The challenges of today's tight lending environment have forced low-income housing tax credit (LIHTC) developers to dig even deeper to make deals happen. Developers are challenged to fill funding gaps with resources that are still viable in today's market.
The Federal Housing Administration (FHA) Sec. 221(d)(4) program is one such stone to overturn. The FHA's insurance program for first mortgages remains strong, and its tax credit functionality has recently been enhanced through legislative and regulatory changes.
Several elements make the Sec. 221(d)(4) program beneficial for new construction or substantial rehabilitation projects that involve tax credits. The loan is structured as a single construction and permanent loan. It bears a low interest rate, which is fixed at the construction closing for the life of the loan, and has a maximum amortization of 40 years. In addition, the debt-coverage factor has remained at 1.15x. The continuous construction and permanent loan structure removes stabilization and conversion risk, and it is non-recourse through both of these phases.
These benefits, however, have sometimes been overlooked. The Department of Housing and Urban Development (HUD) has long held a reputation for a potentially long process, a tendency to “meddle” with deals, and a lack of consistency among offices. Further, it tends to dictate many legal and structural aspects of a deal, even though the HUD loan may be one of the smaller funding sources.
HUD, however, has begun consciously improving its process as it relates to LIHTC transactions. In July 2008, HUD issued Mortgagee Letter 2008-19, which made a significant overhaul that should encourage developers to take a second look at HUD's programs. The key benefits are:
- ”¢ A streamlined process that should result in quicker closings. Historically, final plans and construction costs were needed prior to submitting an application to HUD. Now, HUD allows the submission of final plans and specifi cations to be deferred until after the HUD commitment is issued, but before closing.
- ”¢ A significant reduction in the amount of equity required at construction closing. Previously, projects were required to pay in the bulk of their equity at closing. This typically led either to lower overall equity available to the project or the need to pay for a bridge loan. HUD has significantly reduced the equity required at construction closing to a recommended minimum of 20 percent.
- There have been many other minor program tweaks that will help, and we expect to see more with the new administration. So what can you do to take advantage of this program?
- ”¢ Plan early. Using HUD requires advanced planning and building its process and requirements into the deal timeline. Ideally, the lender should be brought into the early planning stages of a project to help accomplish this and to provide perspective and experience in selecting an architect, a contractor, and others.
- ”¢ Experience counts. A team experienced with HUD can make all the difference. In fact, many of the streamlining benefits mentioned above are available only to a HUD-experienced development team. This includes not just the developer, but also the architect, general contractor, lender, and third parties (such as appraisers and engineers) that are hired.
- ”¢ Communicate with the HUD office. Since these changes are recent, we strongly recommend that developers meet with HUD to present the deal, establish an open dialogue, and get HUD involved before an application is submitted. In addition, if the HUD office has closed any deals under the updated policies, it may be able to provide valuable feedback.
Nicholas M. Gesue is senior vice president of Lancaster Pollard Mortgage Co. His development of a highly efficient underwriting process helped make the company the nation's No. 2 FHA Multifamily Accelerated Processing lender and the leader in Sec. 202 refinances. AFFORDABLE HOUSING FINANCE named him one of its 2008 Young Leaders. He may be reached at [email protected].