What are the differences between financing a New Construction and a Substantial Rehab transaction?
The loans are the same-fixed rate, assumable, nonrecourse, fully amortizing 40 year loans. They each allow for up to a 2 year construction loan. The requirements for initial operating deficits and working capital escrow are figured the same. The real difference is how the loans figure costs. Both are loan to cost limited loans as the lower limit of determining financing-that the program will lend no more than the 83.3% of costs (soon to be 85% under the new MAP Guide). Land value is figured at present value per an appraisal. The land plus improvements require an analysis to take away the improvement value from the site in a Substantial Rehabilitation loan. A Relocation Plan might be required for a Substantial Rehab loan.
What is a Relocation Plan?
Many older properties have residents that have been in place for a long while. FHA is not interested in financing a property that will result in people ending up on the street, no matter how important the rehabilitation is thought to be. As a result, when a developer needs to move residents in order to fix units, they must have a plan as to how to avoid displacement. Who will move the tenant to a different unit while the occupied units is rehabbed? How long will they be displaced? Will the units be as nice as what they were living in before the relocation? What concessions, if any, will be provided as an inducement for the resident to move? All these items need to be addresses. Further, as a base figure for the costs of these efforts, think of $1,000 per unit. These funds can be borrowed inside the loan.
When should I refinance?
This is a complicated question but here are suggested thoughts for an owner to consider:
- Am I personally liable on my present loan? How do I feel about that? FHA loans are non-recourse except for bad boy acts.
- Is my rate too high compared to what I can obtain in the market presently?
- Is my loan too low? Sometimes a high balance loan allows for a buyer to leverage into owning a property, such as when a loan is assumable (like an FHA loan).This promotes maximum value on sale.
- Do I have enough equity and ability to support a property to pull cash out (FHA loans will allow cash out to 80% of value, again, non-recourse.
- How long do I expect to hold this property? An FHA loan is designed for long term holds. Short term, it might not make sense compared to say, a bank loan. If a long term hold is envisioned, then long term financing offers the best protection against interest rate risks.
Why should I use HUD?
HUD financing is different than most available financing, in that the operating terms are largely based on what was the standard in the 1970s. As a result, we offer good old fashioned terms-nonrecourse, fixed rate financing for long terms (35 and 40 years, respectively) that is assumable. You cannot get these terms anywhere else in the market on a national basis with the same basic underwriting criteria. The loans work best for people anticipating a long term hold of the property, so that if you are getting a good rate, you can sell the property at a time when rates have increased, giving the financing greater value to the buyer, and thus increasing the price you can charge. Locking in a good rate now also helps cash flow over time.
Builder and Sponsor Risk Allowance. BSPRA is a credit for two items not usually financed by FHA-the Developer’s fee (which is never a financeable item) and the Contractor Profit. FHA knows that both of these items must be accounted for in the 221 (d) loan, and does so by giving the deal a credit for these items in the stack of costs for the deal. These loans are not based on value but on a loan to cost basis. Say, the hard and soft costs are $9,000,000 and the Land Value is $1,000,000. If BSPRA is activated by an Identity of Interest between the borrower and the General Contractor, then the BSPRA amounts to 10% of the hard and soft costs, or $900,000 in this case. The costs then amount to $10,900,000. By adding BSPRA, FHA recognizes the costs to be fully incurred and provides an avenue for the costs to be paid outside of the loan, either from partnership proceeds or from subordination by the Developer and/or Builder. Either way, the cash required for the loan is significantly reduced, as BSPRA is a dollar for dollar reduction in the equity requirement.
Why do we need an ESA/Market Study?
I don’t need one of those from a private bank. Almost every lender requires an environmental report. That is the standard in the industry. Market Studies might be a different situation. A local bank will likely portfolio their loan, since they know their market. An FHA loan needs to be available for objective determination by staff all across the nation, particularly at loan committee. This requires an education like what a Market Study provides.
What’s a Concept meeting?
A Concept Meeting is a way for the borrower to meet the staff that will be underwriting the loan and for each group to get to know the property better and the loan process better. It helps FHA decide whether they want to do the loan and the borrower whether they have concerns. All of this happens at an early stage when little money is at risk.
Do I need to own the land already before using a 223(f)/221(d)4?
The short answer is “no”. You must have control of the site and such control must extend until completion of loan processing.
What are Freddie Mac and Fannie Mae?
Fannie and Freddie are GSEs: Government Sponsored Enterprises. They report to the FHFA-Federal Housing Finance Agency-which oversees their actions. FHA is a government agency under the Department of Housing and Urban Development. While the purpose of Fannie and Freddie is slightly different than FHA, and their methods of execution of those purposes are achieved uniquely for each entity, their main thrust-providing housing- is the same.