Get Your Multifamily Deal Done With FHA

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1 January 7, 2009 Get Your Multifamily Deal Done With FHA Arbor Commercial Mortgage, LLC

2 Overview In 2008, the housing finance system came to a near standstill as creditors began losing confidence in the portfolios of their lending partners, with very few sources of capital remaining in the marketplace. As a result of the credit crisis, many multifamily borrowers have turned to agency lending from government sponsored enterprises (GSEs), Fannie Mae and Freddie Mac, as well as HUD s FHA mortgage insurance programs to finance their real estate projects. This coming year, borrowers are looking more and more to FHA for new originations and refinancing of their multifamily projects. The primary benefit of FHA is that it is a source of financing that is always in the market regardless of the economic environment. As the sources of multifamily capital continue to shrink and change, HUD and the FHA programs will be critical to determining what the lending landscape will look like in 2009 and beyond, according to Joseph Donovan, Senior Vice President, Production Management at Arbor Commercial Mortgage. To help familiarize borrowers who are accustomed to getting financing through other capital sources, Arbor prepared an overview of FHA s mortgage insurance programs available for multifamily borrowers, with a particular focus on the popular 221(d)4, which provides funding for new construction or substantial rehabilitation. FHA Multifamily Programs According to the Mortgage Bankers Association, approximately 30 percent of families and elderly citizens either prefer to rent or cannot afford to own their own homes. As a cost-effective means of new construction or rehabilitation of rental housing, FHA s multifamily mortgage insurance programs have played a critical role in supporting the availability of much-needed affordable rental housing across the nation. FHA is also one of the primary generators of capital for healthcare facilities, particularly nursing homes. FHA provides the following mortgage insurance programs: 221(d)(4): Combined construction and permanent financing for multifamily properties new construction or substantial rehabilitation. 223 (f): Refinancing or acquisition of existing multifamily properties market rate or affordable. 232: Combined construction and permanent financing for seniors/healthcare facilities (assisted living, congregate care. 232/223(f): Refinancing or acquisition of existing seniors/healthcare facilities. 231: Construction and permanent financing for new or substantial rehabilitation of existing rental property for seniors only (age restricted at 62 or older). 213: Construction, substantial rehabilitation and purchase of cooperative housing. 2

3 Focus on FHA 221(d)(4) Program Under Section 221(d)(4) of the National Housing Act, the FHA provides mortgage insurance to facilitate the new construction or substantial rehabilitation of multifamily rental projects, including apartments for seniors (ages 62 years and older). The program provides both construction and permanent financing. Eligible Borrowers For-profit and non-profit single asset entities may utilize this program. Eligible Property Types Contrary to popular belief, there are no income limits for the 221(d)(4) program. Market rate, moderateincome and subsidized properties are eligible. Certain independent living projects for seniors ages 62 years and older may qualify. Properties with commercial/retail space are also eligible. The property has to have at least 5 units and it can either be detached, semi-detached, row, walkup or elevator-style. What Are The Benefits of the 221(d)(4) Construction Loan Program? Long term, fully amortized debt that is assumable Up to 48 months for new construction and up to 40 years for a permanent loan. All loans are fully amortizing with no balloon payment. Low, fixed interest rate is established after issuance of a firm commitment by HUD and is based on market spreads over the 10 Year Treasury yield. Both construction and permanent rate are fixed prior to the start of construction. High Leverage Loan to cost is 90% maximum (standard) and 100% maximum (non-profits) and is based on total replacement costs, including land and construction interest. No Personal Liability All loans are non-recourse. No Maximum Loan Amounts - No limits or caps on loan sizes or number of loans to one borrower. No occupancy benchmarks or new processing fees are required to convert to a permanent loan. Loan commences to amortize after construction completion and cost certification. Important Factors Borrowers Should Consider When Selecting the 221(d)(4) Construction Loan Program Loan Processing Time Application to closing generally takes 6 to 12 months for new construction/sub-rehab. General Contractor Requirements (GC) Davis Bacon Wage Requirements for new construction and substantial rehabilitation may increase costs in some markets. Prepayment Penalties The prepayment terms are negotiable, but they are include an initial lockout period followed by a declining percentage penalty through year 10 of the permanent loan. Underwriting Requirements Borrowers must submit a substantial amount of paperwork. 3

4 Loan Parameters The maximum loan amount for new construction is the least of: 1.) 90% of the estimated replacement cost including the value of the land, and a developer s fee equal to 10% of all costs other than the acquisition cost of land 2.) FHA s statutory per-unit limit with a geographic cost adjustment factor, or 3.) Amount that meets a 1.11x DSCR The maximum loan amount for substantial rehabilitation is the least of: 1.) The 90% of the cost of rehabilitation plus 90% of the as is value 2.) FHA s statutory per-unit limit with a geographic cost adjustment factor, or 3.) Amount that meets a 1.11x DSCR Substantial Rehabilitation Qualifications: Repairs must exceed $6,500 per unit (adjusted for local high cost factor), 15% of the as rehabbed appraised value or replacement of two or more major building systems. What are the Fees and Expenses Involved? 1.) HUD Application Fee: Non-refundable fee of $3 per $1,000 (0.3%) of the mortgage amount due to HUD with the firm commitment submission package. 2.) FHA Mortgage Insurance Premium: HUD sets the cost of the FHA insurance. The MIP is paid in advance for the construction period and is escrowed monthly after amortization commences. 3.) FHA Inspection Fee: 0.5% of the loan amount for new construction; 0.5 % of the cost of repairs for substantial rehabilitation, to be paid at closing. 4.) Third-party report costs. 5.) Origination / Commitment Fee: Negotiable. 6.) Legal/Closing Fees: Amounts vary by transaction type. How Do I Get Started? 1.) Call ARBOR 10 to speak to an Arbor originator to discuss your options and select the lending program that is best suited to your financing needs. As an approved FHA Multifamily Accelerated Processing (MAP) lender, Arbor provides access to the flexibility of the FHA loan programs on an expedited basis. 2.) The borrower and the lender work together to prepare and submit preliminary project data, a market study and environmental report. HUD has 45 days to review and issue an invitation to Firm Commitment. 3.) Upon receiving a Firm Commitment, the borrower and lender will submit a Firm Commitment Application that includes all third-party reports, full project plans and 4

5 About Us specifications, general contractor s costs, a full credit review of the borrowing entity, principals and general contractor, description of the proposed property manager and business plan. HUD s review time is up to 45 days. 4.) The time from the Application Letter to closing is approximately 9 months. 5.) The borrower and lender may opt to combine both steps in this process and submit a single application to HUD for review. HUD s review time is up to 60 days, and the time from Application Letter to closing is approximately 6 months. Arbor Commercial Funding, LLC, Arbor Commercial Mortgage, LLC, and Arbor Realty Trust, Inc., have extensive experience in mortgage origination, servicing and securitization and have built a reputation for service, quality and flexibility. Arbor s seasoned management team specializes in debt and equity financing for multifamily, office, retail, hotel and various other commercial real estate properties. The company offers a broad array of financing options including Fannie Mae DUS, FHA, CMBS, Bridge and Mezzanine products. Currently, Arbor services approximately $6.1 billion in loans. Arbor is a rated Standard & Poor s third-party commercial loan and special servicer. Arbor also manages Arbor Realty Trust, Inc., a real estate investment trust, (REIT), formed to invest in real estate-related bridge and mezzanine loans, preferred equity investments and in limited cases, discounted mortgage notes and other real estate related assets. Arbor is headquartered in Uniondale, NY, and has full-service lending offices throughout the United States. 5