During this time of economic stagnation and uncertainty, the United States Department of Housing and Urban Development (HUD) has been able to provide a critical source of liquidity in an otherwise scarce market. This is not surprising—HUD generally finds itself to be busiest in times of economic crisis. In fact, during the adversity brought by this pandemic, HUD was deemed to be a “critical” business because of its widely understood role in economic stimulation.
As part of Berkadia’s specialty group focused on facilitating financing agreements through HUD, we are proud to be working with such an essential organization, one that has provided tremendous opportunities for today—and in turn, the future.
The Belle of the Ball
HUD is providing a key source of current liquidity and doing so at unprecedented low interest rates, making borrowers more interested than ever in getting deals done. As such, we have seen a huge push for refinancing and rate reduction loans.
While facing adversity, HUD has been able to mobilize quickly and expand operations to fill current gaps in the market. We are seeing owners with a burning desire to release trapped equity and cash out transactions in order to shore up equity positions. Interest in HUD financing options is being driven from both long-term HUD borrowers and new players who are dipping their toe in HUD’s optimal offerings.
That is not to say that HUD is accepting all requests coming to them. In fact, HUD has been even more strict on their requirements for and reviews of applications. That’s where a huge part of our role comes into play: helping clients navigate the process and advising when they do or don’t meet certain criteria. For example, HUD is now requiring a minimum of a nine-month debt service reserve upon closing for market-rate multifamily properties. These stringent, but fair, rules ensure that borrowers have enough liquidity now to be able to make payments in the future.
On the other hand, some of HUD’s conditions have changed in recent months, offering tremendous opportunities. Take HUD’s three-year rule: in March 2020, HUD waived the need for newly built or substantially rehabilitated properties to wait three years before applying for the 223(f) financing program. As relationship options with institutional investors dry-up, and lending on the conventional side has all but gone away, HUD has filled the void by providing the perfect tool to reduce risk and help borrowers expand their options
Teamwork Gets Deals Done
Like HUD, the entire Berkadia HUD team has remained busy, with deal volume almost 300 percent higher than it was at the same time last year. We have been working on market-rate, affordable and seniors housing projects across the country. More than half of our transactions are with repeat clients and the remaining were signed as a result of our team’s collaboration with Berkadia originators who specialize in other product and/or loan types. Teamwork is critical to our success.
Most recently, we have completed two deals that exemplify our current work: Greyhawk Townhomes and Monument Village.
- Not only were we able to bring down the interest rate significantly for the Greyhawk deal, but under HUD’s 223(a)7 program, we were also able to qualify this new project as “green” and reduce the annual insurance requirements. Together, these factors will ultimately save the owner hundreds of thousands of dollars over the life of this 40-year loan.
- Monument Village, on the other hand, was a bridge loan secured through Berkadia’s bridge program on behalf of long-term client Foulger-Pratt. This loan helped them to acquire a Class-A multifamily asset that provides highly attractive, risk-adjusted returns in a growing market. This deal was truly a collaborative effort within Berkadia, as well as with the borrower, sponsors and seller.
In the midst of these transactions, there have been some challenges, like how to inspect and/or renovate properties. While building access restrictions have delayed progress on select projects, HUD has allowed third-party vendors to provide virtual inspections of building common areas—while adhering to CDC guidelines and social distancing requirements. We are not yet conducting tours through individual units, but seeing maintenance rooms, HVAC, boiler areas and complete PCNA reports is a huge step in the right direction.
One item that has become a unique point of concern is radon testing. Radon testing kits are fairly straightforward, but do need to be present in a unit for an extended period of time. This fact has required a certain level of collaboration among property owners, third parties, HUD and ourselves. All parties have been committed to finding a way to get these deals done, which has fostered a wonderful sense of community and togetherness.
Creativity Fosters Connections
With everyone working from home, it can be hard to feel connected. Our whole team regularly works remotely, so this is not too much of a change for us, but the big difference is in travel. As busy as we are, this is normally a time where we would be on the road with clients. Instead, we are video chatting and making it work!
Also, like everyone, our clients are overwhelmed with “COVID updates.” In order to be most helpful, our team collaborated with Berkadia’s Research and IT departments to develop a light-hearted, yet informative video showcasing Berkadia’s unparalleled market analysis. Though there’s no substitute for being in a room together, it’s been well-received by clients and prospects in this time of information overload.
HUD Financing for the Future
Berkadia’s technological capabilities and the work we are doing right now has been a game changer—it has allowed us to expand our role as advisors and operate as real business partners to our clients. We have taken this opportunity to listen more and help position our clients to meet short- and long-term goals. Right now, HUD loans provide a great opportunity for now and the next 35 years.
This “new norm” we’re living in may not be sorted out over the next six or even 12 months, but it’s important, as an industry, to move forward and seize opportunities where they do exist. Decisions made today will greatly impact what happens in the future—it’s important to take the long view. Know that you have support in us, just as we have in you. Remember: this is a marathon, not a sprint. We may have to take turns carrying each other to the finish line, we will get there. Together.
-By Managing Director Laura Smith, Senior Real Estate Analyst Ann Bolen, and Real Estate Analyst Susan Bealmear