Moderate Rehabilitation with Fannie Mae: An Opportune Financing Option

Like everything in life, we want choices. Affordable housing developers are no different—particularly, when it comes to finding a permanent financing solution to pair with low-income housing tax credits (LIHTCs).

Recently, discussion has largely been focused on the U.S. Department of Housing and Urban Development’s (HUD) new LIHTC Pilot Program. Although that is indeed a strong option, there is another solution out there that deserves attention—using the Fannie Mae Multifamily Affordable Housing (MAH) Program for moderate rehabilitations.

What’s MAH All About?

A moderate rehabilitation using the MAH Program can work exceedingly well with both 4% and 9% LIHTCs. The program can be a particularly attractive option in a rising interest rate environment due to the speed of execution—typically several months quicker than comparative long-term options with HUD.

By taking advantage of a compressed processing time, it offers flexibility to experienced developers. While some agency permanent financing programs can take nine or more months from engagement to closing, the average closing time of several complicated transactions recently financed through Fannie Mae was just four months. 

The program also is ideal for affordable projects undergoing moderate rehabilitation with minimal tenant disruption while using tax credits and a HAP contract. The deal team—lender, developer, general contractor and architect—are particularly important as experience in completing successful rehabilitation of similar projects is critical.

Program Features

The MAH Program has several benefits that distinguish it from other permanent financing sources. While HUD’s LIHTC Pilot Program has a very rigid hard cost limitation of $40,000 per unit, Fannie Mae can allow for greater flexibility. Additionally, while HUD may require Davis-Bacon wage rates, Fannie Mae does not. 

Other significant advantages of the program include:

  • The ability to lock the rate on an immediate basis to take advantage of current low interest rates versus a forward rate lock.
  • The removal of conversion risk as the loan begins amortizing immediately.
  • Fannie Mae does not require a letter of credit or substantial escrows. It requires a project capital assessment (PCA) and lender review, rather than a costly and potentially lengthy architecture and cost review as part of FHA transactions. All of these characteristics add up to a reduced processing time and reduced costs associated with a Fannie Mae transaction.

As mentioned above, a key attribute is the ability to take advantage of immediate fixed rates, which helps tremendously with debt pricing when compared with a forward rate. The interest rate is locked prior to closing and the loan is fully funded on day one. A repair escrow is funded at closing to fund the rehabilitation. Generally, waivers allow for a staged funding of this repair escrow to match the equity pay-in schedule negotiated between the developer and syndicator.  

Fannie Mae MAH Program

The loan is nonrecourse and is available in 15- and 18-year terms with a 30-year amortization. The debt begins to amortize immediately, however, this is offset by eliminating conversion or potential resizing risk that often can be a concern with LIHTC projects. Transactions also can be creatively structured to take advantage of bond credit enhancement. The “sweet spot” for the program would be in the range of $30,000 to $40,000 in hard costs (higher also available) with minimal relocation and an experienced development team. Quality third-party reports, such as appraisal, PCA, phase one environmental assessment, survey, title and termite inspection, can be used from the tax credit process with appropriate reliance letters. This can help save time and money potentially avoiding the need to obtain additional reports. 

FHA Mortgage Insurance

MAH Program in Action

Wateree Villas in Camden, S.C., and Crescent Gardens Apartments in Wilson, N.C., provide excellent examples of a developer obtaining financing through Fannie Mae’s MAH Program. 

Wateree Villas is an 80-unit family development that consists of 14 one- and two-story town houses and a community building. The project, originally constructed in 1979 and previously renovated in 1994, was in need of upgrades to the building exteriors, unit interiors and the community building to preserve and maintain the property for future affordable tenants. The developer, Affordable Housing Partners, Inc., was awarded 9% LIHTCs from the South Carolina State Housing Finance and Development Authority and sought funding from Fannie Mae’s Moderate Rehabilitation program to complete the acquisition and rehabilitation of Wateree Villas. Working with its lender, the developer was able to obtain a $2.2 million fixed-rate Fannie Mae loan to use in conjunction with its 9% LIHTCs. 

When Affordable Housing Partners received tax credit allocations for their next project, they again selected the MAH Program due to its successful execution for Wateree Villas. The MAH Program was used to acquire and rehabilitate an apartment complex in conjunction with LIHTC equity. Crescent Gardens is a 100-unit family development that consists of 18 residential buildings and a community building. The project, originally constructed in 1978, was in need of similar upgrades as Wateree Villas. The developer was awarded 9% LIHTCs from the North Carolina State Housing Finance Authority and state tax credits through the North Carolina Housing Finance Agency and sought funding from the Fannie Mae MAH Program to complete the acquisition and rehabilitation. 

This time the developer was able to obtain a $1 million fixed-rate Fannie Mae loan to use in conjunction with its tax credits. The transaction was completed in an efficient time frame, closing only 90 days after engagement. In addition, the transaction closed within the prescribed time frame of the purchase option between the seller and buyer, enabling the developer to avoid negotiating an extension. 

The lender and its counsel were able to identify the necessary business and legal waivers to close within this short time frame. For example, a waiver was received to allow the state tax credits to close after the closing of the Fannie Mae transaction. This was to accommodate the uniqueness of the state tax credit program in North Carolina which funds transactions on a specific timeframe and eliminated a potential delay of several months. Additionally, because the project will be completely occupied throughout the rehabilitation, the lender was able to structure an immediate funding. 

Speed of Execution

In summary, the Fannie Mae Multifamily Affordable Housing Program is efficient and versatile. The established and reliable program provides fixed and immediate pricing, 15- or 18-year terms and can be executed in an accelerated timeframe. 

Fannie Mae’s processing times are typically at 90 days or less. In contrast, HUD financing is nonrisk-based, so interest rates are typically lower and processing times are longer at 150 days or more. Understanding the trade-off between financing options is key, especially in a rising interest rate environment. After all, time is money.

Ideal candidates are developers that have closed several LIHTC transactions, but are looking for speedier execution than HUD or other funding sources can achieve. New tax credits, assumption and extension of an existing HAP contract and minimal tenant relocation are all key attributes. A good lender can further compare and contrast the economics of a HUD loan, such as one through the LIHTC Pilot Program, to a moderate rehabilitation using Fannie Mae’s MAH Program to allow a borrower to make an informed financing decision that will result in a successful transaction.


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