GUEST COLUMN: Despite Doubts, Sources Exist for Multifamily Construction Loans

By Lucas Matesa, Reznick Group, P.C. The current financial crisis has impacted many facets of the economy, including the multifamily housing sector. In a market where liquidity had been reliant on commercial mortgage backed securities (CMBS), the credit markets have frozen up and few commercial lenders are available. Many borrowers will face debt maturing in the near future, with uncertainty about options surrounding refinancing, and new projects being stalled as a result of lack of capital. Fannie Mae and Freddie Mac have also historically been large players in providing liquidity in multifamily housing financing, but there is concern that under federal conservatorship, they will focus more on single-family lending to help relieve the housing market. Information suggests Fannie Mae and Freddie Mac will continue to stay in the multifamily housing business, however they already are increasing annual commitment fees and tightening credit standards.  Fannie Mae and Freddie Mac will certainly not be out of the game entirely, but their future impact and continued investment in multifamily housing loans is somewhat unknown. Although today’s multifamily loan financing environment is challenging, there are programs for developers that provide an alternative to conventional methods of financing. One such alternative is the Federal Housing Administration’s (FHA) multifamily insurance program, known as Sec. 221(d)(4). This program is dedicated to helping for-profit developers (although not-for-profit entities are eligible borrowers as well) secure both construction and permanent financing, and is overseen by the Department of Housing and Urban Development (HUD).  The FHA program is not new to multifamily housing, but, because capital was previously more readily available the program was often overlooked, specifically by market-rate developers.  “HUD insurance is popular now because it’s available. Tighter underwriting standards have been seen from more conventional lending, even Fannie and Freddie,” according to Margaret Allen, CEO with AGM Financial Services, Inc., a HUD approved Multifamily Accelerated Processing (MAP) lender in Baltimore, Maryland. Under 221(d)(4), construction and permanent loans are non-recourse for up to 90% of projected replacement cost of a development, including land value. This means there is no personal liability on the part of the borrower, unlike with more conventional financing. The interest rate is locked in before the start of construction and currently is in the 6.0% to 6.5% range for new construction (plus 45 basis points for mortgage insurance premiums). HUD allows for a 40-year loan term and amortization after the construction period, and recently, HUD officials will consider lesser amortization periods. The long-term, locked-in rate and non-recourse features can be very appealing to developers in the current economy. In addition, there are no lease-up or other occupancy requirements prior to conversion to the permanent loan. The project can be mixed use, multifamily rental with a commercial component.  However, generally the commercial portion will be limited to 10% of total cost or 15% of total income. Allen also notes, “A HUD insured mortgage is for 40 years plus construction period, and does not resize, there are no occupancy or coverage tests. Basically (one needs to) complete construction and obtain cost certification, and you can get to closing.” HUD is currently handling more deals than historically seen, and volume is up significantly from the previous year. The closing process on a 221(d)(4) loan can be more cumbersome for a borrower than for conventional debt, especially with the rise in applications in the current year. However, HUD has made efforts to improve application processing and has increased the number of processing centers dedicated to the multifamily loan program.  Multifamily has always played, and will continue to play an increasingly important role in the housing market. With conventional lenders asking for lower loan-to-value ratios, and being more conservative in other lending practices, HUD is going to play a larger role in keeping multifamily financing available and affordable, making it a popular and viable alternative for obtaining financing in today’s real estate and construction market.Lucas Matesa is a senior audit manager at Reznick Group, P.C.