Insights

HUD Construction Financing Remains the Holy Grail for Developers

June 14, 2021

Developers are eagerly applying for loans to create ground-up apartment properties as the U.S. economy recovers from the coronavirus pandemic. A growing number of developers plan to lock in low-interest rates with long-term, fixed-rate Sec. 221(d)(4) construction financing from the Department of Housing and Urban Development (HUD).

“HUD financing is in so much demand today that we have at least $2 billion to $3 billion in loans that are in the process of closing right now,” says Barry Wolfson, chief FHA underwriter for Greystone. Greystone saw a nearly 100% increase in HUD-insured construction lending in 2020 over the year prior, and close to 193% increase in overall FHA financing volume in the same period.

For borrowers who have time to plan ahead and who expect to hold onto their developments rather than selling after stabilization, HUD financing can be very attractive. These non-recourse construction loans can be more time consuming to close than construction loans from banks or pension funds, but the benefits include high leverage and the ability to lock in very low interest rates for a long-term loan.

HUD provides more leverage, fixed interest rates, longer terms

HUD’s Sec. 221(d)(4) construction loans cover as much as 85 percent of the cost to develop a market-rate apartment property. In comparison, bank lenders often require recourse on their construction loans and offer far less in loan proceeds – typically 60 percent to 65 percent of the cost of development.

“The biggest difference between a HUD loan and a bank construction loan is higher leverage for the HUD loan,” says Wolfson.                                   

HUD’s 221(d)(4) program is really two loans in one – an interest-only construction loan and a 40-year fixed rate self amortizing permanent loan – with one rate lock and one closing. That’s a benefit for developers who intend to hold onto their properties rather than selling. In contrast, construction loans from banks or pension funds are short-term loans with interest rates that float until the property is fully leased and a new, permanent loan replaces the construction loan.

The time it takes to close a HUD loan might not be a problem for developers who plan ahead.

“If you are thinking about HUD financing, start early,” says Phiet Nguyen, transaction manager with expertise facilitating 221(d)(4) loans at Greystone. “HUD takes time, but it’s worth the wait and the effort. When developers consider buying a piece of land, that is the perfect time to apply for a HUD construction loan.”  

Borrows can apply for a HUD construction loan before they own a piece of land to build on or receive the approval of local zoning officials to build apartments on that land – a process that usually takes many months even when everything goes well. Greystone has deep experience with advising early-stage developers on the path to HUD financing from the beginning so the project meets the requirements.

Greystone has spent a lot of time creating new technologies and has the experienced team to be more consultants than just lenders. “There is certainly a learning curve for first-time HUD developers – but most groups that embrace the process come back to HUD financing over and over again,” added Joe Averbook, a Managing Director for Greystone’s FHA lending platform.

It’s important to note that HUD financing covers the land, but banks will make a developer wait for the title of the land, so essentially there are timing similarities in reaching the closing table. However, affordable housing projects will be expedited through HUD’s process due to regulators’ mission to create new housing for this demographic, so there is an advantage to developing mission-driven housing.