Multifamily Borrowers Benefit From New HUD Lending Policies

Many borrowers have been informed that lenders are unwilling to close on their loan commitments or have dramatically changed loan terms.


Borrowers continue to be impacted by the coronavirus as many have been informed that several banks, bridge lenders and CMBS programs are unwilling to close on their loan commitments or have dramatically changed the loan terms.  If leading market indicators continue to worsen, it would not be surprising to hear that more warehouse lines for bridge lenders are canceled or funding capacity is reduced. History shows us that if you need financing during uncertain times, balance sheet and fund lenders can be good sources of debt but the most reliable source is generally government agencies.  

Government agency programs such as Freddie Mac or Fannie Mae programs will likely continue to capture the majority of multifamily financings, but borrowers must become aware that of all the agencies, HUD programs will always offer the most proceeds, the most leverage and the longest loan term.   By accessing the HUD programs referred to as 221(d)(4) and 223(f), borrowers can access 35- to 40-year fully amortizing loans, avoiding future interest rate risk as well as term/balloon risk in a down market.

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Some borrowers and developers may have missed the news announced in early March that rocked the multifamily construction industry, when the U.S. Department of Housing and Urban Development (HUD) revised its policy that required three years of post-construction occupancy before applying for refinancing under HUD’s 223(f) program.   

Lifting the three-year requirement will allow borrowers to break ground quicker, allow construction to be completed without prevailing wage rates (Davis-Bacon Act) resulting in even lower construction costs and upon asset stabilization, be able to access cheaper financing through the 223(f) program.    

The following highlights help explain the important factors of the HUD financing program and the new changes regarding multifamily construction. 

Multifamily construction borrowers and developers for market or affordable multifamily housing projects that utilize the government HUD 221(d) (4) program versus traditional lenders have benefited through greater leverage, lower rates and longer terms. 

Why then wouldn’t everyone use the HUD program?  The two negatives of the 221(d)(4) program were that higher labor costs were incurred because developers are required to use local prevailing wages (Davis-Bacon Act) and the loan approval process takes about one year, during which time developers were not allowed to break ground on the site. 

The new policy changes allow developers to use a private lender for the construction loan, thereby avoiding the higher wage requirements and break ground immediately.  The old adage here definitely applies, “time is money”. Once the project is completed and stabilized, the borrower would no longer be required to wait three years before accessing the government HUD 223(f) program to refinance the loan.  The 223(f) program gets completed in about half the time period and the loan rates are more than half a point lower than the 221(d)(4) program.

Any property owner with an existing construction loan in place on a stabilized property might be throwing away money by not taking part of the recent changes, which as of March 25, 2020, had fixed rates of approximately 2.8 percent.  223(f) HUD loans for multifamily properties offer assumable, non-recourse loans at 80 percent of the new fair market value. Since the new leverage point is 80 percent of the new fair market value, an additional benefit is that the borrower with a stabilized asset might receive close to 100 percent financing or potentially cash out of the project.

Stabilized multifamily properties must meet the Debt Service Coverage Ratio threshold for at least three consecutive months of 1.17x for market rate projects and 1.11x for affordable projects.  Calculations of the DSCR would factor in any rent concessions such as free rent. Application requirements include such items as a 12-month projection of income and expenses, a current rent roll and historical lease-up information.  

The recent policy change is approved for two years, at which point the policy will be evaluated for the impact it has made on increasing the supply of affordable workforce housing and other objectives.   There are no guarantees, but the new government policy changes should likely be reinstated in 2022 because borrowers are refinancing loans with less risk since the properties would be built and stabilized.    

In summary, borrowers have a choice between which lender/program is best suited to finance their multifamily construction project.  This is not a one size fits all decision and varies from borrower to borrower. For projects that have existing entitlements or sites located in areas of high prevailing wage rates (such as the northeast and west coast), using a private lender for the construction loan can be a good choice.  The property when built and stabilized can be refinanced with HUD’s 223 (f) program. If the borrower is able to start the HUD application process while he simultaneously obtains entitlements in an area where there is a minimal difference in wage rates, he might choose to access the greater leverage of 85 percent with the 223 (d)(4) program.

The HUD program may not be the right choice for all borrowers (such as property flippers) but often is a great option for asset holders of five-plus years. The above summary makes me recall a quote from years past, “Two roads diverged in a wood, and I took the one less traveled by.  And that has made all the difference.”

Paul J. Fitzsimmons is an executive vice president at X-Caliber Capital