As new challenges settle on the commercial real estate lending landscape, borrowers look for opportunities to secure favorable terms and transition into long-term financing options. In the multifamily sector, sponsors have several financing options, from conventional banks to life insurance companies, commercial mortgage-backed securities, and agency loans.

However, not all loans are created equal. Agency-based financing, through the Department of Housing and Urban Development, Freddie Mac®, and Fannie Mae®, generally offer the best permanent financing options compared to a bank or CMBS loan. Due to high demand for multifamily properties across the nation, the government is keen on ensuring that there is enough liquidity for the acquisition, refinancing, and renovation of multifamily assets, according to insights from Multi-Housing News.

The Benefits of HUD-Insured Loans

Agency loans usually offer the highest leverage, longest amortization, and lowest interest rates. HUD-insured financing typically offers the best options among agency loans for investors with long-term financial strategies. HUD loans — and, more specifically, the 223(f) program, which focuses on acquisitions and refinances — offer non-recourse, fixed, and fully amortizing terms up to 35 years, and these loans are also assumable.

Through these financing terms, a borrower can eliminate most of the risk associated with owning real estate, a Forbes article noted. HUD-insured loans remove interest rate risks, as the interest rate remains unchanged throughout the life of the loan unless rates decrease.

Nonetheless, HUD-insured loans are often overlooked due to lengthy underwriting processes. Tight closing deadlines in an acquisition can make securing an FHA loan in time impossible. HUD requirements also include that properties must be stabilized and have an average occupancy rate of at least 85% for the six months prior to the application. Further, that occupancy level must be maintained throughout the entire underwriting process until closing. As a result, some properties might not be eligible for a HUD loan yet, but they might get there soon.

How Bridge-to-HUD Loans Work

This does not mean that a long-term HUD-insured loan option is out of the picture. Bridge loans can come to the rescue to finance these assets in the short term, filling in the gap between the capital a borrower needs now and the future long-term financial plan.

Lenders can work out loan terms to match the specific needs of a borrower while considering the long-term financial needs of the client. A savvy lender can close a deal within a short time to meet an acquisition deadline, allowing the borrower to execute a HUD exit without the added time constraints, an article from ABLAdvisor noted.

“The bridge-to-HUD product is excellent for acquiring multifamily properties, allowing borrowers to refinance into a HUD 223(f) loan, which currently takes about six to eight months to close," said Brandon Ramineh, director of capital markets at Janover. "The bridge platform allows borrowers to acquire much quicker — in around 45 to 60 days — and later transition into the HUD loan.”

It's not just about the timing, though. Bridge-to-HUD loans offer other advantages, too. “A bridge loan is also beneficial for properties undergoing rehab or with insufficient occupancy levels that don’t yet meet HUD requirements,” added Ramineh.

To qualify for a HUD exit, the borrower must submit its application for HUD funding before it closes on a property with the bridge loan. As soon as the application is submitted the borrower can purchase a property with a bridge loan. Later, once the HUD loan closes, the property can benefit from the more favorable HUD acquisition terms, Forbes highlighted.

Before closing on a bridge loan, it’s also crucial to ensure that the short-term loan has comparable leverage to the permanent loan, so the borrower can avoid paying extra cash. A bridge loan should also provide prepayment options, single-digit interest rates, and low origination fees.

According to Bravo Capital, a company focusing on HUD, mezzanine, and bridge lending, eligible properties for a bridge-to-HUD loan include multifamily, assisted living, and skilled nursing facilities. Terms include a maximum LTV of up to 80% (as-stabilized) and 90% LTC. The loan amount ranges from $3 million to more than $200 million. The loans are non-recourse with standard carve-outs for multifamily, with a term of up to 36 months and interest-only payments.

Bravo Capital recently unveiled that it has closed $200 million in bridge, mezzanine and HUD loans through the second quarter of 2022 alone.  

Growing in Popularity

Thanks to favorable policies, and heightened awareness of the program’s benefits, HUD-insured loans have become popular among investors planning to hold their multifamily properties for a longer period. In the 2021 fiscal year, HUD — through its 223(f) program — insured mortgages for 807 properties encompassing 127,398 units, totaling $15.3 billion, the agency revealed.

Considering the current economic climate, a HUD-insured loan can also shield investors from rising interest rates. “If interest rates continue to increase over the coming years, locking in an interest rate now would allow you to avoid any potential risk on a refinance in five to 10 years compared to most other loan products,” Ramineh noted.