How Bellwether Closed a Record Section 538 Deal

Bob Morton, Kevin Bowen (Images courtesy of Bellwether Enterprise)

Bellwether Enterprise Real Estate Capital, the commercial and multifamily mortgage banking subsidiary of Enterprise Community Investment Inc., obtained a $19.6 million loan for Cypress Creek Apartment Homes at Parker Boulevard, a mixed-income, 220-unit community in Royse City, Texas. The record-breaking closing marks the nation’s largest Rural Housing Service Section 538 Guaranteed Rural Rental Housing Program (RHS 538 GRRHP) deal ever originated.

Bonner Carrington developed, constructed and manages Cypress Creek Apartment Homes, which includes a mix of one-, two-, three- and four-bedroom units. The recently completed community operates under the rent and income restrictions imposed by the Section 538 and 9 percent Low-to-Moderate Income Housing Tax Credit programs. Therefore, 14 units are for households earning 30 percent of the area’s median income or less, 56 units are set aside for people making at most 50 percent of the area’s median income and 70 units are reserved to those earning 60 percent of the area’s median income. The remaining 80 units are market-rate apartments.   

How it works

Section 538 provides federal government guarantees for loans made by qualified commercial lenders to developers of multifamily rental housing for low- and moderate-income tenants in rural areas. The U.S. Department of Agriculture guarantees up to 90 percent of the loan. The difference between section 538 and USDA’ s longstanding Section 515 Rural Rental Housing Program is that the first focuses on partnerships between USDA and qualified lenders, whereas the latter makes loans directly to nonprofit or for-profit rural housing developers.

Kevin Bowen, senior vice president of Bellwether Enterprise, and Bob Morton, director of Rural Housing Services Programs & senior vice president of Bellwether Enterprise, arranged the senior permanent loan for Cypress Creek Apartment Homes. Featuring a 24-month forward-rate lock, 40-year term and 40-year amortization at a low-fixed interest rate, the non-recourse loan was used to complete the property acquisition and construction of the project. 

How did you manage to obtain this one-of-a-kind loan and how long did it take? 

Morton: The loan is one-of-a-kind given its size as the loan product is very actively used nationwide. As the RHS 538 GRRHP loan product is intended for rural communities, most project sizes and therefore loan sizes are typically much smaller. This is an existing client of Kevin’s/Bellwether Enterprise so, given the project is located in an eligible rural community, the RHS 538 GRRHP loan product was the best fit and included the best terms we had available to offer the client and the project.

From the beginning of our discussions of the project and the RHS 538 GRRHP loan option to the closing of the loan, it took approximately three years. This included a two-year rate lock period, and then closing on the perm loan at the end of that period.

Bowen: When a client presents a potential loan opportunity to the Bellwether Enterprise team, we evaluate all possible options for them and then help them make the decision as to which loan product makes the most sense. With this project, the decision was easy. The RHS 538 GRRHP execution best fit the needs of the client and made the most sense for the property type.

What were the challenges along the financing process?

Morton: Some challenges included working with the Government National Mortgage Association investment market to manage the low rate we locked, and getting Rural Development Texas and the National Office with the size of the project and the size of the loan. Rural Development was great to work with on this project. At the end of the day, there were only a few additional conditions added to the commitment from Rural Development.

What does this deal mean for the affordable housing market in general? 

Bowen: This transaction is significant because it shows the USDA 538 loan program being used in a situation where you would normally see a Fannie Mae or Freddie Mac permanent loan. This is important because many affordable developers dismiss the USDA 538 loan program when considering their financing options for new construction LIHTC deals. However, as more and more developers become familiar with this financing option, we believe the opportunity to develop more affordable homes for families across the nation will increase.

Morton: It further supports that the RHS 538 GRRHP loan product can be used in various executions and market conditions to provide a great option for financing affordable housing and that a very experienced and knowledgeable lender such as Bellwether Enterprise understands the needs of affordable housing and can deliver with multiple execution options.

How serious is the affordable housing crisis in rural Texas?

Bowen: Texas is home to a wide array of bustling cities and rural towns—making it an attractive state for people of all ages and backgrounds to live in. With a growing population, an increased number of commercial offices and continued ramifications from Hurricane Harvey damage, the need for affordable housing will only continue to grow. As such, it’s important for loan originators to leverage the full suite of financing options so that developers have the tools they need to produce and maintain affordable housing properties.

Morton: As a company, we have provided many executions for affordable projects in the state of Texas. The state continues to grow in population. With growth comes the need for supportive, affordable housing for the middle- and lower-income workforce and their families to both live and grow in.

Images courtesy of Yardi Matrix