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Multifamily FHA Finance Looks Tempting in Credit Crunch
With Federal Housing Administration lending programs “one of the only games in town” for permanent construction of multifamily housing and building owners looking to refinance their properties on more favorable terms in a difficult financial marketplace, the industry is taking a close look at FHA’s Section 221 (d)(4) program for construction and substantial rehabilitation and Section 223(f) program for acquisition and refinancing, according to Bobby Bowling, president of Tropicana Building Corporation, who moderated an April 22 NAHB Web seminar on “FHA — A Viable Alternative in Today’s Multifamily Lending Market.”
Panelists reviewed the benefits and requirements of the two programs and also advised multifamily professionals who haven’t worked with the Department of Housing and Urban Development in the past that they will be signing up for a different way of doing business than they are used to.
“Welcome to the world according to HUD,” said Stillman Knight, Jr., president and CEO of The Knight Company, who has developed more than 6,000 HUD-insured housing units.
“It’s a little bit like passing through the looking glass, this is a different world,” he said. “It is far different than in the conventional sector” and even experienced builders will “face a steep learning curve.”
“Site control is essential,” Knight said, and builders interested in obtaining HUD program insurance should own or hold a 12-month option on it.
As for the differences, participants in these programs need to understand that “the HUD staff is going to follow the book,” which is based on the statutes passed by Congress and the agency’s regulations. “Your job is to understand these better than HUD staffers,” he said.
Participants also need to know that they will have limited contact with HUD staffers and that they will be working through FHA-approved lenders.
HUD operates out of 18 national hubs, and if the hub is good, the processing office should be good as well. But “which office you’re subject to will make a difference,” Knight said, because they vary greatly in terms of their resources and staffs.
Also, responsible for more than 30,000 of its own properties across the country, HUD’s resources can be strained and it will give priority to its inside deals. “There is a rush to HUD for folks who realize they can’t get financing elsewhere,” he said. “But don’t expect HUD to expand to take care of your needs. The government doesn’t.”
Among construction issues, those considering using the programs should be aware that HUD requires an environmentally clean site. Also, cost certification for the job is required since the mortgage is totally predicated on replacement costs. While this happens at the end of the process, “start early and sign up your cost certification accountant in advance of your presentation to HUD,” he advised, adding that the right accounting firm should have experience working on these reports.
Also, “HUD has its own definition of costs, and you have to translate your glossary of terms into theirs.”
On the management side, multifamily developers are typically not accustomed to having the lender telling them when they can make distributions; distributions can be annual, or in some cases semi-annual, and they can only be from “surplus cash” as defined by HUD.
Certified annual audits are also required, according to HUD’s own specifications. “You cannot continue to do business with HUD if you do not turn in your financials on time,” he said.
Also, developers should be prepared for a review of the physical condition of the property; a minimum score of 60 is needed, and anything below that can result in foreclosure.
The developer should work with the mortgagee to determine which of the two programs to use and should only work with a MAP (Multifamily Accelerated Processing) lender. In choosing a mortgagee, ask how many of your loan types they have closed in the last few years and how many of these loans were in the HUD office with jurisdiction over your site. Ask for an estimate of the processing time, and hire the person, not the firm.
“This is extensive and lengthy,” Knight warned, “and it can be a hair-pulling process.”
“Be sure you don’t have a bad history with HUD; if you have been barred from doing federal programs, you will not be allowed to participate,” he said. “This is not your friendly banker you have done business with for 30 years. They will want to look in your underwear, so be prepared.”
Section 223(f) can only be used to acquire or refinance existing multifamily properties that are at least three years old, said Cathy Pharis, director of Deutsche Bank Berkshire Mortgage, Inc., although that rule is being waived in certain cases where borrowers don’t have any other options than this program to get out of their current debt.
Non-critical repairs and capital improvements can be included in the 223(f) loan, but only one major system can be substantially replaced (more than 50%) and project rehabilitation costs are limited.
Obtaining the financing tends to be a four- to five-month process, Pharis said, “if things go very well.”
For Section 221 (d)(4) new construction and substantial rehab loans, market-rate garden and high-rise buildings, suburban or urban, qualify, as do tax credit properties and elderly projects where there are no meals provided, said Margaret Allen, CEO of AGM Financial Services, Inc.
In a substantial rehab, more than one system is being replaced, or the developer is spending $6,500 a unit, which can be multiplied by a local high cost factor, typically bringing the cost of rehabilitation to $15,000 per unit. Commercial space is allowed on the first floor, she said, with the amount based on a formula.
The process takes seven months at best, 10 months is typical and the developer should allow for 12, Allen said.
For more information, e-mail Carmel McGuire at NAHB, or call her at 800-368-5242 x8207
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