeout options: Fannie Mae Near-Stabilization vs. Freddie Mac Lease-Up

Transitioning from a construction loan to permanent financing is a crucial step in the lifecycle of multifamily projects. As a sponsor, it’s essential to understand your options to ensure continued financial stability and growth post-construction. Two available agency financing options are the Fannie Mae Near-Stabilization program and the Freddie Mac Lease-Up program. This article will explore what these programs entail, when a sponsor might consider each and how Walker & Dunlop can facilitate the process.

Overview of takeout options for construction loans

Takeout options allow developers to replace high-interest construction loans with more favorable permanent financing once a project nears stabilization. Selecting between Fannie Mae and Freddie Mac options is important, as each program has unique features tailored to different project statuses and sponsor needs.

Understanding Fannie Mae Near-Stabilization

The Fannie Mae Near-Stabilization program is designed for multifamily projects nearing operational stability. Here are its key features:

• Eligibility criteria: Sponsors must demonstrate the projected ability to reach at least 75 percent occupancy, typically while being about four months away from stabilization.
• Flexible financing: The program allows for locking in financing when occupancy requirements are met, enabling sponsors to transition smoothly away from construction debt.

When to consider Fannie Mae Near-Stabilization

This option is ideal for developers on track to meet occupancy expectations around the time they anticipate stabilization. If you recognize that your project will reach 75 percent occupancy soon, it is best to engage in financing discussions early to lock in favorable rates and secure funding without delay.

Exploring Freddie Mac Lease-Up

Freddie Mac’s Lease-Up program offers another pathway for developers seeking construction loan takeouts, characterized by the following aspects:

• Occupancy requirements: Sponsors can lock in financing at 50 percent occupancy, which can be advantageous in certain market conditions.
• Longer stabilization timeline: While this program offers up 6 to 12 months for achieving stabilization, sponsors must present a leasing trajectory to demonstrate planned growth.
• Credit enhancements: To secure financing, Freddie Mac could require a credit enhancement, which is often provided through a letter of credit, a bank personal guarantee, or another collateral arrangement. Additionally, Freddie Mac places significant importance on the sponsor's experience, requiring demonstrated expertise in lease-up activities and familiarity with the market where the opportunity is located.

When to consider Freddie Mac Lease-Up

Freddie Mac’s Lease-Up program can be favorable when occupancy is still ramping up, and projects have a solid leasing plan aligned with a favorable market. This option gives developers more time to reach stabilization than Fannie Mae, making it an appropriate choice when deals are further from stabilization.

Comparison of Fannie Mae and Freddie Mac options

When considering Fannie Mae vs. Freddie Mac, the following factors should guide your decision-making:

• Occupancy status and timeline: Assess your project’s current occupancy level against each program’s requirements.
• Market conditions: Understand how fluctuating conditions might impact your financing needs and timelines.
• Risk appetite: Evaluate each option's trade-offs related to interest rates, occupancy requirements, and potential cash flow implications.

How Walker & Dunlop adds value

Walker & Dunlop takes a proactive approach to assist clients transitioning from construction loans to permanent financing. Here’s how we support you throughout the process:

• Early engagement: We know that timing is critical. Our team encourages clients to initiate conversations as early as possible in the construction phase—ideally when projects are around 50 percent occupied. By discussing financing options early, sponsors can better strategize their next steps and lock in favorable rates before construction ends.
• Market insight and forecasting: We leverage our extensive market knowledge and analytical tools to provide clients with accurate leasing projections. We help clients create a comprehensive leasing trajectory tailored to obtaining necessary occupancy levels by analyzing recently signed leases and current rental trends. This strategic planning aligns with the eligibility requirements of both the Fannie Mae and Freddie Mac programs, positioning clients for optimal timing in financing discussions.
• Expert guidance on requirements: Navigating the requirements and nuances of Fannie Mae and Freddie Mac programs can be complex. Our dedicated team walks clients through critical timelines and offers insights into what is required for each program, ensuring that all necessary paperwork and documentation are prepared well in advance. For instance, understanding the difference between Fannie Mae’s four-month timeline to stabilization and Freddie Mac’s twelve-month opportunity—including the implications of credit enhancements—is key to making informed decisions.
• Fostering partnerships: We prioritize building lasting relationships with our clients and agency partners. By establishing trust early in the conversation, we reinforce our commitment to adding value. Instead of functioning merely as a lender, Walker & Dunlop aims to be an integral part of our clients’ teams, providing ongoing support, identifying strengths, and addressing any questions that may arise.
• Tailored solutions: Each multifamily project is unique and requires personalized financing strategies. Walker & Dunlop is dedicated to offering comprehensive solutions, helping clients weigh their options, and crafting tailored approaches that maximize value for their specific scenarios. Whether securing rates on a Freddie Mac program or maximizing proceeds through Fannie Mae, our expertise ensures that clients make informed, strategically sound decisions.

By implementing these proactive strategies, Walker & Dunlop positions its clients to navigate and thrive within the financing process.

Key takeaways

Understanding the intricacies of construction loan takeout options is vital as you choose financing for your multifamily projects. By evaluating both the Fannie Mae Near-Stabilization and Freddie Mac Lease-Up programs, sponsors can ensure they choose the solution that best aligns with their occupancy status and market conditions. Walker & Dunlop is here to facilitate this process, providing expert guidance to help you make informed financing decisions.

Need help navigating construction loan takeout options? Contact our Walker & Dunlop experts for personalized guidance today.

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