By Artin Anvar

During times of economic upheaval in the U.S., HUD has been a consistent source of financing for multifamily borrowers looking to buy, refinance, renovate or develop affordable and market-rate multifamily properties. Throughout this global pandemic, as during the 2008-20010 economic recession, HUD’s mortgage insurance programs offer new construction, acquisition and refinance debt, filling the gap left by other capital providers that have curbed their commercial real estate lending programs. Today’s pipeline of HUD transactions is growing, delivering multifamily property investors viable financing solutions as we continue to weather these challenging economic times due to COVID-19.

SunTrust Commercial Real Estate funds these long-term loans and completes the underwriting process. HUD approves and insures the loans. Descriptions of the active multifamily property HUD programs are outlined below.

HUD 223(f) For Acquisition or Refinance
Parameters of the HUD 223(f) non-recourse fixed-rate financing for the acquisition or refinance of multifamily properties include the ability to refinance newly constructed properties. The loan term is fully amortizing for up to 35 years and offers no refinance risk, balloon payment or exit test. The loan allows up to about $40,500 per unit in repairs (depending on location). The loan amount is determined by a 1.176 DSCR or 85 percent loan-to-value (LTV), or higher proceeds for affordable deals. For cash out transactions, the LTV is 80%.

HUD 221(d)(4) For New Construction/Substantial Rehabilitation
HUD is looking at new construction loans through its HUD 221(d)(4) non-recourse financing for new construction and substantial rehabilitation of affordable and market-rate multifamily properties program. Under this program, the loan term is fully amortizing for up to 40 years. HUD 221(d)(4) features 85 percent LTV for market-rate properties and up to 90% LTV for affordable properties with highly competitive interest rates. The new construction program provides a construction loan and permanent financing in one loan.

HUD 223(A)(7) For Refinance Of Federal Housing Administration (FHA) Loans
With historically low interest rates in markets today, the HUD 223(A)(7) program offers borrowers a great vehicle for refinancing multifamily properties with FHA-issued loans. This streamlined refinance program does not allow equity take-out. Benefits of the non-recourse, fixed-rate loan include no appraisal, no environmental assessment, minimal mortgage credit analysis and a reduced application fee. An additional 12 years can be added to the original loan term if approved by HUD. The financing features prepayment terms typically locked for zero to two years with declining penalties through year 10 and no penalty after 10 years.

Some Mitigating Constraints To Offset Market Risk
As of April 10, HUD has added some mitigating constraints for market-rate and affordable transactions to offset additional risk in the real estate market.

For market-rate transactions, HUD now requires a nine-month debt service escrow. The escrow will be held until the project achieves three consecutive months of debt service coverage.

For affordable transactions, projects with new Low-Income Housing Tax Credits, HUD will review the investor lease-up and operating deficit reserve requirements for adequacy and availability to the borrower. For refinance projects with existing credits, HUD requires a 12-month reserve escrow that may be modified by a stress test. Projects with greater than 90% Section 8 Project Based Rental Assistance will not be required to post a debt service reserve escrow.

All of the above HUD permanent loan programs offer excellent sources of capital at low interest rates. SunTrust Commercial Real Estate is actively working with multifamily investors across the U.S. to underwrite these loans.

Artin Anvar is managing director with SunTrust Commercial Real Estate in Washington, D.C.

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