Freddie Mac Buys First Multifamily Loan with SOFR
The transaction supports the refinancing of a $20 million bridge loan for a nearly 300-unit project in Houston.
Freddie Mac has purchased its first multifamily loan indexed to the Secured Overnight Financing Rate. The deal was arranged by CBRE.
Through its direct lending program as a Freddie Mac Optigo Lender, the brokerage firm orchestrated the refinancing of a $20 million bridge loan for Vintage Apartments, a 292-unit multifamily project in the Brookhollow/Inwood neighborhood of Houston, Texas. The loan was acquired by Freddie Mac late last month.
SOFR, an interest rate banks use to price US dollar-denominated derivatives and loans, is replacing LIBOR, the long-standing benchmark rate used worldwide.
The 10-year floating rate loan indexed to SOFR was made to two commercial real estate investment companies based in Houston, and the deal was done by CBRE’s office there. The borrowers bought a SOFR-indexed interest rate cap, which cost three basis points more than a LIBOR-based cap.
The loan also uses the first SOFR-based hedge (rate cap) to mitigate future increases in the Index. Freddie Mac, and all lenders who make floating rate loans, require an interest rate cap in order to mitigate the potential for the SOFR Index to rise over time, thus causing an increase in the borrower’s principal and interest payments. With the Vintage Apartments loan, for example, the SOFR Index yield at closing was 0.09% and the borrower purchased a SOFR interest rate cap that had a maximum yield of 2.00%.
“By utilizing the new SOFR-indexed floating rate loan programs of Freddie Mac and Fannie Mae, a sponsor can obtain a very attractive cost of capital typically in the 2.5 -3.0% range for loans 70% LTV and higher,” said Mitchell Kiffe, senior managing director, capital markets, CBRE, “while maintaining exit flexibility at a very low cost, typically 1% of the loan value.”
The transition to SOFR began in 2018, when global financial regulators realized that LIBOR should be replaced by a more reliable and transaction-based index. Freddie Mac and Fannie Mae are phasing out the purchase of all LIBOR-indexed multifamily and single-family loans by year-end, and both agencies now are buying SOFR loans.
Including the loan for the Vintage Apartments, CBRE has closed five SOFR loans for a total of $118 million and has another 45 loans under application with Freddie Mac and Fannie Mae for over $1.4 billion total.