“Prosperity brings expanded lending, which leads to unwise lending, which produces large losses, which makes lenders stop lending, which ends prosperity, and on and on.”
– Howard Marks, Cofounder of Oaktree Capital
As many developers across the country are currently aware, recessions and market turbulence can affect lending in real estate development. Economic cycles are a normal part of the economy and can be triggered by both market and non-market events. We’re familiar with how the 2000/2001 Dot Com Bubble and 2008 Great Recession spun the nation’s economy into recession; however, other events not controlled by economic factors like WWII, the September 11th terrorist attacks, and today’s COVD-19 pandemic can turn GDP growth negative. In either case, there are valuable resources that provide opportunities for developers to move projects forward. Government financing programs like HUD can provide access to capital markets when traditional options for financing are limited.
The US Department of Housing and Urban Development (HUD) has developed a program through the Federal Housing Administration (FHA) to stimulate multifamily development in all economic conditions; the program is especially helpful in conditions like today’s environment when banks are hesitant to lend. While there are a number of benefits to financing through HUD, there are also drawbacks that make the program tricky. Read on for some highlights of both.
Benefits:
- Up to 90% LTV (PEG has received a quote of up to 86% on a project recently)
- Very low interest rates (PEG received a quote at 3.3%)
- 24 months of interest-only payments during construction period
- 40-year amortization period
- No need to refinance after stabilizing the property
Drawbacks:
- Long, drawn out process to receive funding – submitting proposals for review to HUD and a number of third-party reports must be completed
- Delayed developer/GC fee
- Strict design requirements (access for ADA residents, etc.) and a lot of red tape
- PMI throughout the entire loan period – can be reduced from 65 bps to 25 bps if building meets certain “green” sustainability and energy efficiency requirements
HUD financing can be an important solution, and sometimes the only solution, to moving a project forward during lean times. PEG Companies has used HUD financing in the past to complete development projects and may consider using it in the future to move projects forward during times of economic uncertainty. For developers considering an alternative option to bank debt, HUD financing can be a great fit for those that have the flexibility to delay financing for a period, receive developer fees at a later period of the investment, and pay higher interest rates and closing costs. All in all, during times of economic uncertainty, the benefits of HUD financing can often exceed the costs.
