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Closing the Equity Gap in Real Estate
Development
HUD/ FHA Financing, Economic
Stimulus Funds and Tax Credits
CBA – Real Estate Section Luncheon
September 3, 2009
John K. Carson
303.634.2102 | [email protected]
Closing the Equity Gap
HUD/ FHA Financing
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History of FHA
 The National Housing Act of 1934 created the Federal
Housing Administration (FHA).
 10 percent of homes were in foreclosure.
 Homeownership rate was around 46 percent, today it is
67 percent.
 Section 203 of the National Housing Act created the
single family mortgage program – one to four family
homes.
 Section 207 of the National Housing Act created the
multifamily project program.
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History of FHA
 During the early part of the 20th Century and into
the Great Depression home loans were typically
less than 10 years in duration with a balloon
payment at the end and down payments were 50 of
the purchase price.
 By the 1950s, largely due to FHA, 30 year fixed rate
mortgages were the norm and down payments of
20 percent were standard.
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History of FHA
 FHA mortgage insurance provides lenders with
protection against losses as the result of defaults
on mortgage loans.
 The lenders bear less risk because FHA will pay a
claim to the lender in the event of a default.
 Loans must meet certain requirements established
by FHA to qualify for insurance.*
* www.hud.gov
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History of FHA
The FHA and HUD have insured over 34 million
home mortgages and 47,205 multifamily project
mortgages since 1934.
FHA currently has 4.8 million insured single family
mortgages and 13,000 insured multifamily projects
in its portfolio.
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Closing the Equity Gap
HUD/ FHA Financing
 Denver Office of Multifamily Housing for HUD/FHA covers
apartment new development and purchase/ refinances for
Colorado – 221(d)(3) & (d)(4) and 223(f) & 220.
 Developers/ Borrowers will typically work with an FHA
approved MAP Lender (Multifamily Accelerated Processing).
 Health Care and Long Term Care financings are directed
through the Office of Insured Health Care Facilities in
Washington DC, although processing will be assigned to
certain local HUD offices such as Seattle and Portland.
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Closing the Equity Gap
HUD/ FHA Financing
 Section 221(d)(4) – Market Rate Multifamily New
Construction/ Substantial Rehabilitation (for-profit) –
221(d)(3) for non-profits.
 Combined construction & permanent financing
 40 year mortgage term.
 Loan up to 90% of project’s replacement cost (100%
for non-profits).
 Non-recourse.
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Closing the Equity Gap
HUD/ FHA Financing
 The substantial rehabilitation aspect of the program
includes projects where the cost of repairs exceeds
the greater of $6,500 per unit or 15% of the
estimated replacement cost after all repairs and
improvements.
 Properties with improvements costing less than the
above thresholds are eligible for the 223(f)
purchase/ refinance program.
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HUD/ FHA Financing
 Section 223 (f) – Acquisition/ Refinance.
 Provides mortgage insurance for loans to purchase
or refinance existing multifamily properties.
 Construction or substantial rehabilitation of the
property must have been completed at least 3 years
prior.
 Maximum mortgage term is typically 35 years.
 Mortgage limit is up to 85% of the appraised value.
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Closing the Equity Gap
HUD/ FHA Financing
Section 220 – New Construction or Substantial Redevelopment in
Urban Renewal Areas.
Commercial space can be 20% of gross project area, and 30% of
gross income.
Maximum insurable mortgage for a new development may be up to
90% of the replacement cost, and up to 90% of the sum of the
estimated cost of rehabilitation and “as is” value of the property for
a substantial rehabilitation.
Loan term may be up to 40 years.
Can combine with New Markets Tax Credits.
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Closing the Equity Gap
HUD/ FHA Financing
Section 232 - Long Term Care – Nursing Homes, Assisted Living,
Intermediate Care Facilities.
Patients generally require skilled nursing care, or care by a licensed
or trained professional.
Maximum loan amount for new construction or substantial
rehabilitation is 90 percent (95 percent for nonprofit sponsors) of
the appraised value including major movable equipment.
Under the purchase and refinance program the maximum loan is 85
percent (90 percent for nonprofit sponsors) of the appraised value
including major movable equipment.
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Closing the Equity Gap
HUD/ FHA Financing
There can be no equity take out under the 232 refinance
program.
Mortgage term for new construction and substantial
rehabilitation is up to 40 years, while the mortgage term
for existing properties is up to 35 years.
FHA has insured over 4,000 long term care facilities.
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Closing the Equity Gap
HUD/ FHA Financing
Section 242 – Hospital Mortgage Finance – Recent $756
million deal in Trenton, New Jersey – largest in FHA’s
75 year history.
Public, proprietary, and non-profit acute care hospitals
regulated by the state are eligible, as are Critical
Access Hospitals (25 beds or less) that have received
designation from the states and HHS.
Program also includes Large Urban Teaching Hospitals.
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Closing the Equity Gap
HUD/ FHA Financing
The 242 maximum loan-to-value is 90%, the loan
term is 25 years. Loan is non-recourse.
A Certificate of Need (CON) must be issued or
pending in those states with the CON process.
Design/build construction is allowed up to $30
million.
FHA has insured mortgages on nearly 400 hospitals.
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Closing the Equity Gap
HUD/ FHA Financing
Section 223(f) refinance in conjunction with Section 242 financing –
program announced by HUD on July 1, 2009.
Previously HUD had only insured financing for new construction, or
rehabilitation of existing hospitals.
Hospitals must show that due to the credit crisis they have
experienced, or will soon experience an increase in their interest
rate of 1 percent since January 1, 2008.
Hospital must maintain an aggregate operating margin greater than
0.33 percent and an average debt service coverage ratio of at
least 1.80 for the last 3 years.
Maximum mortgage amount is limited to existing indebtedness plus
reasonable fees.
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Closing the Equity Gap
HUD/ FHA Financing
 Section 234(d) – Mortgage Insurance for Construction or
Substantial Rehabilitation of Condominium Developments.
 Blanket mortgages to finance the development of multifamily
projects that are to be sold as condominiums.
 Mortgage can be up to 90% of the estimated replacement
cost of the project, reduced to 80%if less than 80% of the
total value of the condominium units has been purchased at
the time of FHA endorsement.
 Mortgage term up to 40 years.
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Closing the Equity Gap
HUD Grant Programs
 Community Development Block Grants (CDBG)
 Affordable housing and community and economic development.
 HOME - Affordable Housing
 Access HOME and CDBG funds through state and local
governments.
 ARRA – Economic Stimulus, Neighborhood Stabilization
Program (NSP), Public Housing Capital Funds, CDBG,
Indian housing, Energy Conservation funds.
 TCAP – Tax Credit Assistance Program – HUD appropriation
directly to state housing finance agencies.
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American Recovery and Reinvestment Act
of 2009
 $ 787 billion federal recovery plan.
 Objective is to accelerate the recovery through
government spending, tax cuts and job retention/
creation.
 Signed by President Obama on February 17, 2009.
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Energy Efficiency - Conservation
 Energy Efficiency and Conservation Block Grants
 To increase energy efficiency in transportation, buildings, and
other sectors
 $2.8 billion formula (principally population based)
 $400 million competitive
 28% States, 68% municipalities, 2% tribes
 Weatherization Assistance Program
 $5 billion by formula to States and Indian tribes
 Up to $6,500 per housing unit
 Eligible participants may have household income up to 200% of
the poverty level
 20,000 homes in Colorado alone
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Energy Efficiency - Conservation
 Energy Efficiency and Conservation Block Grant.
 Colorado expects to receive nearly $43 million.
 Projects are to increase energy efficiency, reduce
energy use and fossil fuel emissions.
 Governor’s Energy Office submitting plan to DOE in
June, approval expected by August 1, 2009 – funds
to be spent by September 15, 2012.
 Contact Ms. Angie Fyfe, Governor’s Energy Office,
[email protected], 303-866-2059.
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Energy Efficiency - Conservation
 State Energy Program.
 Promote energy conservation.
 $3.1 billion formula allocation to States.
 Decision maker is the state energy office, eligibility
for funds determined by the states under existing
guidelines.
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Colorado State Energy Program
 Colorado will receive $49.2 million for energy efficiency and
conservation projects.
 Must be obligated by September 30, 2010 and spent by
March 2012.
 Todd Hartman, Media Relations, Governor’s Energy Office,
303-866-2262, [email protected]
 Barbara Alderson, U.S. DOE, 303-275-
4816,[email protected].
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Colorado State Energy Program - $49
million
Residential Programs 12%
Commercial Buildings 11%
3%
21%
12%
11%
1%
10%
42%
Capital Grants & Revolving
Loan Fund 42%
Public Information &
Outreach 10%
Greening Government 1%
Utilities & Transmission
3%
Renewable Energy 21%
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HUD Programs – www.hud.gov/recovery
 Neighborhood Stabilization Program (NSP) II
 To purchase and rehabilitate foreclosed and
abandoned housing, land banking and demolition
permitted (demolition limited to 10% of funds and
no demolition of public housing).
 $2 billion in competitive funds (based on rates of
foreclosure and levels of sub-prime lending etc.).
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HUD – Neighborhood Stabilization
Program
 Applications open to non-profits (which may include
for profit entities in a consortia), as well as state
and local government entities.
 Paper application was due in to HUD headquarters
by July 17, 2009.
 Program builds on the $4 billion in NSP funds
distributed to states and localities most impacted by
foreclosures and sub-prime lending – 2008
legislation.
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HUD ARRA Programs
 Green Retrofit Program for Federally-Assisted Multifamily
Housing.
 $250 million to be awarded nationally to private and non-profit
owners of Section 8 multifamily housing, Section 202 senior
housing, Section 811 housing for the disabled, and USDA Section
515 housing programs.
 Up to $15,000 per unit, estimated 25,000 units nationwide will get
an energy retrofit.
 Applications accepted by HUD Office of Affordable Housing
Preservation (OAHP) on a first come, first served basis beginning
June 15, 2009.
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HUD ARRA Programs
 Public Housing Capital Funds.
 $3 billion has been distributed to PHAs by formula.
 $1 billion to be awarded competitively.
 Revised NOFA posted on June 3, expands eligibility to
a larger number of PHAs.
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HUD ARRA Programs
 Applications related to assistance for the elderly and
disabled, public housing transformation, and gap
financing for stalled projects were accepted from June
22 – August 18, 2009, although applications received by
July 6, will have funding priority.
 Capital fund applications related to the Creation of
Energy Efficient, Green Communities (energy
conservation) were due by July 21, 2009.
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HUD ARRA Programs
 Homeless Prevention.
 Colorado will receive $15.4 million in funds to help
reduce homelessness.
 $8 million being distributed to the Department of
Local Affairs, balance to metropolitan cities and
urban counties.
 Contact Lynn Shine, Department of Local Affairs,
303-866-2046, [email protected]
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HUD ARRA Programs
 Community Development Block Grant.
 Colorado is receiving $10.3 million, $7.5 million
directly to entitlement jurisdictions (50,000 and
above in population) and $2.8 million for small
communities and rural areas.
 Contact: Colorado Department of Local Affairs,
Becky Murray, 303-866-2818,
[email protected]
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HUD ARRA Programs
 Native American Housing Block Grant.
 $242 million in competitive grants for tribal housing
programs.
 Indian Community Development Block Grant
(ICDBG).
 $10 million in competitive funding.
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HUD ARRA Programs
 Section 8 Multifamily Contract Renewals.
 $2 billion in funding to provide for renewal of full 12
month contracts.
 6,300 multifamily projects to be funded.
 Avoid project payment disruptions that have
occurred in prior years.
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HUD Programs
 Making Home Affordable Program.
 www.makinghomeaffordable.gov
 Up to 3 to 4 million households could avoid
foreclosure through a loan modification or mortgage
refinancing.
 Start the process with a HUD approved housing
counseling agency – listed at hud.gov.
 Information also at www.fanniemae.com and
freddiemac.com.
 Significant financial incentives for servicers and
investors to participate in the program.
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ARRA Tax Provisions
 Advanced Energy Credit - $2.3 billion.
 New 30 percent investment tax credit, investment in
a “qualifying advanced energy project.”
 A project that re-equips, expands or establishes a
manufacturing facility used for the production of
energy from renewable sources.
 Projects must be certified by a joint Treasury/
Energy Department program.
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ARRA Tax Provisions
 Tax Credits for Energy-Efficient Improvements to
Existing Homes.
 Tax credit up to 30% of the amount paid for
qualified energy efficiency improvements, up to
$1,500 in a taxable year.
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ARRA Tax Provisions
 Increase in the New Markets Tax Credit.
 Increases the amount available for Community
Development Entities (CDEs) by $1.5 billion in 2008
and 2009 – for a total allocation of $5 billion in each
year.
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ARRA Tax Provisions
 Tax Credit Assistance Program (TCAP) - $2.25
billion nationally.
 Colorado Housing and Finance Agency will
distribute $27.3 million through a competitive
process for programs receiving a tax credit award in
2007-2009.
 Funding to be available in July, Natasha Weaver at
CHFA, [email protected]
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ARRA Tax Provisions
 Tax Credit Enhancement Program (TCEP)
 Will allow CHFA to exchange eligible LIHTC for
cash grants for sub awards to eligible projects
 Cash from the Treasury Department at a rate of 85
cents on the dollar
 www.chfainfo.com/documents/arrahandout.pdf
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LIHTC Update - Colorado
 CHFA’s annual LIHTC allocation is $11.5 million,
allocated in three rounds.
 Demand remains high – CHFA received 17
applications totaling $16.3 million during the second
round for this year.
 1,800 units in Colorado are stalled due to lack of
investors.
 With Fannie and Freddie out of the market, the pool
of investors has shrunk dramatically.
 Credits are selling at about 70 cents on the dollar
compared to 98 cents two years ago.
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Accountability
 ARRA expenditures will be closely scrutinized.
 The Federal Acquisition Regulation (FAR) applies
to contracts entered into by the federal government
using ARRA funds.
 Contractors and grantees receiving ARRA funds
from the federal government must file quarterly
reports on fund expenditures – emphasis on
transparency and public information.
 Inspector General Offices received $295 million in
new funds under ARRA.
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Closing the Equity Gap in Real Estate
Development
HUD/ FHA Financing, Economic
Stimulus Funds and Tax Credits
CBA – Real Estate Section Luncheon
September 3, 2009
John Carson
303-634-2102 - [email protected]