One size does not fit all in multi-family financing
Deciding between financing alternatives involves careful consideration, especially at a time when the options are plentiful. MHN spoke with Hudson Realty Capital Managing Director Brad Cain about the nuances of Federal Housing Administration packages versus government-sponsored business packages and conventional loan products.
Cain joined Hudson Realty Capital in March 2021 to accelerate the growth of its FHA business, which the mid-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 the ability to lend during times of illiquidity more important than ever. Given the turmoil of the Great Financial Crisis from 2008 to 2012, our management team felt that adding FHA capabilities to our conventional loans was a natural fit for us.
The addition of FHA loans has been in the works at Hudson since late 2019, when the founders of our company first approached Greater Southern Realty Capital, now called Hudson Realty Finance LLC, to join our platform. Since September 2020, our leaders have focused on building a strong team of professionals that has generated over $ 1 billion in mortgages for the FHA and seeks to expand the company’s presence to include both MAP and LEAN.
How does working with FHA loans compare to the conventional lending space?
Cain: As often, and especially now, borrowers are inundated with financing options and may be unsure of which financing solution best meets their goals. 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.
FHA loans allow borrowers to obtain non-recourse financing at low fixed interest rates with high leverage and full amortization terms of up to 35 or 40 years. FHA loans are also fully assumable for a fee of 0.05%, payable to HUD and subject to lender approval.
The specific underwriting criteria depend on the characteristics of the property. For example, the refinancing of a project at the market rate would be eligible for a maximum mortgage amount of up to 1.176x DSC and 85% LTV (cash-out up to 80% LTV).
How does HUD funding compare to other government sponsored funding alternatives?
Cain: It is common for borrowers to consider FHA vs GSE alternatives when deciding on the best financing solution for their multi-family assets. The biggest differences between these alternatives are often the timing of the whole process, the interest rate (fixed or variable), loan term / amortization options, and possible new construction.
GSEs offer fixed and variable rate options and shorter loan terms with longer amortization periods (risk of bloat), while FHA loans must be fixed rate and fully amortized over the life of the loan. Unlike GSEs, FHA offers construction finance and permanent loans for new construction projects and more recently has also allowed the resumption of newly stabilized projects (similar to GSEs).
The timing of the whole process will depend on the specifics of the project and the type of loan, but FHA loans will take longer to close, which can sometimes be the deciding factor, especially for acquisitions. At Hudson Realty Capital, we leverage our long-standing bridging capabilities to streamline transactions for clients who need more time to close or reposition their assets before executing a permanent loan.
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What do you look for in a multi-family asset before deciding whether or not it is eligible for the HUD financing program?
Cain: Hudson Realty Capital’s intensive due diligence process allows us to assess risk and provide the greatest possible execution certainty for all parties involved. Additionally, our hands-on approach combined with our experienced FHA team allows us to screen potential transactions and guide clients through every step of the process from origin to closing.
As you would with any asset, we seek out well-located multi-family properties in good markets with strong sponsorship in place. It is always beneficial for the sponsor and the management company to have prior FHA experience, but we can help them build a team if necessary. From there it looks at property level financial performance / data and any specific characteristics (e.g. commercial space, green / energy, affordability, elderly students or residents, etc.).
What are the main trends that you have noticed in terms of demand for HUD loans?
Cain: We have 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 the resilience of the multi-family 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 outstanding deadlines. In addition, new construction alternatives and bridging loans with competitive terms and certainty of execution will be in high demand.
Have you noticed a shift in the demand for HUD Multi-Family Construction and Rehabilitation programs? What about acquisition and refinancing?
Cain: HUD multi-family construction remains in demand, but we have also seen more requests for conventional financing, given rising construction costs and the longer lead times required to secure new FHA construction loans.
Even experienced FHA developers are considering conventional alternatives with the ability to refinance their newly built projects with the FHA 223f program once it stabilizes and meets minimum DSC requirements etc.
The increased value of multi-family assets – which was not only driven by the environment of low interest rates and lower capitalization rates, but also by real growth in rents and other strong market fundamentals – led to strong demand for HUD refinancing, in particular, withdrawal opportunities. up to 80 percent LTV. Our team has also seen increased interest from borrowers in bridging loans and seamless executions of gateways to HUD for their acquisitions, with capital flowing into stronger US markets.
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Are there any specific objectives for the new FHA division of Hudson?
Cain: We target national markets that best serve our new and existing customers. Gateway and secondary markets with strong fundamentals are the primary factors when evaluating opportunities for our FHA business.
What role do you think HUD financing solutions play in addressing the pressing shortage of affordable housing in the United States?
Cain: The HUD plays a critical role in affordable housing solutions and for the workforce. I have been in the industry for over 20 years and learned the FHA trade early in my career underwriting enhanced tax-exempt multi-family bond transactions with FHA Mortgage Insurance and Ginnie Mae MBS, the HUD 202 capital grant, HOPE VI and alternative housing funds – all often combined with social housing tax credits to meet an extremely important industry need.
And, while affordable housing debt solutions are often complicated and require a lot of diligence, it is a high priority for HUD and our team to be part of the solution to address the affordable housing shortage in the United States.