Overview

Overview

Federal Loan Buydown Authority (FELBA) offers a financial engineering product designed to assist owners of properties with unfavorable existing debt terms. This product can increase a property's marketability, and is mutually beneficial to both sellers and buyers. The product facilitates transactions for properties that would otherwise be poor candidates for sale due to existing amortizing debt and large prepayment penalties. FELBA is a loan buydown product that is offered in conjunction with BB&T Bank, which is the acting escrow agent.

Program

The program allows the seller to prepay a portion of existing debt service for the buyer, thus lowering the loan constant for a period of years. Typically, the loan buydown is equal to the principal portion of the loan payments for the first 1-4 years of new ownership, which reduces the loan constant. The buyer assumes the loan and with the FELBA monies credited to debt service, achieves a payment which is comparable to new debt with interest only features. This financial engineering not only makes the debt attractive to a buyer, while avoiding a prepayment penalty for the seller, but can allow the property to be priced as if it were being purchased on an all cash basis.

How It Works

The buyer and seller of a property agree to reduce the buyer's debt service during the initial years of ownership by contracting to enter into an agreement with FELBA as facilitator, and BB&T as escrow agent. The sale closing attorney sends an executed escrow agreement, which includes a payout schedule, and wires the funds to BB&T to be disbursed monthly to the buyer pursuant to the escrow agreement. The buyer will receive the amount shown on the monthly payout schedule in its bank operating account, and this will be credited against the debt service on the buyer's operating statement. This transaction effectively reduces the debt service and increases cash flow during the period the escrow agreement is in place, which normally is twelve to forty-eight months.

FELBA's Versatility

The FELBA program is totally flexible. Most of the time, the seller will determine the amount of FELBA monies they are willing to fund through consultation with their real estate broker. The broker includes the FELBA information in the Offering Memorandum stating the seller has agreed to buydown the first mortgage by a predetermined amount. There is no upfront cost or obligation on the sellers or buyers behalf. All things equal, the seller will choose the offer that nets them the greatest proceeds. It could be an all cash offer in which case FELBA would not be utilized, or if the offer utilizing FELBA nets the most proceeds the parties move towards closing on that basis.  The amount of FELBA monies can differ year to year and generally cover a one to four year period. For buyers requiring higher cash on cash returns, the amount of FELBA monies can be adjusted to achieve that yield. 

Escrow Agent's Role

FELBA has contracted with BB&T to be the escrow agent. BB&T shall payout the funds pursuant to the escrow agreement with the borrower.

FELBA's role

FELBA will act as the transaction facilitator. The fee for this service will be equal to the greater of $20,000 or 1/10th of 1% of the buyer/borrower's permanent loan amount. FELBA will pay for the escrow costs and retain the earnings from the account to help offset these costs.

Best uses for the Product

FELBA is optimized when a seller has an amortizing loan with a significant remaining term, and a high loan constant. These factors make it difficult to sell in today's market. If the same property could be sold on an all cash basis, a buyer could obtain an agency loan with a one to four year interest-only period on a 10-year term. This interest-only period has value advantages which FELBA can replicate.

Ease of Closing

This website provides the escrow agreement for execution at closing. The agreement is non-negotiable and contains all the necessary terms for the closing attorney. Once the agreement is fully executed by the buyer, seller, FELBA, and BB&T, the funds are transferred and the agreement is in effect. Our team is always available should you need further assistance.