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Kathryn Thompson Originates FHA Substantial Rehab Loan

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FHA Substantial Rehabilitation Loan
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Kathryn Thompson Originates FHA Substantial Rehab Loan

Broadway Lofts was an FHA-financed new construction project that went into default and was assigned to HUD. The developer purchased the note from HUD, resolved all outstanding litigation and sought financing for the project. Apartment Financing America Managing Director Kathryn Thompson originated an FHA Substantial Rehabilitation Loan as a correspondent apartment lender through our strategic partner Rockhall Funding, an FHA MAP lender, to complete construction of the project.

The FHA substantial rehab property is prominently located at the confluence of I-35, I-37 and Highway 281 in Downtown San Antonio near the Riverwalk. For years, the half-completed structure was an eyesore for commuters driving into the city. Once the FHA substantial rehab loan was closed and construction resumed, the project received significant positive coverage in the media.

Apartment Financing America has provided FHA substantial rehab loans and other mortgage loans to the world’s most sophisticated investors for almost five decades. Contact Kathryn Thompson at Apartment Financing America to learn more about FHA Substantial Rehab Loans, as well as the many other possibilities we offer for multifamily projects.

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Challenges

  • Perception of Soft Rental Market. HUD rejected the 2009 pre-application on the grounds that the market had a 12% vacancy rate, high vacancies in recent multifamily completions and slow absorption for newly built projects.
  • Office Space Exceeded HUD Guidelines. The project plans included an 80,000 square foot office building which was slightly in excess of published HUD limits. Existing office space in San Antonio-area FHA-insured deals was showing high vacancies.
  • 100-Year Floodplain.   HUD discourages new construction in mapped 100-year floodplains.
  • Freeway Noise.  The project is very close to three large freeways. HUD has strict indoor and outdoor noise limits for new construction projects.

Solutions

  • Perception of Soft Rental Market. In our experience, HUD often relies on macro-level data to draw conclusions about rental housing demand for a particular project. By obtaining project-level occupancy data from Lincoln Management, we were able to show that in the primary market area rents were rising, vacancies were falling and the overall picture was good. We provided detailed information about absorption rates of new multifamily projects located along the very desirable Riverwalk. The subject project’s submarket actually had a 97.6% occupancy rate for class A properties such as the subject. HUD accepted our analysis that the subject’s market was stronger than the HUD economist originally thought.
  • Office Space Exceeded HUD Guidelines. In this case, HUD was right. Burdening the project with an 80,000 square foot office building was risky. The San Antonio office market was soft and the location of the project was not ideal for office. We convinced the borrower to pull the office building out of the FHA deal and finance the rehab of the office conventionally.
  • 100-Year Flood Plain. Because of recent flood control work done to the San Antonio River, a new floodplain delineation map was being prepared by the San Antonio River Authority that would take the subject project out of the 100-year floodplain designation. Due to delays in obtaining FEMA approval, Rockhall would have been required to conduct an 8-step review which would have significantly delayed processing. We knew that the project had previously been FHA insured as a new construction deal. No one involved with the project, including HUD, could produce any evidence that an 8-step process had been completed. The originator, after spending hours reading microfiche of government records, found the completed 8-step review for the project and that satisfied HUD.
  • Noise. Rockhall advised the developer to hire an acoustical engineer with HUD experience to work with the design engineer to ensure that all interior and exterior spaces met HUD acoustical requirements. The acoustical engineer issued a report that HUD used to ensure that the project was in compliance.

Lessons Learned

  • Pick Your Fights. We felt highly confident that HUD had understated the strength of the multifamily market. We were able to press our case and win. We tended to agree with HUD about the office market. Rather than fight HUD we convinced the developer to pull the office building out of the deal and finance its rehab conventionally.
  • Extra Effort Can Save a Deal. If the originator hadn’t been able to exhume the microfiche record of the 8-step process, the deal could have been delayed by months.
  • Don’t Give Up If You Believe in the Deal. Although we knew this lesson already, Broadway Lofts reinforced our belief that good deals eventually will get funded.

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