CREJ

Page 12 — Multifamily Properties Quarterly — February 2022 www.crej.com Finance M ultifamily developers famil- iar with the high-levered U.S. Department of Housing and Urban Development 221(d)(4) program have begun to look elsewhere for construc- tion financing due to an exacerbation of the vehicle’s historically burden- some process. Accelerated cap rate compression, coupled with robust liquidity in the capital markets and an insatiable appetite to acquire apartment communities, has cre- ated a remarkable sense of urgency in the ground-up space.Whether it be a corporate relocation announce- ment, an alleviation in submarket zoning constraints or a natural shift in resident demand, there’s typically a race for developers to be “first out of the ground.”The 221 (d)(4) borrow- ers previously could get comfortable with the program's lengthy 12- to 16- month closing time frame because of unique attributes including competi- tive leverage (85%), long-term orienta- tion (35-year term), low interest rates (2.75-3.25%), and nonrecourse flex- ibility. The pandemic has created a disrup- tion in the output of these loans for myriad reasons. Government offices, namely those servicing HUD busi- ness, were temporarily closed during the heart of the COVID-induced shut- down. Upon reopening, these regional offices were met with unprecedented demand and have since been expe- riencing a disrup- tive amount of backlog. Depending on the office, the estimated time to execute a 221 (d) (4) loan, in some cases, can exceed 24 months. Because of this, developers have been pursu- ing financing alter- natives that can match the pace of the current real estate market. In response to the extraordinary backlog at HUD, multifamily develop- ers have started to migrate toward creative capital stack solutions that are timelier and can provide compa- rable leverage. Specifically, conven- tional bank debt with a subordinate tranche via preferred equity can achieve similar proceeds (85%-87% loan to cost) at a vastly accelerated timeline with a competitive blended rate (5%-6.5%). This is accomplished through banks lending up to 65%-70% LTC at Libor plus/minus 215-275 and preferred equity filling the balance up to 85%-87% LTC at a 12%-14% fully accrued rate. This is all done in a process that is 15 to 21 months faster than going the 221 (d)(4) route. In addition, this eliminates the HUD requirement to use David-Bacon wages, which can inflate overall proj- ect costs by 2%-5%. Lastly, locking in to long-term financing with hefty pre- payment penalties can meaningfully limit the developer’s ability to take advantage of a potential robust buyer pool for an asset upon completion. The bank and preferred equity struc- ture allow for improved optionality on exit: Sell free and clear or refinance. Patient capital investing in build- to-hold communities is likely well- equipped to bear the burden of an extended timeline with HUD. Opportunistic developers seeking to capitalize on market trends are often better suited for the preferred equity route. Needless to say, there is robust liquidity in the capital markets for the ground-up construction of apart- ment properties. The best use of the above structures should be defined by both the asset-level and long-term sponsor-level business plans. s fwells@greysteel.com jslocumb@greysteel.com Explore high-leveraged construction finance options Fisher Wells Managing director, capital markets, Greysteel Jeremy Slocumb Senior associate, structured finance, Greysteel In response to the extraordinary backlog at the U.S. Department of Housing and Urban Development, multifamily developers have started to migrate toward creative capital stack solutions that are timelier and can provide comparable leverage.