One year into the pandemic and multi-family housing loan transactions are down and numbers remain flat. Those who are approaching renegotiation time face some tough demands, firstly as they must continue to operate at basic service level, and secondly as they must work diligently to keep residents safe from the Covid-19 pandemic, with the added challenge of renegotiating a loan. Borrowers in need of a new construction loan face the challenge of trying to build in an environment of restricted movement and social distancing. Finding a deal that offers an attractive loan-to-cost ratio and value is an exacting and time-consuming task at the best of times. During a pandemic, “It can be downright frustrating,” stated Cambridge Realty Capital President Jeffrey Davis. Additionally, “most conventional lenders have come up with a variety of reasons to change their underwriting,” he noted, “making obtaining financing more out-of-reach and driving up the cost for borrowers. Effectively, the entire real estate business is on hold.”

The pandemic has also incurred greater cost to senior living operators. Many have found themselves having to hire extra staff to help with infection control and are spending more on goods such as enhanced cleaning products, hand sanitizer and PPE. Operators can scarcely afford to pay more for a loan, and yet this is what borrowers are facing from conventional lenders even as lenders themselves grapple with similar workplace challenges and increased daily operational costs.

Yet through it all, there is one multi-family housing lender that is oft forgotten, which has been in the market through thick and thin and has terms and conditions that make the conventional markets pale in comparison. Yet they are getting little traction because most people don’t know their terms and conditions, or even who they are: The Department of Housing and Urban Development, or HUD. “HUD has always been an appealing option, but they are like the proverbial middle child who gets lost in the shuffle and forgotten about. The height of a pandemic is the perfect time to remind multi-family and senior living operators that HUD is still there, still active, and still providing the same great rates and terms that it always has. It is truly a fantastic option for investors and developers in the multi-family arena,” Davis contended. Providing stability in a time of uncertainty, HUD stands out from conventional lenders in five major areas:

Proceeds: For a typical HUD multi-family loan, the proceeds are 80% to cost or value, sometimes approaching 90%. For a typical conventional loan, the proceeds are 60% or less to cost “with underwriting that flips and flops around and does not give anybody assurance that the deal is for real,” Davis pointed out, adding that conventional loan value shows no sign of increasing in the very near future. “Those who are holding out in hope that the tide will turn in their favor may have a very long and potentially costly wait.”

Personal recourse criteria: Conventional lenders tend to finance using commercial real estate as well as personal recourse. On the other hand, there is no personal recourse with a HUD multi-family loan. When faced with these options in a time of growing expenses, “it’s an easy choice,” Davis asserted.

Interest rate: The Federal Reserve has decreased interest rates to approximately zero, and this has a direct impact on most interest rates, with few exceptions. HUD interest rates tend to be approximately 2.25% for an existing transaction and slightly higher for new construction. “Trying to get a handle from conventional lenders on interest rates is challenging,” Davis said, “but generally they are plus or minus 3.5% to 4%” while HUD rates move very little.

Term and amortization: Conventional lenders typically have a 3-5-year loan with a balloon term, which in certain environments, such as the one we have with the pandemic, could make it very challenging to get a construction mini-permanent loan. Compare this to HUD funding, which has terms of up to 40 years, is self-amortizing without a balloon, and is prepayable based on prepayment conditions.

Equity requirements: Most loans for new construction using conventional financing in today’s world require equity of a minimum of 40% and sometimes greater. On the other hand, HUD does not have significant equity requirements and often has leverage up to 90% or greater. The net result of more proceeds in your loan and less equity is cash on hand. This can provide working capital, the ability to do other deals, and basically, helps pay the developer moving forward.”

Davis continued, “Thinking outside of the box during a pandemic is the only way to think,” Davis said. “If COVID has proven anything, it is that nothing stays the same.” Davis calls HUD “the Sleeping Giant” of multi-family lenders. While it continues to be popular with those already familiar with its merits, he predicted it will gain momentum and a new following as the pandemic wears on and conventional lenders continue to tighten their own reins. “We welcome all developers, brokers, investors, and others in the multi-family world to reach out to us and give Cambridge a shout so we can show you how your multi-family deal can work with your next deal of any size.”

Comparison of HUD 221d4 Construction/Permanent Terms & Conventional Construction/Permanent Terns for a $25,000,000 Project

Terms for Comparison.HUD 221 d4Typical Conventional
Loan AmountsNo MaxNo Max
Interest Rates2.25%3.75% or Greater
Loan to CostUp to 90%Today 60% or Less
Loan to Value80%Not Greater Than 65%
Prepayment PenaltyYes. Subject to Prepayment PenaltyYes, Subject to Prepayment Penalty
Personal RecourseNoYes, most of time.
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