Brian Andrews of Andrews Commercial Mortgage was blunt when he spoke earlier this year about financing for commercial real estate.
“There is no financing available for commercial real estate,” he said, and then walked off the stage.
Andrews was exaggerating a little. He came back to the podium to explain in all seriousness that loans are available, only with tighter standards than a couple of years ago. Local banks say they’re still willing to back owner-occupied projects, but virtually everyone in the financing game has lost their appetite for speculative lending.
Except, maybe, Uncle Sam.
The U.S. Department of Housing and Urban Development has long promoted apartment construction through its 221[d][4] program. HUD doesn’t lend the money; instead, it insures HUD-approved lenders against loss on mortgage defaults. The terms of the program are remarkably generous to lenders and developers. In fiscal-year 2007, HUD insured about $1 billion worth of mortgages for 104 projects with 16,219 units nationwide.
“Probably half of the complexes built in the last five years—the market-rate, upscale ones—were done using [d][4], but it was simply one of several options available to people,” says Wesley Moore, an appraiser with Cook, Moore & Associates. “Now, it’s essentially the only option.”
Moore recently returned from a conference in Dallas, where HUD lenders were a hot topic. The consensus among attendees was to go to HUD if you want to build a new apartment complex of any size.
HUD’s Web site says the program is intended to “assist private industry in the construction or rehabilitation of rental and cooperative housing for moderate-income and displaced families by making capital more readily available.” Complexes built with the program are considered market rate and generally are not for low-income renters.
“Many of the nicest projects in town have 221[d][4] financing,” Andrews says.
It’s essentially a 42-year program, including two years for construction and a 40-year, fully amortized permanent loan. No balloon payments, and no need to find multiple lenders. Participating lenders include Prudential, Greystone Capital and Key Lending Solutions.
And it gets better.
The borrower only needs to put up 10% equity, which can include land equity. A developer can get away with very little of his own proverbial skin in the game if the deal is structured properly, which is unheard of in the current lending climate. Most banks will ask for at least 20%.
The loans are federally insured and, with some limitations, nonrecourse, so the risk to both parties is minimal. All in all, it’s a sweet deal for everyone involved, except, of course, the taxpayer if the deal goes south.
“It’s great. It’s a sign-me-up deal,” Moore says.
So why doesn’t everyone use it? HUD doesn’t approve every project; if there’s a HUD-backed complex near your proposed project, the department won’t want the two to cannibalize each other.
And a developer has to be willing to withstand HUD’s scrutiny and able to negotiate the bureaucracy involved. The process can easily take eight or nine months—sometimes even longer.
Tom Delahaye of Plaquemine is developing Villages at Juban Lakes, a planned $12 million project in Denham Springs, using 221[d][4]. Delahaye has acquired the land, but construction has not yet started. He expects to close on his loan in September.
“I’ve done tax credit deals,” he says. “To me, it’s just different hoops. I didn’t find anything extraordinarily difficult.”
He says HUD made it clear that it didn’t want to saturate the market, and it didn’t want someone who was going to rush through a project to collect tax benefits. So, would Delahaye’s project have happened without the program?
“No, not in today’s market,” he says. “I don’t think anyone would do the financing. There’s no tax credit market out there, either. This is it.”
