CONTENT SPONSORED BY EASTERN MORTGAGE CAPITAL
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 .
Bank financing help facilitate the quick delivery of a 284-unit multifamily development in Rexburg , Idaho . and closing , a single 40-year amortizing loan at a highly competitive fixed interest rate , no personal guaranty , steadily declining prepayment penalties , and no limits on rents , tenant income , or return on equity .
THE BEST OF BOTH WORLDS While some developers appreciate the single step ease of a construction-to-perm loan , others would rather retain the flexibility provided by an established banking relationship during construction and lease-up . Traditional bank construction financing usually calls for a personal guaranty but often offers more freedom with project design , construction contract structure , and change orders .
HUD ’ s 223 ( f ) permanent financing program can take out bank construction loans with long-term financing on favorable terms nearly identical to those of HUD ’ s construction-to-perm product . A stabilized project can be refinanced out of its construction loan with a 35-year fully amortizing loan . The loan is fully nonrecourse to the borrower with no carve-outs , features step-down prepayment for 10 years and no prepayment penalty thereafter , and is assumable .
Additionally , the 223 ( f ) allows developers to borrow more than the outstanding construction loan balance . Stabilized projects can be financed at up to 85 percent of appraised stabilized value ( higher for affordable projects ) or 80 percent with cash out beyond the existing loan balance .
Using a 223 ( f ) to refinance a construction loan adds a separate underwriting process and closing to the development timeline . However , the costs of closing the HUD financing can be rolled into the permanent loan , and the 35-year amortization schedule provides cash flow relief to help absorb the costs of a separate loan .
MAXIMIZING PROCEEDS FOR METRO PHILADELPHIA DEVELOPMENT The neighborhoods to the north of City Hall in Philadelphia are seeing an exciting level of redevelopment to increase the city ’ s supply
HUD-Insured Financing Solutions for New Construction and Substantial Rehab
HUD 221 ( d )( 4 ) Construction-to-Perm Loan
• One underwriting and closing for construction and permanent financing .
• Nonrecourse with no carve-outs , even during construction .
• Up to 85 % LTC ( higher for affordable transactions ).
• 40-year amortization .
• Borrower-friendly step-down prepayment years 1-10 and no prepayment penalty thereafter .
HUD 223 ( f ) Refinance of Bank Construction Loan
• Allows developers to utilize flexibility of bank construction financing .
• Up to 85 % LTV ( higher for affordable transactions ) or 80 % LTV if taking cash out . Value based on stabilized market rents , regardless of affordability restrictions / trailing statements .
• Borrower-friendly step-down prepayment years 1-10 and no prepayment penalty thereafter .
• Loan is assumable .
of class A rental housing . Using FHA mortgage insurance , Eastern Mortgage Capital , a leading national lender focusing on multifamily and senior living / health care lending , provided approximately $ 45 million in construction-to-perm financing for a new project in Philadelphia that includes 108 residential apartments and first-floor commercial space . Why did the developer choose a HUD-insured construction-to-perm loan ? In this case , they wanted maximum loan proceeds to leverage opportunity zone equity . Additionally , the loan ’ s 40-year amortization marries well with the developer ’ s plans to hold the property long-term . They likely will not hold the loan for its entire term , but want the flexibility to sell or refinance at their discretion without the constraint of a looming balloon payment .
FREEING TRAPPED EQUITY IN A GROWING MARKET Developers used a conventional bank construction loan to create 284 units of new apartment housing in the growing market of Rexburg , Idaho . Bank financing allowed the developer to begin construction quickly and have more freedom through the design and construction phases . With rents on the rise in this increasingly popular location , the completed project held significant value that the developers wanted to realize . The HUD 223 ( f ) refinance loan provides up to 80 percent LTV for cash-out refinances . Eastern Mortgage Capital was able to deliver a nearly $ 27 million loan that features a 35-year fixed rate and requires no personal guarantees from the borrower .
Peter Tousignant Vice President of Eastern Mortgage Capital
Contact him at ptousignant @ easternmc . com or 617-897-1079 to learn more about HUD-insured financing
CIREMAGAZINE . COM COMMERCIAL INVESTMENT REAL ESTATE MAGAZINE 37