With the credit markets still frozen solid for construction or permanent loans on multi-family residential owners and developers need to explore all available options.  Although loans insured by the Federal Housing Administration (“FHA”) present challenges that have made them a last resort for some owners and developers, the chilly credit climate has caused many to give the FHA another look. 

Those seeking to construct or rehab residential health care facilities, including nursing homes, assisted living facilities or a combination of both are finding the Section 232 program to be a viable alternative to traditional mortgage financing.  The same goes for for-profit and non-profit developers of multifamily rental or cooperative housing who are eligible to participate in the Section 221(d) New Construction/Substantial Rehabilitation of Apartments program for moderate-income families, the elderly and the handicapped .

First, the good news: 

• The FHA has funds for new construction loans in markets that have little or no job growth. 
• LTV at 80% is not uncommon for properties that are stable and producing revenue.   
• Terms are competitive or better than what are available from commercial banks. 
• Loans are designed to meet market needs.  For example, construction and permanent financing is combined in the popular Section 221(d) New Construction/Substantial Rehabilitation of Apartments program.
• Non-recourse loans are available under several FHA programs including the Section 221(d) New Construction/Substantial Rehabilitation of Apartments program. 
• HUD has streamlined the application process by creating "Multifamily Accelerated Processing" (MAP) using MAP-approved lenders.

Now, the not-so-good news: 

• Even with MAP, the application process is more involved and generally takes longer than a typical development loan (6 to 8 months for the FHA vs. 2+ months for a commercial bank). 
• Small to medium-size borrowers may find the documentation required as part of the application process to be too much of a burden.
• The $25,000 application fee is non-refundable. 
• Developers must comply with the Davis-Bacon Act by paying locally prevailing wages and benefits, something that can be a burden in some metropolitan areas.
• The ongoing documentation requirements after the loan has been made may be perceived to be too stringent, if not downright aggravating.

Local HUD field offices can provide detailed information to developers about programs in the offices’ service areas, including a list of HUD-FHA approved lenders.  Taft attorneys would be happy to help you evaluate whether the FHA loan programs are right for your business.