Is there still money for multifamily?

James Pyle

There were times, not long ago, when developers had an endless selection of lenders from which they could secure multifamily capital - including banks, private investors, CMBS lenders and Fannie Mae. But in today’s world, the bottom line is banks aren’t lending - and that has resulted in many developers asking, “Is there still money for multifamily?”

The answer is yes, and multifamily developers are acquiring funding by turning to the U.S. Department of Housing and Urban Development’s Federal Housing Administration (FHA) for financing options. Developers are particularly interested in the FHA Section 221(d)(4) program that insures mortgage loans to facilitate the new construction or substantial rehabilitation of multifamily rental or co-op housing. In 2008 alone, HUD insured mortgages for 88 such projects with nearly 14,000 units for a total of $1 billion.

As a Jacksonville-based general contractor who is currently working on several such HUD projects in the Southeastern United States, we are here to offer advice and insider tips for developers seeking HUD financing in the year to come.

HUD financing is popular among developers because of its 40-year, non-recourse term, which means developers are not required to sign a personal guarantee for the project. And banks and lenders prefer HUD because the note is secured by a U.S. government entity.

Another positive is that HUD requires approximately 10% equity on a project it approves, whereas banks today would require around 25% to 40% equity. The only hitch for some developers may be the length of time a HUD application takes, which is approximately nine months compared to only the few months it used to take for banks to approve and finance similar loans. However, HUD provides a Multifamily Accelerated Program, known as a MAP, which reduces invitation response to 30 days and the firm commitment to 60 days.

If you’re ready to secure HUD financing, the first step is to do your research. Make sure the area you are going to develop can sustain such a project. If you’re confident that the area is in need of development, make sure to choose the right team to work with. Secure a team that is familiar with HUD, including architects, planners, civil engineers, and consultants, because all HUD projects require specific forms and strict guidelines that your team will need to be aware of and follow.

Once your team is secure and your project solidly defined, the second step to securing FHA mortgage insurance for a HUD loan is to complete the pre-application process. There are regional HUD offices that take applications and work with approved lenders and preferred facilitators, who serve as a liaison between the developer, the HUD office and the lender on every project.

To find a facilitator, go to the HUD office and get a recommendation or call on people you know for a good reference. Once you’ve found your preferred facilitator, develop a relationship with them because they are intimately familiar with the regional office and can probably give you an early indicator whether or not the project even has a chance for financing before the process ever gets under way.

Once you’ve found a facilitator, the application process works two-fold: first, you will submit a pre-application, which will be reviewed by HUD. They will either approve it and invite you to apply for a firm commitment for mortgage insurance or decline your application. If approved, you will work with your facilitator to complete all the necessary paperwork, checklists and application requests for the project.

Once your application is submitted, it will be reviewed to determine if the proposed loan is an acceptable risk. According to the HUD Web site, the reviewers will consider several variables, including the market need, zoning, architectural merits, capabilities of the borrower, availability of community resources and other items. If your project meets the program’s requirements, the local HUD office will issue a commitment to the lender for mortgage insurance on the project.

Developing, applying and securing HUD financing may be a lengthy and trying process, but for many developers, it is the only course of action in today’s economic climate. With the right team, research, facilitator and project, HUD financing can be the spot-on solution many developers seek to get their projects off the ground.

More information about HUD and the application process can be found at www.hud.gov.

James Pyle is president and CEO of LandSouth Construction in Jacksonville. LandSouth Construction is currently working on Village at Secret Lake, a 432-unit luxury apartment community located four miles west of Disney World’s main entrance in Osceola County. The project is one of the largest HUD Program Section 221(d)(4) contracts in Florida.