Multifamily Pref Equity Behind Agencies
I've heard preferred equity has had a hard time closing behind Fannie Mae with Freddie Mac being the preferred lender for pref shops. Anyone know if this is true and, if so, why Fannie is harder to work with?
My firm does this pretty heavily. It is hard because there are a lot of hurdles that need to be checked in order to close which a lot of vanilla pref groups do not now how to navigate. As well as DSCR tests and things like that which typically do not fit well for pref. With that said there are ways around this.
Fannie has been a pain this year as they were supposedly changing their internal guidelines. They are now much more strict on pref equity. I think a portion of this is related to the issues coming up with DUS lenders (i.e Meridian fiasco), however, the paint point with pref lenders is how Fannie is restricting rights. We have had extensive discussions with both Fannie and Dus lenders on this subject and we have been getting various different answers. For now we are not doing Fannie Mae investments until official guidelines are released.
EDIT - I would also like to add something. Over the past year or so there have been a ton of groups trying to get into the preferred equity/mezz space. A lot of this newer capital has no idea that mezz structure is not allowed at all behind Fannie and Freddie and think that pref/mezz are interchangable. It's important because both the agencies do not allow a mezz position as it is a secondary lien. This significantly affects credit for these groups and is another reason they cannot structure behind the agencies correctly.
What are examples of my business plans that need preferred equity loans?
I have a few fannie forwards with pref equity.
It's about how the pref is structured, Fannie doesn't allow "mandatory" payments to capital subordinate to it. There is a lot of nuance to that "mandatory."
I've been seeing more LP's getting into affordable housing coming to terms with these restrictions.
Our deals typically have put/call options on the pref equity/ sale price, completion and return guaranties, and no UCC.
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