Colorado Real Estate Journal - September 2, 2015
In the Colorado multifamily real estate market, particularly Denver, now is an - - excellent time to take advantage of market conditions that favor Federal Housing Administration financing from the U.S. Department of Housing and Urban Development. Multifamily property values are high and the demand for financing is on the increase. This is being driven by robust valuations, elevated levels of investment activity and above-average construction deliveries. However, despite low rates and strong multifamily fundamentals, some borrowers are finding themselves with fewer viable debt financing options. Recent moves by Fannie Mae and Freddie Mac to increase pricing and slow loan demand are raising questions about how many deals will be financed. Furthermore, with no end in sight for soaring multifamily loan demand, these concerns are likely to persist in coming years. The issue is more than just high demand and limited supply, but also a lack of suitable alternatives for properties outside the selective conventional financing box. Some of the deals crowded out by Fannie Mae and Freddie Mac will land with commercial mortgage-backed securities or life companies. But a significant beneficiary will be FHA, which is gaining in popularity as borrowers seek higher-leverage and longer-term fixed-rate financing. Due to a number of developing trends, FHA is positioned to capture an increasing share of this business. This opens up the opportunity for HUD/FHA financing with its high-leverage loan-to-value ratios, long-term fixed rates and flexibility. For example, the ratio on a market-rate refinance is currently 83.3 percent (80 percent if the deal includes cash out). Leverage on an affordable property refinance is even higher at 87 percent. FHA multifamily loan products cover acquisition, refinancing, new construction and rehabilitation/renovation. A unique feature of FHA construction loans is that they automatically roll into fixed-rate, permanent loans when construction is complete. The rate is locked at the time the firm commitment closes. FHA is the way to go if you’re looking for high-leverage , long-term , fixed-rate financing for multifamily and health care facilities. FHA will finance properties that offer either market rate rents or affordable (reduced) rents for low-income families, the elderly and persons with disabilities. Top trends favoring FHA. Four trends are currently giving FHA financing a boost in the Colorado multifamily market. First, property values are high and multifamily owners are looking to capitalize on current market conditions. However, selling presents one of two issues: a sizable tax consequence or paying top dollar (via a 1031 exchange) to invest in a crowded pool of hungry multifamily investors. For these reasons, FHA has become an attractive alternative for many multifamily owners. With high LTV ratios and a 35-year term, owners can extract equity at current valuations and still benefit from future rent growth – all without the tax consequence of a sale. Second, despite the consensus view that interest rates will continue to rise, interest rates remain near historic lows. Multifamily owners are increasingly bypassing shorter-term debt options and instead seeking to lock in longer-term, fixed-rate financing such as FHA. There is no telling what the next multifamily cycle will bring, so locking in a low interest rate for 35 years has become an appealing strategy for many owner-investors. Third, the availability of government-sponsored enterprise financing through the remainder of 2015 may be limited to certain borrowers due to complications surrounding the GSE lending cap. This will result in more local FHA transactions, as some borrowers will seek financing alternatives to the GSEs. Fourth, probably the most important trend, is the huge and growing need for multifamily housing in Colorado. Especially in Denver, there is a high rate of job growth that is fueling demand for additional multifamily supply. We’re seeing more and more in-migration from other states – word is getting out that Denver has well-paying jobs coupled with 300 days of sunshine. The flexibility of FHA to finance market-rate and affordable properties as well as new construction and permanent loans will continue to boost FHA business in the Colorado multifamily market. Challenge and opportunity. By far the biggest challenge for FHA borrowers is timing. FHA deals take more time compared with Fannie Mae, Freddie Mac and other capital sources. If borrowers can get comfortable with this longer time frame, they can reap a golden opportunity: high leverage, long-term financing with some of the best terms in the market. Familiarity breeds success. To ensure success in obtaining FHA financing, it’s critically important to choose a lender with a deep knowledge of and familiarity with FHA loan programs. A lender with sufficient depth of FHA experience will be able to demonstrate a certainty of FHA execution. Not only do you need an FHA specialist lender backed by a strong track record, but also you need to make sure that the company you choose has deep HUD resources. That’s because HUD relationships are important. Your lender should have senior staff who are experienced in working with HUD and who understand the agency’s loan programs. This is a key point because it goes back to why FHA is different than other capital sources. Since FHA financing is a service rather than a commodity, it is important to use a financing company that knows its way around in this service-based lending niche. If you are dealing with an FHA-savvy lender, it will lead you in the right direction. The bottom line on FHA financing is that it is not for everyone. But, if you have the time, and need long-term, high-leverage financing, there currently is no better financing vehicle for multifamily properties in the Colorado market.