Issue link: https://read.dmtmag.com/i/251530
FEBRUARY 2014 18 THE JOURNAL I am trying to find a way to provide a higher quality, approach to m/h community development opportunities, which provide me with minimal risk for my equity (invest- ment) with development financing (debt) to take advantage of my experience with sales and marketing of HUD Code homes. What do you suggest? Sam T., Carrolton, TX. As many of us as experienced community re- tailers and developers know, problems exist in the financing of HUD Code homes sold to resi- dents of m/h land lease communities. With the general lack of secondary markets for notes made by lenders on Chattel Mortgages made by pur- chasers of m/h in land lease communities, there has been a serious lack of motivation for quali- fied developers to build new communities. The result has been very few new all age m/h land lease community development in the past 12 years. In the alternative, the U.S. Department of Housing and Urban Development's (HUD)s whose mission is to create strong, sustainable, inclusive communities and quality affordable homes for all may be providing a way to provide affordable housing using HUD Code homes. HUD accomplishes a part of its mission by in- suring mortgages made by private lending institu- tions help finance construction and rehabilitation of multifamily rental housing and mobile home parks. Given the current virtual freeze in capital markets, HUD's lending programs are facilitating the financing of apartment projects which makes capital available for multifamily rental housing through attractive and innovative private non- recourse lending programs. Such programs are currently in the works for developments in areas like the North Dakota Bakken reserves in North Dakota and Eagle-Ford shale reserves in SW East Texas. HUD's 221(d)(4) program also is available for new market rate housing with no restrictions on rents or tenant qualifications. Little known is the fact that HUD Code units may be used as Single Family Detached (SFD) units if the site is zoned for manufactured housing. They also must be installed on "permanent foundation systems" and qualify as real property by local taxing au- thorities. Developers are attracted to combined con- struction (for up to 18 months) and permanent loans amortized over a 40-year term with an in- terest rate that the developer can lock in at the time of loan endorsement (funding on the con- struction portion of the loan). In response to concerns about previously somewhat lengthy pro- cessing times, HUD has implemented a Multi- family Accelerated Processing (MAP) program to expedite and simplify loan processing. Because of the availability of virtually unlim- ited low cost capital from investors and expedited loan processing, private developers are seeking financing for new construction or substantially re- habilitated, rental housing utilizing HUD's Sec- tion 221(d) (4) program for affordable housing. For projects to be considered as "affordable" under Section 221(d)(4), the project must be subject to a recorded regulatory agreement with a term of at least 15 years with a local housing au- thority that at least 20 percent of the units must be rented to residents with household income at 50 percent or less of HUD's adjusted median in- come or 40 percent of the units at 60 percent of Adjusted Median Income (AMI). These include projects, which may be organized as cooperatives or condominiums. Up to 90% financing for "affordable" housing projects under Section 221(d)(4) typically re- quires working capital and operating deficit es- crows. HUD determines the maximum loan amount based upon debt service coverage and loan to value ratios. In addition with the use of using a typical "developer's fee" using the provi- sion of the BSPRA (Builders and Sponsor's Profit and Risk Allowance) feature, developers may fund up to 93% or more of approved costs, greatly reducing the equity required at loan clos- ing. The favorable low interest rates and 40 year amortization period as well as the ability to close on the permanent financing as part of the con- struction loan are major advantages of this HUD insured loan program for apartment projects. Non-recourse and fully assumable (upon HUD's approval of the buyer and a 1% fee) terms make these loans quite attractive for developers HUD determines the loan amount based upon debt service coverage and loan to value ratios and risk perceived by HUD based upon independent third party market analysis. Lawyers and con- sultants for the lender and the developer are ex- pected to act as quarterbacks in bringing the deal to the closing table. Once the FHA -approved private lender has completed its underwriting, lender's counsel sends out a "welcome letter" to developer's counsel setting forth all of the docu- mentation requirements. HUD requires all documentation to be pre- cisely in accordance with its requirements. Un- like many commercial lenders, HUD allows very little room for document negotiation and any substantive revisions may be subject to the ap- proval by HUD's national office. To facilitate the expeditious processing and closing of a HUD loan, a developer's professional resources (attor- neys, engineers, and accountants) should care- fully review all documents – from zoning and utility availability letters to architect/civil engi- neer agreements, construction contracts, surety bonds and letters of credit – for compliance with HUD requirements and coordinate their delivery to lender's counsel. Ask Eddie BY ED HICKS DEVELOPMENT MARKETING \ 21