This is part two of a four-part series on the latest financing opportunities under HUD.

As the United States Department of Housing and Urban Development (HUD) takes greater steps to make affordable housing finance more feasible, its insured loan programs are playing an increasingly vital role for borrowers.

Through the Federal Housing Administration (FHA), two key financing tools for multifamily owners and developers are HUD’s Section 223(f) and Section 221(d)(4) loan programs, which allow borrowers to acquire, build, and refinance affordable rental properties while taking advantage of favorable, non-recourse loan terms at fixed interest rates.

HUD’s affordable multifamily loans can be paired with federal and state Low-Income Housing Tax Credit (LIHTC) programs to help borrowers boost their overall debt and equity proceeds while covering essential costs. Other important HUD incentives for affordable multifamily borrowers include Rental Assistance Demonstration for Section 202 Project Rental Assistance Contracts, the Mark-to-Market program, and the Green and Resilient Retrofit Program, which can provide additional funding for specific uses.

Lument has remained a leading HUD/FHA multifamily lender over the years with more than $1 billion in closed loans in 2023. Our experienced originators, underwriters, and loan servicers are uniquely positioned to help non-profit and for-private borrowers around the country navigate today’s market opportunities and challenges.

Lument’s affordable housing production team is able to fully model financing transactions, including available tax-credits, to help give borrowers the best options. As rising costs make affordable housing transactions harder to pencil out, it’s especially important for owners and developers to partner with a knowledgeable and hands-on FHA lender.

Here is a closer look at how affordable multifamily borrowers can make strategic decisions with HUD’s financing programs in 2024.

Making Sure Affordable Deals Pencil Out

With a national housing shortage of more than 7 million affordable homes, according to the National Low Income Housing Coalition, affordable multifamily creation and preservation is on virtually everyone’s mind.

Making the numbers work on the financing side, however, takes a keen understanding of local policies and the availability of soft financing for affordable housing throughout various markets.

With project-based Section 8 rental assistance, property owners are able to leverage recent significant increases in Fair Market Rents (FMR) to lock in substantial rent growth. The increased rents give affordable multifamily owners an opportunity to refinance their debt to cover major renovations to their properties as well as other costs for their missions.

Lument provided a $13.1 million loan for an affordable multifamily development in Arizona through the FHA 223(f) program in 2023. This transaction allowed the borrower to address immediate physical needs at the project while setting aside proceeds from the financing to fund pre-development and true development costs of a LIHTC transaction that is expected to close in 2024. For the LIHTC transaction, Lument will provide a supplementary FHA 241(a) loan and serve as the underwriter for the tax-exempt bonds.

While taking advantage today of the benefits from refinancing, developers and owners can potentially utilize HUD’s Interest Rate Reduction (IRR) program and other financing options, including Fannie Mae and Freddie Mac, to reduce their overall loan costs if interest rates decrease in the coming years.

Tapping into Supplemental HUD Incentives

Looking ahead, as HUD works to find more solutions for affordable multifamily owners and developers, the department has revamped some of its supplemental programs while introducing new incentives.

Among HUD’s big pushes are the recently updated Mark-to-Market (M2M) program, the revised RAD for PRAC program, and the Green and Resilient Retrofit Program (GRRP) under the Inflation Reduction Act of 2022. Some of these programs are being expanded and updated to account for increased costs in today’s economic climate.

The M2M program allows owners of Section 8 properties to restructure their loans and lower their debt service to accommodate mandated rent reductions. GRRP gives HUD $837.5 million in grant funding and up to $4 billion in loan authority for eligible affordable properties with climate-resilient and sustainable retrofits. HUD’s RAD for PRAC program—which supports the preservation of affordable housing for elderly tenants—was adjusted last year to allow for higher rents to cover capital improvements.

Lument has been involved in the initial application of a number of deals under these programs, including recent discussions with more than two dozen non-profit owners and operators looking to tap into the RAD for PRAC program. Through the program, Lument’s affordable housing production team closed an FHA 223(f) refinance for a PRAC property in Texas.

It’s important to also note that while these key programs offer significant benefits to properties and borrowers, there are inevitable limits to HUD’s overall available funding. A big question for industry stakeholders looking ahead: Will HUD continue to receive and deploy enough capital to keep up with borrower needs?

HUD’s March 2024 update to the M2M program, for example, allows owners of eligible properties to do budget-based rent adjustments. However, there are qualification rounds with a “prioritization structure” based on the highest-need properties. Similarly, RAD for PRAC deals require HUD-approved budgets to support rent increases.

Given the growing interest in these programs, HUD is carefully monitoring the markets rather than rubber stamping deals to make sure there is enough funding for borrowers of all stripes.

Utilizing Lument’s Lending Expertise

Lument’s affordable housing production team takes a tailored approach with all FHA-insured multifamily loan transactions from start to finish to help non-profit and for-profit borrowers optimize their financing.

As the overall costs of building and maintaining affordable rental housing increase, strategic financing decisions are an essential part of successful property operations to provide the best outcomes for tenants.

Knowing the many considerations for affordable multifamily owners and developers—from potential land deals and public-private partnerships to the availability of tax credits and other funding sources—Lument takes relationship lending to new heights. Lument additionally underwrites tax-exempt bonds and provides loan servicing solutions to ensure affordable multifamily deals pencil out for all parties involved.

Contact Lument to get the latest offerings and insights on affordable housing financing solutions through HUD and the agencies. Make sure to also follow the rest of this series for more insights on HUD financing opportunities in 2024.

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