馃攳
HUD 223(f) Multifamily Loans- Advantages and Disadvantages | An Overview of HUD Multifamily Loans - YouTube
Channel: Trevor Calton
[0]
The HUD 223(f) multifamily loan is
actually a pretty special product.
[6]
It's in certain ways, more competitive
and more advantageous to the
[11]
borrower than any other commercial
loan available on the market.
[14]
The first advantage of the HUD 223(f) loan
is the LTV or the loan to value ratio for
[21]
market rate properties and the HUD loan.
[22]
It can go up to as high as 83%
or even higher in the case of.
[28]
Affordable housing or subsidized
housing properties with section
[32]
eight or section two to can get
as much as 90% on their LTV.
[37]
The next advantage is the debt
service coverage ratio requirement.
[41]
The HUD loan is set at a very generous
minimum and for market rate properties,
[46]
the debt service coverage can be as
low as 1.18 relative to the net income.
[51]
Affordable housing subsidized housing
can have debt service, coverage ratios
[55]
as low as 1.15 or even 1.1, one for
section eight or section two oh two.
[62]
Next is the interest rate.
[64]
The HUD rate is typically lower
than other agency loans or
[69]
conventional loans sometimes by as
much as a full percentage point.
[72]
So obviously the lower interest
rate means lower payments and
[78]
more cashflow to the investor.
[80]
Additionally, the amortization
on the HUD multi-family loan
[85]
can be as far as 35 years.
[87]
And that is atypical compared
to other loans on the market.
[90]
Most standard loans are 25 to 30
years, but with a 35 year amortization,
[97]
that extends the amount of time that
the principal needs to be repaid.
[101]
So when you combine that with the lower
interest rate, the longer amortization
[105]
creates a significantly lower monthly
payments than other loan products.
[109]
The HUD loans are non-recourse loans,
which means that the borrower does not
[113]
have to personally guarantee the loan.
[115]
And it doesn't show up on their balance
sheet as a contingent liability.
[119]
The HUD loan is also fully assumable,
and that means that if the borrower
[123]
decides down the road that they want to
sell the property, it is possible that
[128]
the buyer could come in and assume the
existing loan at the same rate in terms
[133]
for the remaining life of the loan.
[135]
This could be a huge competitive
advantage in the market if interest
[139]
rates rise significantly, because if
the property has a long-term fixed rate,
[144]
low interest rate HUD loan on it that
can be assumed, that property might
[149]
be more desirable making that property
more attractive to buy relative to
[154]
other properties that are on the market.
[155]
The HUD loan has no
geographic restrictions.
[157]
It can be applied to multi-family
properties anywhere in the United
[162]
States and the U S territory.
[164]
There are no population requirements,
unlike other agency and conventional
[169]
loans, certain lenders won't go
into rural markets or small markets.
[174]
The HUD loan can be obtained
in on a multi- family property,
[179]
anywhere in the U S or territories.
[181]
The HUD allows for additional
funds to be taken out.
[184]
So if there are capital projects
or major systems that have deferred
[189]
maintenance, the HUD loan can
accommodate that by adding additional
[196]
funds to the loan that are specifically
used to improve the property.
[200]
The prepayment penalty on the
huddle loan is predictable.
[203]
Typically it's a ten-year prepayment
penalty as opposed to a yield
[208]
maintenance or a defeasance prepayment
penalty, which is subject to change
[213]
due to market interest rates.
[215]
The HUD prepayment penalty is predictable
and therefore can be analyzed in advance.
[221]
The HUD loan also allows
for supplemental financing.
[224]
So in the event that the borrower
wanted to say, expand the property
[229]
or do some major improvements to the
property, there are additional loans
[235]
that can be taken out to be joined.
[237]
Basically a second that can be joined with
the original HUD loan and HUD allows this.
[243]
So that property is maybe further
developed down the road and not all other
[249]
loans allow for secondary financing.
[251]
So as you can see, the HUD loan
has quite a few advantages relative
[256]
to other loans on the market.
[257]
Now let's talk about the disadvantages.
[259]
First or the documentation requirements.
[262]
Because this is a government guaranteed
loan, the documentation requirements
[266]
are pretty significant, and that
can be an arduous process having to
[270]
go and collect and compile all of
the information that HUD requires
[274]
in order to originate this loan.
[276]
That can be really frustrating
for some borrowers, especially
[278]
if they're not organized or maybe
they're self managing and they don't
[280]
have advanced reporting systems or
all of their financials in place.
[285]
But typically a good commercial mortgage
broker can help with that process and
[290]
reduce the frustration that the borrower
may incur by originating the HUD loan.
[296]
The next disadvantage is the timing.
[299]
Typically it takes several
months to just complete the
[303]
package for formal application.
[305]
And then from there, once formal
application is made, it's usually
[309]
about five to six months before
the loan is approved and funded.
[313]
So that whole process can take
eight or nine months or even longer
[317]
from beginning to end before the
loan actually funds and closes.
[322]
The origination costs on the HUD loan and
the ongoing costs are a little bit higher.
[328]
Typically you would pay a financing
fee and a placement fee, which is
[331]
effectively the origination fee,
but that can add up to one and a
[335]
half to two and a half percent.
[337]
Additionally, HUD requires initial
mortgage insurance premium payments,
[342]
and then there are a variety of other
costs that the borrower must incur.
[347]
In advance or during the application
process such as inspection fees, legal
[353]
fees, and other costs that can add up.
[355]
So make no mistake.
[357]
The HUD loan is more expensive to
originate on the front end, but the
[362]
longer amortization and the lower interest
rate and the lower payments typically
[366]
make up for that additional cost.
[368]
Pretty quickly, the HUD loan
requires mortgage insurance to be
[371]
paid both upfront and each month
throughout the life of the loan,
[375]
regardless of the loan to value ratio.
[378]
HUD requires property inspections,
both origination and annually.
[383]
So HUD can come out once or twice
a year to inspect the property.
[387]
Obviously this takes time
and resources from the owner.
[390]
And of course they do an initial
inspection prior to closing.
[393]
Now, some owners that I've worked with
in the past, who do a great job of
[396]
maintaining their properties, don't
see the HUD inspectors very often.
[400]
Sometimes they don't even come out
every year, but certainly properties
[403]
that have more deferred maintenance or
aging systems should expect a formal HUD
[409]
inspection of the property each year.
[412]
HUD requires audited financials
to be submitted every year.
[416]
And as opposed to just submitting the
borrower's own financials, they must be
[421]
submitted to a tax or finance professional
for audit before being submitted to HUD.
[426]
This process usually costs between
two and $3,000 and is something that
[432]
needs to be factored into the operating
costs of the property going forward
[437]
while the HUD loan is in place.
[439]
Now, this may seem like a disadvantage.
[440]
However, owners should note that audited
financials reduce their risk of any
[447]
sort of misappropriation of funds or
anything going wrong with the bookkeeping.
[453]
So there's a certain peace of mind that
comes with having your financials audited
[458]
every year, but also requires replacement
reserves to be set aside at closing.
[463]
And this, is in addition to
tax and insurance escrows.
[467]
But HUD will require an initial
deposit into the replacement reserve
[472]
account and usually an ongoing deposit
into that account, especially in
[478]
the case of distressed properties
or properties that have a lot of
[482]
deferred maintenance or capital needs.
[485]
Now, these reserves can be as little
as say, $250 per unit per year, but
[490]
in the case of properties that need
more work, it can be as much as.
[493]
$1,000 per unit per year or even higher.
[496]
So the age and condition of the
property will affect the amount of
[499]
replacement reserves that HUD requires
both at closing and annually ongoing.
[505]
There are cash out
restrictions on the HUD loan.
[508]
The borrowers can usually take up to
80% or higher on their loan value,
[513]
but typically if they're getting cash
out, back to them at closing that
[518]
cash needs to be earmarked for capital
projects or other items that are
[523]
being used to improve the property.
[525]
And often HUD will require
that those funds be held
[528]
back until that work is done.
[530]
And finally, one of the last disadvantages
to some owners is that HUD only allows
[535]
two owner distributions per year.
[538]
Once after the annual audited
financials have been submitted.
[541]
And then one other time during the
year, So borrowers cannot take monthly
[546]
distributions or quarterly distributions.
[548]
They can only be semi-annually.
[550]
Now, that's just for the net
cashflow that does not apply to
[553]
capital projects or other needs.
[555]
And owners can certainly request that
they draw funds that are going to
[560]
be used on the property at any time.
[562]
But typically owner distributions
are limited to twice per year.
[566]
So when is the HUD loan, the
best option for a borrower?
[569]
Although the upfront costs and
documentation can be a bit arduous,
[573]
the advantages, especially longterm
certainly outweigh the disadvantages,
[578]
particularly from a cashflow perspective
and from an investor's IRR perspective.
[583]
So definitely give us a call here at
Evergreen Capital, or talk to your
[587]
commercial mortgage broker to find out if
the HUD loan is the best option for you.
Most Recent Videos:
You can go back to the homepage right here: Homepage