One Size Doesn’t Fit All in Multifamily Financing
Hudson Realty Capital's Brad Cain discusses the nuances of FHA lending vs. conventional and GSE loans.
Deciding between financing alternatives involves careful consideration, especially at a time when options are plenty. MHN spoke with Hudson Realty Capital Managing Director Brad Cain about the nuances of Federal Housing Administration originations vs. Government Sponsored Enterprise originations and conventional loan products.
Cain joined Hudson Realty Capital in March 2021 to accelerate the growth of its FHA business, which the middle market capital provider launched this summer.
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What prompted Hudson Realty Capital to launch an FHA loan division?
Cain: The pandemic has made it more important than ever before to be able to lend through periods of illiquidity. Given the turbulence of the Great Financial Crisis in 2008 through 2012, our executive team felt that adding FHA capabilities to our conventional lending was a natural fit for us.
The addition of FHA lending has been in the works at Hudson since late 2019 when our company’s founders first approached Greater Southern Realty Capital—now called Hudson Realty Finance LLC—to join our platform. Since September 2020, our executives have focused on assembling a strong team of professionals that has originated over $1 billion of mortgage loans for FHA and is looking to expand the company’s footprint to include both MAP and LEAN.
How does working with FHA loans compare to the conventional lending space?
Cain: As often the case, and particularly now, borrowers are inundated with financing options and can be unsure of the financing solution that best fits their objectives. Our team has extensive knowledge of the commercial real estate market, which allows us to partner with clients to successfully navigate the conventional lending space and all the nuances of FHA loans now as well.
FHA loans enable borrowers to obtain non-recourse financing at low fixed-interest rates with high leverage and fully amortizing terms up to 35 or 40 years. FHA loans are also fully assumable for a 0.05 percent fee, payable to HUD and subject to lender approval.
Specific underwriting criteria depend on property characteristics. For example, a refinance of a market-rate project would be eligible for a maximum mortgage amount up to 1.176x DSC and 85 percent LTV (cash-out up to 80 percent LTV).
How does HUD financing compare to other government-backed financing alternatives?
Cain: It’s common for borrowers to consider FHA vs. GSE alternatives when deciding on the best financing solution for their multifamily assets. The biggest differences between these alternatives are often the timing of the entire process, interest rate (fixed vs. variable), loan term/amortization options and possible new construction.
GSEs provide fixed and variable rate options and shorter loan terms with longer amortization periods (balloon risk), whereas FHA loans must be fixed-rate and fully amortizing over the term of the loan. Unlike GSEs, FHA offers construction and permanent loan financing for new construction projects and, more recently, allowed for the takeout of newly stabilized projects as well (similar to GSEs).
The timing of the entire process will depend on project specifics and loan type, but FHA loans will require more time to close, which can sometimes be the deciding factor, especially for acquisitions. At Hudson Realty Capital, we leverage our longstanding bridge capabilities to streamline transactions for clients that need more time to close or reposition their assets prior to a permanent loan execution.
What do you look for in a multifamily asset before deciding if it’s eligible or not for the HUD financing program?
Cain: Hudson Realty Capital’s intensive due diligence process early on allows us to assess risk and provide the highest certainty of execution possible for all parties involved. Moreover, our hands-on approach combined now with our experienced FHA team allows us to screen potential transactions and guide clients through every step of the process from origination to closing.
Just as you would for any asset, we’re looking for well-located multifamily properties in good markets with strong sponsorship in place. It’s always beneficial if the sponsor and management company have previous FHA experience but we can assist them in putting a team together if needed. From there, it’s digging into property-level performance/financials and any specific characteristics (e.g., commercial space, green/energy, affordability, student or elderly residents, etc.).
What are some of the main trends you’ve noticed in terms of demand for HUD loans?
Cain: We’ve seen strong demand for HUD loans and expect this to continue for the remainder of 2021 (and beyond), given the low interest rate environment and resilience of the multifamily sector.
We anticipate that projects with green/energy and/or affordability components will continue to have a strong interest in the industry, as well as refinancing of newly stabilized projects and those with pending maturities. In addition, new construction alternatives and bridge loans with competitive terms and certainty of execution will be in high demand.
Have you noticed any shift in demand for HUD multifamily construction and rehabilitation programs? What about acquisition and refinancing?
Cain: HUD multifamily construction remains in demand, but we have seen more requests for conventional financing as well, given increased construction costs and longer lead times needed to close FHA new construction loans.
Even experienced FHA developers are considering conventional alternatives with the ability to refinance their newly constructed projects with FHA’s 223f program once it stabilizes and achieves minimum DSC requirements, etc.—and not having to wait three years from the final certificate of occupancy.
The increased value for multifamily assets—that has not only been driven by the low interest rate environment and lower cap rates but also actual rent growth and other strong market fundamentals—has led to strong demand for HUD refinancing, in particular, cash-out opportunities up to 80 percent LTV. Our team has also experienced an increased interest from borrowers for bridge loans and seamless bridge-to-HUD executions for their acquisitions, with capital flowing to the strongest U.S. markets.
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Are there any particular targets for Hudson’s new FHA division?
Cain: We target markets nationwide that best serve our new and existing clients. Gateway and secondary markets with strong fundamentals are the main factors when evaluating opportunities for our FHA business.
In your opinion, how big a part does HUD financing solutions play in addressing the pressing U.S. affordable housing shortage?
Cain: HUD plays a vital role in affordable and workforce housing solutions. I’ve been in the industry for more than 20 years and learned the FHA business early in my career by underwriting tax-exempt multifamily bond transactions enhanced with FHA mortgage insurance and Ginnie Mae MBS, HUD 202 capital grant, HOPE VI and Replacement Housing funds—all often combined with low-income housing tax credits to serve an extremely important need in the industry.
And, while affordable housing debt solutions are often complicated and require much diligence, it’s a high priority for HUD and for our team to be part of the solution in addressing the affordable housing shortage in the U.S.