David Treadwell
Vice president, CBRE Capital Markets, Debt and Structured Finance, Denver
By nature, I am a very optimistic person but at the same time, it’s also prudent to be realistic. So use this information to look ahead and don’t get caught standing on the sidelines while the savvy commercial real estate investor plows right through.
Commercial lending is tightening. That’s reality! It’s not meant to sound alarm bells but, simply put, lenders have quietly become more selective on the loans they close. When asked why, they say it’s getting late in the cycle and they would rather miss an opportunity than get caught with a bad loan. At some point, if you keep preaching slowdown, then eventually it becomes a self-fulfilling prophecy.
Furthermore, the loans that are getting closed are requiring much more equity in the game. Even the most experienced real estate developer with a proven track record can only secure financing at 65 to 70 percent loan to construction cost. Only a select few that already are existing clients of the lender are able to attain 75 percent LTC. At the same time, equity investors are becoming more cautious for the same late-in-the-cycle reasons, making it even more difficult to complete the capital stack. If you are multifamily developer, there is an option that always has been available but seldom used!
Nationally, the Federal Housing Administration /U.S. Department of Housing and Urban Development commercial lending platform is one of the most successful in the country. Some of the most successful multifamily developers have used this platform to build right through a slowdown when conventional lenders are pulling back. Plus, there is less competition in the marketplace because other developments get put on the shelf.
Why so skeptical? Are you relying on just what you’ve heard about the FHA/ HUD process? Sure, it takes patience and planning, especially the first time through, but that’s what separates the field. Start by syncing up your entitlement process with your FHA loan process. By the time you have your site approvals and your building permits, you will likely have your HUD loan approved. Once you become an experienced FHA borrower, you may never process another conventional recourse loan. Why would you?
FHA New Construction or Substantial Rehabilitation (221(d)(4)) loans are 40-year fully (interest only during construction) amortizing nonrecourse loans at 85 percent LTC for market-rate apartments. That’s right, this loan program applies to market-rate apartments. Don’t be misled, this is not just an affordable lending product. If you add an affordable component, you can potentially increase your loan proceeds to 90 percent LTC while also lowering your mortgage insurance premium. That solves a big part of your equity problem. Two years of interest only during construction and then shortly after certificate of occupancy, it automatically converts (no lease-up requirement for conversion) to a 40-year fully amortizing, fully assumable, nonrecourse loan. (D)(4) loans also are assumable for significantly less than the traditional 1 percent assumption fee. They also offer great prepayment flexibility with a limited or no lockout period and then declining percentage prepay thereafter through year 10. After year 10, the loan can be paid off at par at any time throughout its term. Where else can you find a 40-year nonrecourse, fully amortizing loan that can be paid off after 10 years but with the option to hold for another 30 years? Not convinced yet? As we go to print, the all-in interest rate, including mortgage insurance premium, is in the 4 percent range, fixed for 40 years plus a two-years interest-only construction term. Additionally, there is the option to include green features into the construction, which can lower the MIP from 65 basis points to 25 bps, thereby decreasing the all-in rate to less than 4 percent and increasing either loan proceeds or cash flow to the property.
This (d)(4) loan program also is eligible for substantial rehabilitation on existing projects with these same terms. There also are eligible repair programs for existing product under the 223(f) acquisition and refinance program that don’t quite meet the definition of substantial rehabilitation. Even if you already have an FHA/HUD loan in place, you can lower your existing interest rate and increase your mortgage proceeds.
The bottom line is that there are alternative lending platforms out there for multifamily through FHA/HUD. Don’t sit idle and be subject to market whims. If your development is based on sound fundamental principles, then it can be successful in any market. All it takes is a little due diligence, planning and guidance. Make it happen!
