CONTENT SPONSORED BY EASTERN MORTGAGE CAPITAL
By Peter Tousignant
SECURE HIGH LOAN PROCEEDS AND NONRECOURSE TERMS
Eastern Mortgage Capital offers HUD-insured multifamily loans for construction-to-perm or construction loan takeout financing .
For experienced multifamily developers , U . S . Department of Housing and Urban Development-insured financing provides a unique solution to secure maximum potential loan-to-cost ( LTC ) rates on construction financing as well as favorable terms on a project ’ s permanent debt .
A ONE-STOP SOLUTION Offering a simple process at attractive rates , the 221 ( d )( 4 ) construction-to-permanent loan boasts a single approval and closing process , and finances up to 85 percent of project cost — and even higher for affordable projects . Builder and sponsor profit and risk of 10 percent of allowable costs may be utilized as a credit to equity requirements . Third-party expenses and loan costs are also financeable .
Upon construction completion , the interest-only construction loan automatically converts to a permanent loan at the same interest rate as the construction financing with a fully-amortizing 40-year term . This long amortization period supports stronger cash flow and maximizes loan proceeds . The loan can be fully amortizing , eliminating the need for a balloon payment and allowing the borrower to focus on project management without the stress of planning a refinancing event .
While some developers appreciate the single step ease of a construction-toperm loan , othaers would rather retain the flexibility provided by an established banking relationship during construction and lease-up .
Many developers are surprised to learn that HUD loans offer tremendous flexibility in the event of refinance or sale despite being long term in nature . HUD loans feature step-down prepayment for Years 1 through 10 and are repayable without any penalty after 10 years . Unlike many other forms of long-term financing ,
HUD loans never utilize yield maintenance or defeasance , which can severely limit opportunities to sell or refinance a property . HUD loans are also assumable . Given the loan ’ s high initial LTC , loan amounts at assumption are more likely to meet a prospective buyer ’ s equity budget than lower LTC loans .
While even well-established developers are often required to post personal guaranties on bank construction loans , all HUD financing is fully nonrecourse with no personal guarantees and no carve-outs to the nonrecourse language . This is true even during the construction and stabilization periods with the HUD 221 ( d )( 4 ) program .
The fully nonrecourse nature of a HUD construction-to-perm loan does require more processing time than some other types of construction financing . HUD ’ s underwriting process requires submission of full plans and specs , and it includes deadlines that developers must meet . Project teams must also include a bonded contractor , and it is best if the architect and contractor have experience building projects that are financed with HUD-insured loans .
In exchange for the time and procedure required , the 221 ( d )( 4 ) provides developers the convenience of one underwriting process
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COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE SUMMER 2022