Some of you may recall the AT&T commercial earlier this year showing a gentleman sitting at a table full of children and asking the group, “What’s better, faster or slower?” We all remember the answer–“faster!”– and chuckle at the response from one of the children who mentions something along the lines of taping a cheetah to her grandmother’s back. Unless you’re in the business of making high quality barbeque, the same concept can be applied to our professional lives, including refinancing commercial real estate.
Yet, faster is not always better. For instance, assume a refinance of a multifamily asset in secondary or tertiary market that requires maximum leverage. While it can’t be debated that the GSE’s, on average, allow an owner to get to a closing table quicker than HUD/FHA, there are many significant benefits that often get overlooked when choosing an execution primarily based on speed. We see owners shy away from HUD for a variety of reasons, including the perception of being overburdened with paperwork and the aforementioned issue of timing. They think they are going down to the DMV for their commercial real estate loan. In my opinion, however, they are being a penny wise and a pound foolish when looking at the overall situation. We are in the throes of a rising interest rate environment, and by choosing an execution with a 7 to 10 year balloon, those apartment owners have now opened themselves up to refinance risk.
With a HUD 223(f) execution, an owner can have the best of both worlds. He or she can eliminate refinance risk by nature of the program’s self-liquidating term that covers a 35 year period. Moreover, that same 223(f) loan can be structured to have the prepayment penalty limited to a 5 year period and open to prepayment in the 6th year. This structure is nearly as short as the GSE’s 5 year product, and unlike Fannie and Freddie, the underwriting is not subject to the exit strategy stress tests that can often limit proceeds. This versatility on the prepayment period gives the owner the benefits of a GSE execution without exposing himself or herself to refinance risk at the end of a traditional 7-10 year term. And if maximum leverage is required, no execution compares to HUD/FHA. For one thing, HUD does not discriminate on leverage based on where the deal is located. Finally, like the GSE product, a 223(f) loan is fully assumable. Who wouldn’t want to assume 35 year money at the lowest interest rates in the industry?
I’m still surprised at the number of folks who elect not to pursue a HUD refinance and take on the risk associated with a balloon payment in a rising interest rate environment. With HUD, you can continue to hold on to the asset if you’re not receiving the offers you originally expected, or sell it and make the windfall you’ve brilliantly outlined in your original exit strategy. Either way, with HUD, you’re not forced into a capital event in the future that you wish you could have avoided by simply adhering today to the concept of “faster isn’t necessarily better.” You can thank me later. Now, with that said, go “queen my dishes, please.”