by Joel Kaplan and Elia Popovich
Attorneys at Law - Oregon Law Group
In today's challenging financing environment, apartment owners have increasingly turned to Freddie Mac as a ready source of financing for apartment acquisitions. Freddie Mac’s new and sometimes onerous loan process may, however, present obstacles for borrowers not familiar with Freddie’s Capital Markets Execution (CME) loan product.
CME loans were developed in the summer of 2009, after the residential real estate bubble burst. These loans are pooled, tranched and sold as mortgage-backed securities. By securitizing the CME loans, Freddie is able to provide greater liquidity and stability to the residential markets. However, along with this greater liquidity comes less flexibility and more stringent legal requirements than the standard portfolio loan.
The following Freddie Mac requirements are particular to the new CME loans:
- All borrowers must be special purpose entities (SPEs) that own only a single asset. This provides protection against the risk of borrower bankruptcy for activities unrelated to the collateral.
- All SPEs must be formed in Delaware, and have either one springing corporate member or two springing members who are natural persons. This requirement provides Freddie with protection against the inadvertent dissolution of the borrowing entity.
- Opinions from the borrower's counsel about the enforceability of the loan documents will be required. This provides the lender with assurance that in the event of a default, Freddie will be able to recover the loan proceeds.
- Borrowers have less ability to modify loan terms. CME loans demand greater document uniformity to facilitate cost-effective securitization.
- Escrow for immediate repairs and reserves for long-term capital replacements are required, in part because the SPE limitations leave the borrower with no assets other than the mortgaged real estate.
- CME loans may not be prepaid if the loan is securitized within a year after origination. As a consequence of securitization, they must instead be defeased, but even then only after a two-year lockout.
Joel and Elia are partners in Oregon Law Group, a Portland-based law firm that specializes in the acquisition, development and management of multifamily projects. Joel Kaplan can be reached by phone at 971.285.4260 or email firstname.lastname@example.org. Elia Popovich may be reached by phone at 971-285.4261 or email email@example.com.