Hudson Realty Capital is building out its Housing and Urban Development financing platform as rising interest rates and fluctuating construction costs leave borrowers seeking alternative ways to fund their developments.
HUD loans, which have been available as an option for borrowers since 1965 through US federal government-backed programs, offer longer-term construction financing as well as permanent financing for multifamily and healthcare projects.
“As the availability of construction financing has dried up, more specifically from the commercial and regional bank markets, there has been an increase in demand for d-4 HUD loans,” Rich Ortiz, co-managing partner of Hudson Realty Capital, told Real Estate Capital USA.
The New York-based manager obtained a HUD license three years ago but has seen demand rise steeply. To this end, the firm has expanded its teams with more professionals in the West, Midwest & North and Southeast. It also plans to grow its transaction volume over next 12 months, although specific numbers were not confirmed.
“HUD was originally intended to ensure liquidity in the market in the multifamily and healthcare sectors,” said Ortiz. “So when liquidity started drying up [this year] from conventional sources, including commercial banks and, more recently funds, Hud gained traction.”
Part of the demand for longer-term loans is tied to the inverted Treasury curve.
“The two- and three-year yield curve has seen spikes, so it’s more costly to borrow on the shorter part of the curve than on the longer part. HUD is generally priced off the 10-year, meaning it’s actually cheaper to borrow longer term,” Ortiz continued. “In today’s market, we have an inverted yield curve environment. So, what that has done is created a lot of demand, not just for HUD 10-year but also for longer-term fixed rate insurance products.”
While HUD loans are typically more time-intensive compared to more conventional capital sources, borrowers increasingly recognize some of the other benefits associated with this type of financing.
Risk mitigation is one. Unlike some other loan options, HUD loans offer borrowers a greater level of certainty by minimizing the possibility of market conditions or factors unrelated to the project jeopardizing the loan. This provides reassurance and helps developers plan more effectively, Ortiz said.
“Another reason for the increased demand for d-4 HUD loans is when the project is finished you don’t have to go out and refinance your construction loan – it sizes to that project on the outset,” said Ortiz. “As such, there is no refinancing risk and further, the loans are non-recourse.”
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