HUD and Fha
HUD; the US Department of Housing and Urban Development and FHA; the Federal Housing Administration were founded as two separate entities but now share much more than originally planned. HUD oversees and guarantees both residential and multifamily lending and insurance programs. The FHA, which in 1965 became a part of HUD deals primarily in residential lending; aiding in the purchase of primary residences for Americans. FHA is, although now a "subsidiary of HUD" responsible for the overall management and administration of HUD's Multifamily Housing Programs and HUD ultimately provides the insurance.
HUD Insured Loans
A common misconception is that HUD makes loans to developers and real estate investors for the recapitalization, acquisition, rehabilitation and construction of multifamily properties, but the reality is that HUD actually insures these loans and the loans are made by investors.
Refinancing, building, Rehabilitating or Acquiring Multifamily Properties
The FHA or HUD 223(f) program was created for the refinance or acquisition of multifamily properties. It is another misconception that HUD focuses on Section 8 properties, subsidized housing or low income housing, but the reality is that the HUD 223(f) program insures loans for the full spectrum of market rate multifamily properties across the nation, with further considerations for low income housing, rental assistance, LIHTC, and so-on. The HUD and FHA insurance programs were created to ensure the ongoing availability of capital for the acquisition, rehabilitation, development and refinancing of all apartment properties and absolutely not excluding market rate apartments.
HUD For Multifamily Developers
The FHA or HUD 221(d)(4) program insures multifamily developers building market rate, low income, rental assistance and other multifamily developments. Loans generally range from $2,000,000 to $100,000,000 or more. There is no hard cap or bottom for the loan amounts but because of the costs involved with originating a HUD Insured multifamily development loan, oftentimes developers of smaller multifamily projects are intimidated by the pricing, as well as the process. The HUD 221(d)(4) process has been improved and streamlined over the years but can still take 8-12 months to close.
Amortizations and Maturities
FHA insured financing provides for the longest terms in the industry, but something that further sets these loans apart is that all loans are fully amortizing, thereby also creating the longest amortizations in the industry and the most flexibility on debt service coverage ratios as longer amortizations mean lower payments. FHA insured construction loans are fixed for 40 years plus up to an additional 3 years during the construction period. HUD 221(d)(4) provides one of the very few, if not only, fixed rate construction loans in the multifamily development business. Existing assets for purchase or refinance similarly are qualified to achieve very long term fully amortizing loans. In the case of HUD 223(f) insured loans; these loans are fully amortizing for up to 35 years; provided the term and amortization does not exceed 75% of the property's remaining economic life. As industry professionals know, the longer the fixed rate, the higher the interest rate (except for in the case of an inverse yield curve), however in the case of FHA and HUD insured loans, because they are government insured and earn a AAA credit rating, rates are lower than Fannie Mae and Freddie Mac 10 year fixed rate loans.
Timing and "Red Tape"
For all the benefits of HUD insured loans: rates, leverage, term, amortization and so-on; there are undoubtedly additional hurdles to overcome, although in the case of 221(d)(4) and 223(f), the process is no longer as long and difficult as it may have been in the past -- provided you are represented by an experienced intermediary. HUD insured loans require annual financial audits which may cost upwards of $2,500 per year, they take longer to close (223f loans may take 120 days, and 221d4 loans may take 10 months), and there are more upfront costs and closing costs associated with the origination of HUD insured loans. That said, a 223f insured loan isn't vastly different from originating a Fannie or Freddie multifamily loan. Other requirements involve things like: Phase 1 environmental reports are required to include led based paint and asbestos reviews for properties build before 1978, HUD doesn't insure loans for new properties located within a 100 year flood plain and construction and substantial rehabilitation loans required adherence to David Bacon labor standards. The Davis Bacon Wage determination can be found online at www.wdol.gov/dba.aspx. By entering the state, county and construction type, in this case residential, the tool will populate the most recent wage requirements. Additional requirements are spelled out in the "Loan Programs" section of our website relative to each product.
HUD insured loans may not be for everyone, and certainly are not for small balance loans (as fixed origination costs translate to higher costs when interpreted as a percentage of the loan amount). Time sensitive loans are also no likely to be the best fit for an FHA insured loan. Navigate our website and www.Multifamily.loans to understand all the multifamily financing options available and choose carefully. With the guidance of an experienced intermediary financing the acquisition, development, rehabilitation or recapitalization of apartment properties should be a reasonably seamless process.