Affordable housing owners will likely find it easier to rehabilitate their properties under new rules released by the Department of Housing and Urban Development (HUD).
A significant increase to the “non-critical” repair cap is one of the big changes included in the latest Multifamily Accelerated Processing (MAP) Guide. Updated for the first time since 2011, the guide is the operating manual used by lenders to underwrite Federal Housing Administration (FHA) deals.
“This makes it easier for us to do more repairs without crossing into substantial rehabilitation,” says Kelley Klobetanz, deputy chief underwriter at Prudential Mortgage Capital Co., explaining that the cap has been increased to $15,000 per unit times the local high-cost factor. That means developers will be able to do approximately $40,000 in repairs compared with the recent $17,000 per unit mark, depending on the property location.
It will be a big boost as many regions will be able to get close to the $40,000 ceiling under the Sec. 223(f) loan program, according to Tracy Peters, senior managing director at Red Capital Group.
At the same time, the deals would not be considered “substantial rehabs.” This is significant because developers will be able to do more work on their properties without stepping into the substantial-rehab level, which typically requires them do go through a more rigorous planning and review process.
This is a significant change because it has a far reach and applies to many properties, says Mark Eidson, principal at Prudential Mortgage. For example, the new provisions can be used for affordable housing transactions that may not otherwise qualify for the FHA Tax Credit Pilot Program as well as older Sec. 8 or affordable properties that don’t have low-income housing tax credits (LIHTCs), he says.
Several other notable changes are in the MAP Guide:
Replacement reserve funding: HUD provides replacement reserve funding relief by moving to a focus on the first 10 years of a 20-year schedule for the reserve for replacements.
“For affordable deals, where debt service is very important to be able to reduce the annual escrow to the replacement reserves, it helps with the underwriting, in some cases, substantially,” says Bob Warren, managing director and FHA chief underwriter at Wells Fargo. This change affects both the Secs. 223(f) and 221(d)(4) programs and brings them more in line with industry standards.
“Not only does it help with the underwriting, it also helps with the cash flow because developers will not have to reserve as much,” says Warren.
Green incentives: The guide also includes new incentives for owners to improve the energy efficiency of their properties. Making key improvements would result in projected utility savings. Lenders would be able to underwrite up to 75% of those savings.
This change came on the heels of the FHA announcing it would reduce multifamily mortgage insurance premiums (MIPs) starting April 1 to stimulate the production and rehab of affordable, mixed-income, and energy-efficient housing. For energy-efficient properties, which include those committed to industrywide green building standards and committed to energy performance in the top 25% of multifamily buildings nationwide determined by the Environmental Protection Agency Portfolio Manager score, FHA will lower annual rates to 25 basis points (bps), a reduction of 20 to 45 bps.
“By what they’ve done with the MIP and the MAP Guide, they’re sending a clear signal to the market that they intend to stay relevant in the financing of affordable and energy-efficient housing,” says Cathy Pharis, managing director and head of the FHA platform at Wells Fargo.
Overall, there are many changes in the guide that “dramatically improves our ability to do affordable transactions, according to Pharis.
Key underwriting changes: The underwriting parameters for the Secs. 223(f) and 221(d)(4) program have improved, according to Peters.
The coverages for Sec. 8 deals under the 223(f) loan program have gone down from 1.15 to 1.11 debt-service ratio, and the loan-to-value has increased from 87% to 90%. In another change, the guide is allowing the vacancy for rental-assistance projects to be underwritten to 3% from 5%.
Defeasance costs: Defeasance costs associated with underlying financing, yield maintenance, swap termination fees, or costs to satisfy similar derivative instruments can be recognized in the eligible cost basis up to 10% of the requested FHA loan amount, under the new MAP Guide. “In the past, if a loan had a defeasance or yield maintenance prepayment penalty structure, that was not considered eligible debt and not allowed to be included in a mortgage build up,” says Ken Buchanan, senior vice president and director of FHA underwriting at Walker & Dunlop, noting that this is a change that would affect both affordable and market-rate deals.
Large loans: The MAP Guide also offers a simpler way of looking at large loans. These deals would start at $75 million, and deals under that amount would not face some of the extra mitigants that come into play on large loans, says Buchanan. This change would impact market-rate transactions more than affordable deals.
There are approximately 90 MAP lenders originating FHA-insured multifamily housing developments. Updating and clarifying the MAP Guide supports an estimated $11 billion of FHA-insured lending each year.
The new MAP Guide is scheduled to become effective May 28. However, HUD is allowing lenders to request a waiver to use some of the new features prior to that date.
Separately, HUD is continuing to work to expand the Tax Credit Pilot Program to the Sec. 221(d)(4) program, says Red Capital’s Peters.
The FHA 223(f) pilot program, which was rolled out in 2012, aimed to speed up the processing time for FHA-backed deals that use LIHTCs. In the past, affordable housing developers had difficulty using FHA products because slow processing times were an obstacle in meeting in the deadlines imposed by LIHTC financing.
The pilot program has focused on aligning FHA-insured financing, through the Sec. 223(f) program, with housing credit equity, but has also been testing its use with the 221(d)(4) program in California. More information about the 221(d)(4) pilot program is expected to come out later this spring.