CREJ - Multifamily Properties Quarterly - May 2016
The Federal Housing Administration’s multifamily programs have undergone several exciting changes that will benefit borrowers and the industry as a whole. The administration recently issued its new Multifamily Accelerated Processing guidebook, which takes effect May 28. In addition to the new MAP Guide, FHA released a waiver that outlined a reduction in the mortgage insurance premiums for multifamily properties that meet certain affordability standards or green and energy-efficient standards. The FHA continues to transform into a 21st century modern agency via its Multifamily for Tomorrow initiative. In 2013, the FHA decided to simplify both its organizational structure and processing methods by consolidating more than 35 field offices and program centers into five regional centers that have one to two regional satellite offices. They adopted a single underwriter model, which fosters greater efficiency and effectiveness. One of the more pronounced logjams in the previous processes, during the height of the financial crisis and FHA heyday, was the breaking apart of applications and distributing applications across the disciplines of it reviewers. The single underwriter and workload-sharing concept allows the department to spread its work around the disciplines according to an application’s risk and complexity. The FHA successfully transformed three of its five contemplated regions. The Front Range now is located in the West region. Thankfully, the Denver office will remain intact and will act as satellite for the San Francisco regional center. Our region is expected to be fully transformed by mid-September. The FHA is proud to report that it has been meeting its expected 45-day and 60-day review timeframes, according to Mark Feilmeier, supervisory project manager of the FHA Multifamily Regional Center. Our region also is gearing up for the expected influx of applications resulting from its improved underwriting standards outlined in the 2016 MAP Guide. The issuance of the new guidebook provided borrowers with several improved underwriting standards that allow them to borrow at higher loan-to-value ratios and lower debt service coverage ratios with less burdensome reserves as compared to the most recent standards modified in 2010 and again in 2014. Market-rate properties that have been operating for at least three years can borrow up to 85 percent of the value for acquisitions or the retirement of existing indebtedness or up to 80 percent for cash-out transactions through the Section 223(f) program. The debt-service coverage ratios have been reduced to 1.17 in contrast to the previous 1.2 ratio. The bellwether FHA 221(d)(4) construction to permanent loan program now allows leverage up to 85 percent of replacement cost with similar debt-service coverage ratios for market-rate properties. The replacement reserve escrow calculation for both the construction loan and the permanent loan were modified to be less onerous for borrowers. The new construction program will move from an antiquated formulaic approach to the ability to have an independent review of the specification of materials to establish a schedule with values for the ongoing contributions to these escrows. The 223(f) still will rely on a 20-year schedule with a greater focus on the first 10 years, similar to its agency counterparts at Fannie Mae and Freddie Mac – making this program very competitive again. Both the construction loan program and the permanent loan program increased the allowance for commercial space. In some instances, the FHA now will permit 221(d)(4) market-rate applications to be submitted without 100 percent completed plans and specs, as long as both the general contractor and architect are experienced with the U.S. Department of Housing and Urban Development. This must be demonstrated clearly, and the developer must be HUD experienced. HUD must to have confidence that the project will close within 60 days after the issuance of the firm. The permanent loan program expanded its definition of repairs and the amount of repair allowed under the program. Properties in the Front Range will be allowed to have a repair budget of up to $40,500 per unit as long as the repairs don’t include the replacement of two or more building systems. Additionally, these repairs are not subject to Davis Bacon prevailing wages like those mandated on the construction loan programs. In light of the increased repair allowances, they will likely need a detailed scope of work and an independent third-party review of this scope if repairs exceed $15,000 per unit. The FHA furthered its commitment to affordability by expanding the PILOT program for streamlined processing to the 221(d)(4) loan program for new construction and substantial rehab when used in conjunction with low-income housing tax credits. This program will further reduce processing timeframes for tax credit developers wanting to use the nonrecourse construction money for their projects. The FHA is allowing borrowers utilizing this program to use developer fee and general contractor’s profit in its replacement-cost debt sizing. It also is allowing the borrowing entity to make use of bridge debt secured by the tax credits to bridge the equity pay-in from the tax credit investor. Green Standards On April 1, the FHA placed into effect a waiver for the mortgage insurance for most of its multifamily programs in an effort to promote sustainability, energy-efficiency and affordability. New construction projects meeting one of many green building programs and properties with permanent loan requests that can become Energy Star certified can participate in a reduced mortgage insurance premium obligation of 0.25 percent both initially at closing and ongoing for the life of the loan. This is significant in many respects because the current MIP rate for a market-rate project is 0.65 percent annually and 1.3 percent at closing for new construction; and 0.6 percent annually and 1 percent at closing for the permanent loan. This 35- to 40-basis point reduction MIP can make the difference of millions of dollars in loan proceeds that are constrained by debt service. The initial closing savings and first-year savings, in many cases, can offset the additional cost incurred to meet these energy standards. Similarly, projects meeting one of many affordability definitions can enjoy a MIP rate of 35 bps both at closing and ongoing. With construction rates currently below 4 percent and the energy MIP rate at 0.25 percent, a borrower can put in place a 40-year mortgage with all-in rates below 4.25 percent with 85 percent leverage. The weighted average cost of capital is considerably lower when compared with a typical structured finance scenario that makes use of a 70 percent loan-to-cost senior construction loan at 3.5 percent and an additional 15 percent mezzanine loan with a rate of 12 percent. The FHA loan starts to make a lot of sense for longer-hold borrowers who have a predevelopment runway that can afford a few months more of processing in exchange for a nonrecourse, low-interest-rate construction loan that permanently removes interest rate risk from the equation. The same can be said for borrowers aware of upcoming loan maturity. Current permanent loan rates below 3.25 percent and the energy MIP of 0.25 percent for 35 years are very compelling.