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HUD 223 (f) – Pros and Cons

Borrowers who never considered FHA/HUD are now being told they need a FHA/HUD 223 (f) loan.  However, most borrowers, and brokers who are selling this product, don't understand the issues relating to these loans.   The 223 (f) is FHA/HUD's acquisition/refinance program for conventional apartment projects.  With limited sources for apartment financing today, this program is being pushed by most mortgage brokers and bankers as the way to refinance your apartment project.To get a complete, but very dry, description of the program visit the HUD web site at http://www.hud.gov/offices/hsg/mfh/progdesc/purchrefi223f.cfm.   The summary of this program states that "Section 223(f) insures mortgage loans to facilitate the purchase or refinancing of existing multifamily rental housing."  So first things first, this is not an FHA/HUD loan, because HUD does not lend money, FHA provides insurance on the loan allowing the lender to sell a security to fund the loan.  So while FHA/HUD underwrites and approves the loan they do not fund it.  It's really the original conduit loan. FHA/HUD underwriting, loan terms and restrictions are not like conventional loans.  They look at the numbers differently and limit loans based on things other than just LTV and DSC.   Because of this you really need to deal with someone who has experience in HUD lending and knows how to process your loan.  There are many approved FHA/HUD lenders and a list can be found at the HUD web site.  Some lenders are just small shops and some are FHA/HUD departments of national or regional mortgage bankers.  As long as they......
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Tips to make your lender happy...part 3

Tips to make your lender happy....Tips to make your lender happy....real estate taxes and utility bills.   to continue with the information you need to send your lender to refinance or acquire a multifamily property it is time to talk about real estate taxes and utility bills.Real Estate TaxesRefinances are pretty straight forward.  If you have the bill we will underwrite to the current year tax bill.  If you don't have the bill we will look at the previous years and try to estimate some reasonable increase.  It only gets tricky if the property is due for a new assessment and/or you plan to do some substantial rehab to the building which would bump the assessment.Acquisitions are tricky when the transfer of the asset triggers a new assessment.  That is particularly painful in states like Michigan.  The new assessment will most likely increase the real estate tax which will directly effect the net operating income.Utility Bills Newer buildings are typically individually metered and the tenant pays their own utilities.  Older buildings are often master metered and either the tenant pays a set utility allowance to the owner or the utilities are included in the rent.   I even have one client that was able to negotiate their gas bill in advance for a three year period.  This was a huge benefit when prices were rising.  It really doesn't matter how your building is set up you just need to let your lender know what utilities are in the rent, what utilities are paid directly by......
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Multifamily Rates - going up or down?

 Over the last month the 10 year treasury rates has moved up by over 30 Bps.  At the same time spreads on Freddie and Fannie multifamily loans have dropped (more for Freddie than Fannie) easing some of that upward interest rate pressure on multifamily loans.   Where they are going from here is any ones guess but many people believe this upward pressure will continue. In the long run we must all agree that rates will go up.  Treasury rates are at very low levels from a historical perspective.  They have maintained this low level because of the recent credit crisis, a flight to own safe treasury securities and government intervention to keep rates low.   At some point this must end.   I maintain that rates will not increase for, at least, a few months, but I have been wrong many times in the past.I recently read an interesting article; the history says the 10-year yields set for summer slide.    This article argues that the 10 year treasury will drop over the summer months.  OK the reasoning is a bit of "it happened before so it will happen again".  We know this is faulty logic, but that does not mean it's not true.   If that does happens we will see multifamily rates from Freddie, Fannie and HUD drop.   Most other lenders today are banks and they don't allow their rates to follow the treasury curve so these rates may not move    Also, Freddie and Fannie will probably not give you the whole treasury drop, if it occurs, but will......
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GSE basics or how to find the right Freddie or Fannie loan

You hear a lot today that, with the exception of FHA-HUD, the GSE lenders (Freddie Mac and Fannie Mae) are the best, maybe only, lenders in today's multifamily market.  This isn't really true, but its often said.  However, with the exception of a sales call, there's very little discussion of the best way to access GSE capital. Today we will address that issue. Let's start with the basics. First, Freddie Mac and Fannie Mae do not make any loans.  They are not direct lenders and, by law, cannot make new loans. They buy (or credit enhance) loans or pools of loans from approved lenders. For multifamily loans these approved lenders are called DUS (delegated underwriting/servicing) lenders for Fannie Mae and Program Plus lenders for Freddie Mac. There are not many of these lenders and a list of approved lenders can be found at Freddie and Fannie's web sites. Some lenders represent both Freddie and Fannie and some just one or the other.  Second, the two agencies are very different in how they treat their lending partners and how they underwrite their deals.  Fannie, for the most part, allows the DUS lenders to make decisions on the loans they buy and Freddie makes their own lending decisions.  Fannie lenders also take part of the risk on the loan and in exchange for taking some of the risk they are allowed to make lending decisions. Underwriting is mainly done inside the lenders company with their own staff and not with Fannie Mae staff.   Freddie takes......
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Adjustable rate loans, a ticking timebomb?

comparison-ratesWouldn't it be nice if your mortgage rate was under 2%.  Well there are a number of borrowers who have lucked into that situation.  These are borrowers who had chosen adjustable rate mortgages over the last few years.   Adjustable rate loans have rates that periodically change, typically every one, three or six months, based on a set spread over an index.   The index on these loans is typically LIBOR, but the agency lenders use their own reference notes and some lenders use treasury indexes such as the CMT or MTA.  Up until about mid-2007 spreads for these loans on stabalized multifamily properties were 125-250 Bps.  When the loans were made the overall rate was usually a bit better than the fixed rate loan at the time, but there was risk, unless you purchased a rate cap the rate could go up.   Or, as we have recently seen the rate can go down. As we all know in the late 2007 the Fed began easing rates.  As shown below the Fed dropped the Fed Funds target rate from over 5% to 0-0.25% in about 15 months.  This caused other short term indexes to drop creating a winfall for adjustable rate borrowers.  30 day LIBOR has been at about 50 Bps and the Freddie Mac reference bill is under 25 Bps.  This means many of these borrowers have rates of 2% or less; thats lower than anyone ever expected.  As my mother always said sometimes its better to be lucky than smart. Now that these......
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Who’s lending today, a multi-family perspective?

Someone on MSNBC just said that no one is making loans today! The banks are hording money and won't lend to anyone. The commercial real estate journals say that for commercial real estate the only one lending are the Agency lenders; that means Freddie, Fannie and HUD are the only place to get a loan. If you keep repeating something long enough it might become true, but even if it's not true you will start to believe it. While the number of lenders for stabilized multifamily properties has been reduced dramatically, they have not all gone away. Some banks have stopped lending as have some insurance companies, but the only ones who have shut their doors on a wholesale basis are the conduit lenders and that happened over a year ago. There are banks that are lending as are some life companies and yes, Freddie, Fannie and HUD. While the overall amount of lending has been reduced it is not driven by lenders not willing to lend.The issue today is not liquidity (the ability to get loans), but the terms of those loans. The biggest change in the marketplace has been that the types of loan terms offered by conduit lenders are gone. That means, high leverage, non-recourse loans based only on the cash flow of the apartment project with limited analysis of the market and borrower or sponsor. Pretend we are back in the early 1990's, before the rise of the conduits. If you remember the kind of loan you got......
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Tips to make your lender happy....

Tips to make your lender happy....insurance and payroll.  To continue with the information you need to send your lender to refinance or acquire a multifamily property I wanted to talk about two big ticket items on the operating statements:  insurance and payroll.InsuranceWhether buying or refinancing a property the lender is going to look at the cost of hazard insurance for the previous three years.  Take a close look at those numbers before you send the information to the lender.  If you think the number is too high go out and get a bid from another insurance company and send it along.  Most lenders will underwrite to the new bid when it is lower than the previous costs.  This is particularly important with acquisitions where the previous owner of the property may not have the best insurance rates.  PayrollPayroll is always a sticky line item.  From a lender's perspective the best operating statements separate out the cost of full time employees, temporary employees,  employment taxes,  and benefits.  One property I looked at recently had a lump sum number in for payroll.  There was a $10,000 jump in the line item last year which if carried over to my numbers had a direct impact on the net operating income and  lowered the proposed loan amount by $124,000.   Once we started investigating the increase we learned that the property hired temporary labor the previous summer to complete  capital improvements.   Since this capital improvement was a one-time expense I was able to leave it out of my numbers.  Most......
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Tips on how to make your lender happy...

Tips on how to make your lender happy when applying for a multifamily loan.....There are several key documents that a lender is going to look at to size your loan request.  If the documents are in order up front you will both impress your lender and save time.  Here are tips on two of the documents. First, and most obviously,  you need to supply a current rent roll.  Ideally, the rent roll will show the unit number, tenant name, type/size of unit, lease sign date, lease expiration date, the market rent, the actual rent, and the deposit.   For most of us this is a no-brainer however, within the past six months I received a loan request for a 190 unit property with a hand written rent roll that only included the tenant name, the unit number, and the rent.  It did not show the vacant units, street rents, lease starts or expirations, or deposits.  The delay cost the borrower valuable time getting his property refinanced.The lender will also need to see the previous three years of operating statements along with a current year budget and a year-to-date.  Some lenders require a "trailing twelve" which just means monthly statements for each of the past twelve months.  If you are expensing capital improvements in the maintenance/repair  line please provide a separate list detailing the improvements that were made that year.  This is very important because the lender's underwriter is not going to make adjustments unless they have the back up.  Capital improvements that end up in the annual expense number or the budget directly effect the loan amount......
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