Cambridge Capital predicts HUD loan increases

Real Estate Weekly, April 19, 2000

Chicago-based Cambridge Realty Capital Companies closed more than $84 million in FHA insured HUD loans in 1999 and is projecting that HUD loan applications will continue to soar in the decade ahead. "Although profit margins and credit market aberrations have combined to sideline many conventional lenders, HUD has remained a remarkably stable and reliable financial partner in times of need, providing funds with better terms at lower rates," said Cambridge chairman Jeffrey A. Davis.

As one of the nation's leading senior housing and healthcare lenders, Cambridge closed more than $750 million in senior housing and healthcare loans in 170 separate transactions during the 1990s. HUD loans accounted for approximately $400 million of this total, which funded more than 10,000 beds.

Davis says Cambridge expanded its lending operations beyond the Chicago metropolitan area in the '90's with closings in California, Florida, Georgia, Iowa, Michigan, New York, North Carolina, North Dakota, Ohio, Pennsylvania, Utah and Wisconsin. HUD loans are attractive to borrowers today for a variety of different reasons, he maintains.

In the current market, interest rates for HUD loans range between 8 percent and 8.25 percent with a .5 percent MIP. And there are HUD loans for every senior housing/healthcare category.

In contrast, conventional lenders typically offer prime plus 1 percent to 2 percent floating, or 9 percent to 12.5 percent, and are very selective in the types of properties they are prepared to underwrite, Davis noted.

The favorable comparisons do not end there. Whereas HUD offers borrowers a 40-year fully amortized loan for new construction, major expansion or rehab, and a 35-year term and amortization for refinanced transactions, conventional loans most typically offer 10 year loans that are amortized over periods of 20 to 25 years with renewal options that may be negotiated later.

According to Davis, for HUD loans, the loan-to-value ratio is 90 percent for new construction and, typically, 85 percent for refinancing.

Additionally, HUD refinancings may qualify for up to 100 percent loan-to-cost funding. For conventional loans, a 75 percent loan-to-value ratio is considered at the higher end and loans are more typically 65 to 70 percent loan-to-value.

Conventional lenders often require borrowers to assume 100 percent personal liability for their loan, Davis said. In contrast, HUD loans all are underwritten on a non-recourse basis. With HUD, the interest rate is fixed and will not change for the life of the loan. On the other hand, conventional loans typically "float" above a predetermined index and are subject to periodic rate adjustments throughout the life of the loan.

HUD loans are underwritten at a 1.11 debt service coverage on the value of the lease, and the loan is pre-payable with minimum payment penalties, while conventional loans are underwritten for a 1.39 to 1.50 debt service coverage on projected net operating income.

While the conventional loan is usually pre-payable, high prepayment penalties normally apply. With a HUD loan, borrowers are required to have cash equity of 10 percent for new construction, but there is no cash requirement for refinancing. With conventional loans, cash equity requirements typically range between 20 and 35 percent for new construction.

Although HUD is willing to process construction and permanent financing simultaneously, Davis says conventional lenders typically require separate transactions, which results in a duplication of fees.

Another important HUD loan feature is that the loans are assumable, which can't be said for conventional loans. Also, while underwriting for HUD loans is standardized in all 50 states, the process for conventional loans varies from lender to lender.

The underwriting process for both HUD and conventional loans considers the borrower's ability to pay, but conventional lenders tend to place a lot more emphasis on the experience and track record of the borrower, Davis observes.

"In the past, HUD's primary role in the senior housing/healthcare market was funding single-property, one-at-a-time venues. However, in the current credit crunch, HUD programs are being adapted to meet the needs of borrowers with larger portfolios of assisted living or nursing home properties," he said.

Davis believes HUD programs will remain a predominant funding source for senior housing/healthcare borrowers in the first decade of the new century, but commercial lenders and Wall Street almost certainly will stage a comeback from the fall-back position they currently occupy.

"We think new lending products will continue to arrive in the marketplace to fill in vacated gaps and to meet the needs of enterprising and entrepreneurial development in the years ahead," he said.