The 4 Keys to Doing Commercial Real Estate Business With HUD
Apartment construction and occupancy rates are up in many cities across the U.S. In some regions the multifamily market is truly outpacing the nevertheless-recovering single-family market. It is no surprise that the U.S. Department of Housing & Urban Development’s (HUD) mortgage insurance commitment authority surpassed approximately $25B in FY2013. These facts betray the reluctance of many in the multifamily community to do business with HUD.
Several misconceptions linger regarding transacting business with HUD. Yes, HUD is a government bureaucracy and any bureaucracy has its own rare idiosyncrasies. HUD is no different. Understanding the cultural norms of HUD is basic and in some situations might average the difference between consummating your transaction and having it stall needlessly.
There are a few things of dominant importance any developer or lender should know in order to get your HUD deal approved. These guidelines are generally applicable to most HUD transactions, including new construction and refinance loans, in addition as transfers of physical assets assumptions (TPAs). Here’s what you need to know:
- Speak to HUD in improvement
Schedule a pre-application meeting with HUD’s multifamily staff in the office where your deal will be submitted. It is advisable to consult with the person responsible for the multifamily portfolio (often called the Housing Director of Multifamily center Director), the actual asset manager responsible for a given character, and the government’s lawyer (HUD Office of General Counsel). Ask for a conference to discuss your project with these individuals, as they will have dominant responsibility for approving or denying your application. Their buy-in is meaningful to getting your deal done.
It is not uncommon in such meetings for HUD representatives to unearth possible problems with your transaction. For example, if you are acquiring a character by a refinance loan or a TPA, HUD might alert you to problems with the physical condition of the character that perhaps should be resolved before approval. In other instances, your hypothesizedv legal structure for the entity might be problematic, or the financing for the project might be challenging. HUD will typically apprise you early on as to any major issues with a deal; take their advice thoughtfully. In any case, walk them by the anatomy of the deal, get their responses, and work to resolve any issues before you submit the application.
- Submit a complete application package
This seems elementary, but a surprisingly sizable number of applications are not processed due to incompleteness. Check all the boxes, get all the signatures, ensure documents are tight, and be forthright with HUD: trying to hide the ball is never a good idea. One of the most often cited reasons why developers avoid HUD mortgage insurance is the perception that the application course of action is intrusive, lengthy, and unpredictable.
Every HUD program carries with it a requirement that parties submit several documents, including organizational forms, and legal and financial documents. Most professionals who liaise with HUD will inform that while some information can seem rare to HUD, most of the documentation required is much the same as what you would submit in a traditional loan application. The quantity of information HUD requires creates a temptation to neglect some details of transactions; there is always a chance that HUD will not catch those omissions, but given the multiple internal reviews, chances are someone will catch it. The consequence, already when unintentional, is usually a higher level of scrutiny for a given deal.
- Be responsive
After your application is submitted, HUD will respond with a list of deficiencies. This might be informal or formal, but however it is given, please respond timely. The character of the deficiencies could range from omissions in the application to substantial problems with the application. In the case of omissions, HUD will typically provide an opportunity to cure those defects soon after submission. In the case where substantial problems exist, i.e. issues with the business structures, or one or multiple principals have had problems with HUD in the past which causes them not to pass a pre-clearance check, HUD might cease processing of the application and return it so that the parties can clean up those issues to then resubmit at a later date. This could cause substantial delay and ultimate denial of an application, depending on the severity of the matters involved. in any case the issue, HUD will usually offer their feedback and when they do, be responsive. As time passes after submission, it is also advisable to make a habit of keeping in touch with them so that your application stays top of mind to HUD staff.
- Hire a lawyer who knows HUD
HUD transactions include very particular knowledge and experience. It is virtually impossible to get your transaction closed without legal representation. HUD views most multifamily transactions as legal proceedings, oftentimes requiring a formal table closing in the applicable HUD office where the character is located. Lawyers for the government, lender, buyer and seller are usually present. Legal documents will be passed and signed, but long before sitting down at the closing table, lawyers will have performed most of the work of the transaction. This work involves the actual packaging of the transaction for HUD, but more considerably, complicate negotiations with HUD staff after the package is submitted to get the government to ‘yes.’ You should not leave this to anyone but experienced HUD counsel with the know-how to work with HUD. Far too many developers depend on their general business or real estate lawyers to provide this service. The consequence more times than not is serious delays that ultimately are measured in real dollars lost.
Developers should not view HUD as an irritant, but as an alluring partner to get your project built or acquired. Loan guarantees of 35 years, non-recourse loans, low interest rates, and attractive loan-to-value ratios – all make for powerful reasons to tolerate a little additional paperwork.