Developers rely on GSEs and FHA to get deals done.
By Margot Carmichael Lester
Mitchell Rosenstein of Carlisle Development Group is all too aware of the tough market for financing debt and equity.
“Underwriting benchmarks, guarantor requirements, partner appetites, and pricing are constantly changing,” says the vice president of finance for the Miami-based developer of affordable housing. “Recent tightening of conventional banks’ regulations and internal underwriting standards have made borrowing from them expensive and practically infeasible. Freddie Mac and Fannie Mae are among the very few options with somewhat predictable executions still available.”
Of course, many developers already rely on government-sponsored enterprises (GSEs) like Freddie and Fannie and the Department of Housing and Urban Development (HUD). But in these challenging times, developers are turning to the programs for more funding to bridge the gap between what’s needed and what non-government lenders are willing to provide.
“Because they’re government agencies, [they] have money to lend,” says David Smith, vice president for capital markets at Cohen Financial in San Francisco, a national real estate capital services company and an originator of commercial real estate debt and equity transactions. Last year, Freddie Mac set a record for whole loan and bond guarantees at $24 billion. Fannie Mae financed $35.5 billion in multifamily rental housing.
Carlisle typically finances its properties using a combination of private equity and conventional debt. “The senior debt is frequently obtained from large, institutional banks or Delegated Underwriting and Servicing (DUS) lenders who provide funds from their balance sheets during construction and offer forward commitments for permanent, amortizing debt backed by Freddie or Fannie during the operating period,” Rosenstein says.
One popular product is HUD’s Federal Housing Administration Sec. 221(d)(4) program, which insures mortgage loans to enable new construction or significant rehabilitation of multifamily rental or cooperative housing for moderate-income families, the elderly, and special-needs residents.
“You can get 90 percent of cost with 40 percent amortization,” Smith explains. “The only hitch is a higher interest rate at 7.5 percent. The key is to make sure the yield on your property is higher [than the interest rate]. If the interest rate for an apartment building is 7.5 percent, you’ll need a cap rate at 7.5 or higher so you have positive leverage.”
The program is becoming more flexible, Smith says, and may include takeout construction loans, a longer-term loan that can be used for expenses after construction is complete. “This could help multifamily properties that are slow to lease up or projects that started as condos and converted to multifamily because the for-sale market tanked,” Smith says.
While the GSEs are willing to lend, securing the funding isn’t a piece of cake. “Freddie and Fannie work through DUS lenders to originate, underwrite, close, and convert loans, so your choice of lender can make or break your deal,” Rosenstein notes. His advice? “Perform necessary due diligence when deciding whom to work with, as you should when choosing any professional.”
Margot Carmichael Lester is a freelance writer living in Carrboro, N.C.
