FHA to the Rescue
Large-scale borrowers can leverage federally insured loan programs.
Federal Housing Administration loans are not only for first-time investors and developers seeking to finance $5 million acquisitions. In fact, while typical FHA loans range between the tens of thousands and hundreds of thousands, many FHA borrowers are also using these programs to finance projects over $100 million. Many large-scale borrowers are enticed by FHA's favorable loan terms. For example, in the last decade, at least 15 health care loans have topped $100 million in places like Charleston, S.C.; Arcadia, Calif.; Rio Rancho, N.M.; Cayey, Puerto Rico; and New York. In the multifamily sector, at least eight loans closed in excess of $100 million with lenders such as Wells Fargo Bank, N.A.; RED Mortgage Capital LLC; and Dwight Capital LLC for projects in New York; Washington, D.C.; Miami; and Gaithersburg, Md.
These large FHA loan projects vary in type and amenity offerings. For example, New York's Co-op City - the largest housing cooperative in the world, with 43,752 residents - was funded through grants and other financing including a Department of Housing and Urban Development loan in excess of $600 million. It is considered a “city within a city,” with its own power plant, shopping and commercial centers, an educational park, and 35 high-rise buildings alongside seven clusters of townhouses. On the other end of the spectrum, luxury apartment buildings with substantial HUD financing in Venice, Calif.; Washington, D.C.; and Miami feature amenities such as private beaches, pools, hot tubs, resident lounges, yoga studios, full-time concierge services, rooftop gathering spaces, waterfalls, and demonstration kitchens.
The fact is, not many conventional lending programs have terms as attractive as government-backed mortgage options. Unlike other loan options, the typical FHA-insured loan is non-recourse and fully amortized (i.e., no balloon) for up to 40 years. Further, because FHA lenders are supported by a government guarantee, they can offer low interest rates regardless of location, leverage, or property type, as well as the highest leverage levels (80 percent loan-to-value cash-out, 85 percent LTV with no cash-out, and up to 90 percent LTV for affordable housing). It is not hard to see why more and more borrowers are choosing FHA loan programs to finance multifamily developments and health care projects such as hospitals, assisted living facilities, and nursing homes. The investment makes the most sense for borrowers who intend to hold on to the property for a longer term (usually five years or more).
Because FHA lenders are supported by the government guarantee, they can offer low interest rates regardless of location, leverage, or property type.
These programs are not for everyone. As with most government programs, the time to close an insured loan is typically longer than a conventional loan due, in part, to HUD's limited resources to process applications. Many FHA lenders, however, offer bridge loan solutions for borrowers that need a temporary loan while waiting for FHA financing to close.
Additionally, in past years, large borrowers - those with at least $500 million in FHA-insured loans - were subject to additional scrutiny due to the perceived risk that such a concentrated insured-loan balance created. Recently, though, HUD recognized the value of these large borrowers and has made efforts to streamline procedures for assessing centralized risk and make the credit approval process less complicated. For example, HUD increased the length of the credit approval from one year to two. As such, applications for future insured loans within the two-year approval period will see a quicker turnaround time. Prior to this streamlined procedure, large borrowers were required to undergo lengthy approval processes for each project, but they can now save as much six months of processing time.
Not all lenders are authorized to underwrite and service FHA loans. Careful consideration should be taken when choosing an FHA lender because their experience and relationship with HUD can be invaluable during the closing and servicing process.