Large, federally insured commercial mortgages that are secured by multifamily properties are subject to new requirements. The revisions impact the maximum allowable ratios and property owner requirements.
The Department of Housing and Urban Development has indicated that although its multifamily program standards were previously tightened, the changes only required higher minimum underwriting standards and reserve floors. The revisions didn’t account for the loan or project size.
So the federal housing agency outlined new program changes to approved FHA lenders in Mortgagee Letter 2011-40.
Impacted loans are those in excess of $25 million used to finance projects with more than 150 housing units.
On new construction for affordable-mixed income transactions, the debt-service coverage ratio is 1.15 for loans less than $40 million, while the DSCR rises to 1.20 percent for loans up to $60 million and 1.25 percent on loans greater than $60 million.
The loan-to-cost ratio ranges from 87 percent on loans under $40 million to 80 percent on loans above $60 million.
On refinances less than $50 million, affordable-mixed income DSCRs are limited to 1.176 percent, while the figure climbs to 1.25 percent for loans greater than $75 million. The loan-to-value limits range from 85 percent on rate-term refinances less than $50 million to 80 percent on loans in excess of $75 million.
For loans less than $25 million and under 150 units, required reserves will be the greater of four to six months’ debt service or 3 percent of the mortgage. On loans for more than $60 million and more than 400 units, the reserve requirement jumps to the greater of 15 months’ debt service or 8 percent of the mortgage.
Principals on loans of at least $25 million will need an aggregate net worth of at least 20 percent of the loan amount. They will also need liquidity of at least 7.5 percent of the loan amount. However, the requirements can be waived for sponsors of subsidized affordable housing properties.
Unless the borrower has owned the property at least three years, the value will be the lower of the appraised value or the acquisition cost plus the direct costs incurred for property improvements. The cost for property improvement can include rehabilitation, upgrades or zoning change expenses. They can also include verified land improvements like removal of environmental hazards, or infrastructure improvements.
But if home values in the local area have also risen and the increased property value is based on an increase in net operating income as a result of improved property operations “and is not based solely on recognition of a capitalization rate that is lower than what was prevalent in the market or was applied by the sponsor at the time the property was acquired,” then the Hub Director can issue a waiver to allow an appraised value that is more than the cost of acquisition and improvements.
Borrowers on large loans need prior experience operating similarly sized complexes. Experience in residential or commercial real estate management will not be considered in a potential waiver on the experience requirement.
“The capital markets for multifamily financing, while improving, still face significant challenges,” the letter said. “In the context of these continuing challenges, FHA is being asked to insure more loans with sizes much greater than historically experienced by the department.”
HUD acknowledged that it could “suffer an extraordinary loss from the failure of a large loan since it represents such a concentrated investment in a single large property located in a single submarket with one borrower and potentially hundreds of rental units.”
