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By: Scott Lynn and Andrew Hanzl Metropolitan Capital Advisors (“MCA”) is a member of the Real Estate Capital Alliance ("RECA"), a professional association of 18 Read more

Getting Creative: HUD 221 (D) (4)

By: Andrew Hanzl Take notice! The landscape is shifting: In anticipation of a market slow-down, commercial real estate lenders are dialing back their leverage and Read more

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Whither CRE Construction Lending?

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Commercial Real Estate Finance

Getting Creative: HUD 221 (D) (4)

By: Andrew Hanzl

Take notice! The landscape is shifting: In anticipation of a market slow-down, commercial real estate lenders are dialing back their leverage and exercising greater caution with lending practices. This isn’t necessarily however, a cause for concern – your deal can still go through. The financiers at Metropolitan Capital Advisors (“MCA”) understand how to dig deep, get creative, and still make successful deals in this changing market! In fact, we are currently working on a highly leveraged loan request to develop a large multi-family project in a secondary market in Utah. We consider this a request to tackle headfirst in the challenging current environment! We know that the capital is available if we are creative in our approach and look for it hard enough. We searched far and wide, showing this particular deal to over 50 capital sources including: local, regional, and national banks; life insurance companies; and, agency debt. We even considered sourcing a piece of preferred equity in our pursuit to complete the assignment.

If you are currently seeking a similar loan to facilitate the development of an apartment complex, you may want to think outside the box and consider the Housing and Urban Development (“HUD”) 221 (d) (4) loan program. Guaranteed by the U.S. Department of Housing and Urban Development, this category of loan is the highest leverage, lowest cost and least liability (non-recourse) fixed rate loan currently available. The leverage is far more aggressive than is available at conventional banks – most currently max out at 75%, (if you are lucky!)  where the 221 (d) (4) program leverage starts at 83.3% LTC for market rate properties and tops at an astounding 90% LTC for rental assistance properties.  Additionally, it offers a 40-year fixed and fully amortizing term with interest rates between 3.95% and 4.30% (as of March 2017).  Further sponsors are also given a three-year interest only period during the construction phase (making this effectively a 43-year loan).
HUD-SECTION-221D4

The single combined structure (construction + permanent) eliminates both the interest rate risk at takeout as well as the payment of additional fees upon conversion.  The program is not only available for development deals, but also for existing properties requiring substantial rehabilitation. It caters to all project sizes, starting from loans as small as $2 million. Although there is technically no limit, loans over $40 million are subject to more conservative leverage and DSCR restrictions. Another advantage of the 221 (d) (4) program is that the loans are non-recourse (subject to standard carve outs) during both the construction and permanent phases. This feature is rare amongst other sources of capital. Forty years is a long time to own a property and therefore sponsors are often concerned about disposition. Buyers are able to fully assume 221 (d) (4) loans subject to FHA approval and a small fee.

Clearly the program has a lot of upside for sponsors, however, it does come with some disadvantages. Like with most things that involve the Government, the process is time consuming, thorough, paperwork intensive, and, comes with additional fees. Let’s take the example of the timing for affordable and rental assisted properties: it is typically a 5 to 7 month timeline from loan start to close.  For market rate properties the timeline is closer to a year (8-12 months). It usually takes 90 days just to secure a soft commitment that basically says they ‘like’ your deal! Unlike bank loans, HUD loans are absolute asset based, which require a longer time to scrutinize the location, pro-forma rents and expenses, and the experience of the sponsors. Another issue with the program is that it is fee intensive, 5.3% of the total loan amount is paid up-front.

Nonetheless, despite the higher fees as compared to traditional bank financing, the attractive structure and low interest rate is well worth the additional costs. Furthermore, the properties are carefully monitored to ensure they are performing on an ongoing basis. HUD loans require an annual audit of operations. The tighter monitoring of the cash flow results in less frequent distributions to equity investors; restricted to every 6 months or annually – where banks permit distributions monthly or quarterly.

Although not often considered for multi-family development, the HUD 221 (d) (4) program offers tremendous benefits for sponsors willing to wait for approval. Navigating the process can be overwhelming, but an experienced mortgage broker can help and simplify the process tremendously. If you would like more information about HUD financing, or help securing other forms of capital please contact Andrew Hanzl at ahanzl@metcapital.com.

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Whither CRE Construction Lending?

By: Justin Laub

The mantra of commercial real estate developers around the country when speaking of the state of construction lending these days might be: ‘you don’t miss something until it’s gone’. Though we are not witnessing the complete shutdown of the construction lending industry, we are certainly witnessing a pause in, and a shuffling of the market. The tightening of the construction lending market that began as a  trend a year ago has now become a permanent fixture in today’s capital markets. Though projects are still being financed, lenders are now pickier about what they finance and the terms on which they do so. The result is that it now takes more creativity to convince lenders to finance development deals

You may wonder what is driving this changing trend? There are multiple factors. The main drivers of this trend are: i) The Dodd-Frank banking regulations that penalize banks for overextending on construction lending, ii) the sheer volume of development projects over the past three years that have absorbed much of the lending industry’s construction capacity and iii) concern amongst lenders that we are late in the cycle. All together these create the situation we are in today, whereby the reins have been pulled in on construction lending. A new wild-card in this equation, is the new Trump administration. With the possibility that they may roll back Dodd-Frank (and other) regulations as well as the post-election surge in consumer and business confidence, there is the possibility of significant change. That however, would be the subject of a separate blog.

It’s difficult to precisely quantify how much construction lending has tightened as a result of all of the above, but I would estimate that Loan-To-Cost (LTC) levels have tightened by 5-10% when comparing deals then and now on an apples to apples basis.  Perhaps a  better way to describe the situation is to say that projects at the margins (i.e. new sponsor, out of the box product type, pioneering locations, etc.)  are harder to get done these days. Banks are still lending on institutional quality deals at similar, conservative leverage levels as before, albeit it may be 5% less in LTC. Non-institutional deals however, are tougher to finance in today’s market. I would estimate that sponsors need to put anywhere from 5-15% more equity into their deals to get them across the line. Even so, greater equity doesn’t always make a viable, non-institutional project financeable in today’s market.

So what are the solutions? The alternatives today basically fall into two categories: i) you deleverage your project, or ii) you find alternative capital structures and/or capital sources to get to the leverage that you want. The first solution is straightforward, in that you simply put more equity into your project. The second solution, however, requires more creativity. There are a handful of one-stop shop, non-bank construction lenders that can get you higher leverage in exchange for a premium rate. There are also various combinations of bank and non-bank capital sources that you can combine into senior/mezzanine and senior/preferred equity structures in order to get to the leverage that you want at potentially more attractive pricing options than a one-stop shop. Regardless of what your solution is – less leverage or more creativity – the marketing effort to secure a deal today is more challenging than it was a year ago.

For strategic advice on your next development project, you can reach Justin Laub, Senior Director, at jlaub@metcapital.com. Or visit the Metropolitan Capital Advisors website at http://metcapital.com.

The author, Justin Laub, is a Senior Director in the Dallas office of Metropolitan Capital Advisors.

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