Although it features great financing programs, working with the Department of Housing and Urban Development (HUD) presents many challenges, said panelists at “Negotiating the HUD Maze,” at the AHF Live conference in October.
Still, some developers are making HUD programs and subsidies such as mark-to-market and interest-reduction payments work for them as they exploit opportunities in acquiring and rehabbing Sec. 236 properties.
HUD programs like Sec. 221(d)4 offer 40-year amortization at a fixed rate, and are non-recourse. But dealing with the department’s red tape can derail a deal, and many of its local offices function inefficiently, making deal timelines uncertain.
“I’ve dealt with HUD through five or six different administrations, and HUD’s field office structure has never been weaker,” said Sheldon Schreiberg with the law firm Pepper Hamilton, LLP.
While HUD helps developers by providing subsidies such as interest-reduction payments, the department also forces developers to deal with inefficient processes, such as the active partners performance system (APPS), which looks at the history of potential deal participants, and HUD’s real estate assessment center (REAC), which inspects existing HUD properties for compliance.
“A good field office is usually the difference between if a deal can or can’t happen,” said Laura Burns of Eagle Point Enterprises.
Eagle Point sees opportunities in acquiring Sec. 236 properties with some project-based Sec. 8 assistance that can be rehabbed and repositioned. Sec. 236 properties in strong markets often have below-market rents, and HUD’s mark-to-market program can markup those rents to market levels. “I can get a rent increase on a 236 deal more than anywhere else,” said Burns.