Commercial Loans Blog

What Is a FHA 221(d)(4) Loan?

Posted by George Blackburne on Wed, May 31, 2017

HUD.jpgApartment buildings wear out over time.  As apartment buildings become dilapidated, the good-quality tenants move out and the riff-raff move in.  Superbly-located apartment buildings can, over time, become an eyesore and a breeding ground for crime.

The Department of Housing and Urban Development ("HUD") was created to prevent just such a deterioration of the country's housing stock.  Do you remember the Republican presidential debates?  That very likable African-American brain surgeon, Ben Carson, was appointed by President Trump to be his Secretary of Housing and Urban Development.

Under HUD is the Federal Housing Administration ("FHA").  The FHA is a United States government agency created in part by the National Housing Act of 1934. It sets standards for construction and loan underwriting, and it insures loans made by banks and other private lenders for home building.  Among its many programs to promote the construction and renovation of apartment units is the FHA 221(d)(4) program.


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An FHA 221(d)(4) loan is a FHA-insured, long-term, fixed-rate loan used for new construction or substantial rehabilitation of multifamily projects nationwide. FHA 221(d)(4) loans are usually made by large mortgage banking firms, although a few commercial banks specialize in making such loans.

Who remembers the difference is between a mortgage banker and a mortgage broker?  A mortgage banker retains the loan servicing rights. A mortgage banker might earn 10 bps. to 12.5 bps. per year for servicing a large FHA apartment loan, which can be serious money if the loan amount is large enough.  Folks, the real money in the mortgage business is in loan servicing fees.  What's the fastest way to become a servicer of commercial real estate loans?  Answer: Become a hard money lender.


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After making an FHA 221(d)(4) loan, the mortgage banker will sell off this insured loan to the Government National Mortgage Association ("Ginnie Mae") at a premium of 4 to 8 points.  Ginnie Mae is a Government Sponsored Enterprise ("GSE"), just like Fannie Mae and Freddie Mac.  Ginnie Mae will later sell the loan to a trust and then syndicate the loans in the trust.

In the paragraph above, I used the term, "premium".  A premium occurs when a bond or a loan is sold for more than its face value.  Huh?  More than its face value?  Yup.  Many times investors will happily pay $1,080,000 for a $1 million bond or loan, if the interest rate is sufficiently higher than the market rate.




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Now back to FHA 221(d)(4) loans:  These are 40-year, fixed rate loans, after the new construction period or the renovation period.  In addition, the interest rate is delicious because the loan is insured by the FHA, an agency of the U.S. government.

On renovation loans, the developer must spend more than $15,000 per unit fixing them up.




Perhaps the single most attractive feature of FHA 221(d)(4) loans is that the lender will advance as much as 85% of cost!  Remember, I have written over the past few weeks about how large construction lenders are limiting their new apartment construction loans to just 60% of cost.  Eighty-five percent of cost - wow!


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Topics: FHA 221(d)(4) loans

What Is a HVCRE Loan?

Posted by George Blackburne on Wed, May 24, 2017

land development.jpgWhen the Great Recession hit in 2008, commercial banks suffered enormous losses (read: they lost their butts) in land loans, A&D loans, and construction loans.  As part of the Dodd-Frank Act bank reforms, the FDIC established a new category of high-risk bank loans called HVCRE loans.

The term, "HVCRE loans" is short for a High Volatility Commercial Real Estate loans. The FDIC defines a HVCRE loan as follows: "With respect to commercial real estate... as a credit facility that, prior to conversion to permanent financing, finances or has financed the acquisition, development, or construction (ADC) of real property."  I promise that before we're done here today I will explain why you should give a hoot.




In plain English, this means that a loan made by a bank to finance the purchase of commercial land - including the future site of a multifamily project or a residential subdivision - is considered a HVCRE loan.

An A&D loan is another example of a HVCRE loan.  An acquisition and development (A&D) loan is a loan used to buy a piece of raw land, makes the horizontal improvements, and then sell off the building sites.  Typically the finished project is either some shovel-ready home sites or some finished commercial or industrial building sites.  While 50% loan-to-value is considered the maximum prudent loan on raw land, A&D loans of 60% loan-to-cost are common.

A&D loans are structured just like construction loans; i.e., they have interest reserves and sales commissions (as you sell off each lot) as separate line item costs in the construction budget.  By the way, the term, horizontal improvements, means to clear the land, to grade it, to bring utilities to the site, and to construct roads, curbs, and gutters.


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Denny Developer owns an option to purchase a 20-acre parcel in the suburbs of Chicago.  Right now the land is vacant, but for a run-down old farm house.  He applies to the bank for a $2 million acquisition and development loan (A&D) to buy the parcel, to make the horizontal improvements (see above), and to sell off 36 finished home sites to the public and to custom builders.  Included in the $2 million construction budget is a $60,000 interest reserve and a $90,000 line item for sales commissions to the real estate brokers who bring him individual lot buyers.  The above is an example of an A&D loan.

Okay, now let's get back to the list of three types of loans that constitute HVCRE loans.  So far we have garden variety land loans and A&D loans.

The third and final type of HVCRE loans are commercial construction loans.  This includes category includes the construction of apartments and residential subdivisions, even though you might be tempted to consider them to be just residential loans.

Important note:  If the bank finances the construction of a strip center, and, upon leasing, the construction loan rolls over into a permanent loan, the loan is no longer considered to be a HVCRE loan.




"Boring! Why should I care about HVCRE loans? I'm not a bank. I'm falling asleep here, George.... zzz."

Here's why you need to know this term:

(1) If you are trying to place a HVCRE loan, you need to know that the loan will be much harder to close than in the past. Federal regulators are really trying to discourage banks from making many more HVCRE loans.

(2) If a bank makes a HVCRE loan, it must now set aside a very high amount of reserves against losses.

(3) Many banks, if not most, will now require the developer to contribute a whopping 40% (!!) of the total cost of construction. In the past, banks would only require that the developer contribute 20% of the total cost (80% loan-to-cost ratio).




(4) The developer must contribute at least 15% of the total project in cash - actual paid architectural, engineering, and land purchase costs.  Let's suppose a developer is cash poor, but he inherited a prime piece of land in downtown San Francisco that - at fair market value - represents a whopping 40% of the total cost of his proposed multifamily development.  According to the new HVCRE rules, the developer will not qualify for a construction loan from a bank because he has not contributed 15% of the total project cost in cash.  (Note: While the land cost of most commercial construction projects is normally around 20% of the total project cost, if the land is located in the very heart of a thriving city, the land cost can represent 40% to 45% of the total cost of a low-density project.)

(4) Banks can no longer give the developer credit for the fact that the land has appreciated greatly since he purchased it. Suppose you're a smart developer. You purchased the apartment land in 2009 for $1 million, at the very bottom of the crash when blood was running in the streets, and the land is now clearly worth $3 million. The bank can no longer count the $2 million worth of appreciation as equity that the developer has contributed to the project towards that required 15%.


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(5) The bank can no longer give the developer credit for the huge increase in the land's value because he got the property re-zoned from agricultural to residential - at least as far as this 15% requirement is concerned.

That being said, tons of commercial construction loans are still being made.  Do you need an A&D loan or a commercial construction loan? is jam-packed with hungry commercial construction lenders.  Important note: intentionally does not list Acquisition and Development Loans as a separate Loan Type option in its drop-down menu.  Instead, if you need an A&D loan, please choose Construction Loan in the Loan Type drop-down menu and then Residential Subdivision or Land in the Property Type drop-down menu.


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What is the difference between ("CMDC") and   CMDC is a quick and easy way to look up some potential commercial lenders, but it does NOT provide a way for you to apply online to any of them., on the other hand, provides you with a way to actually submit your commercial loan to wave after wave of hungry commercial lenders, six lenders at a time.


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Topics: HVCRE loans

Why Mortgage Funds Fail

Posted by George Blackburne on Thu, May 18, 2017

Panic.jpgOver two-hundred new hard money mortgage funds have arisen from the ashes of the Great Recession. After all, its relatively easy to hire an attorney to create the legal documents to form a new mortgage fund, and private investors are flocking to these brand new outfits for a chance to earn double-digit returns. Unfortunately many of these private mortgage investors may be doomed to suffer large lossess when these new mortgage funds almost inevitably fail.

Here's why: Most hard money mortgage funds only make bridge loans - loans with terms of two years or less. The sponsor makes two to three points for originating each loan, plus maybe 75 bps. for servicing. The bottom line is that the sponsors of these mortgage funds make 70% of their dough from originating new loans, as new deposits flow into their pools and as old loans pay off. Okay. There is nothing morally wrong with this, right? Right?


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Unfortunately, horrible real estate slumps seem to hit every seven to twelve years. Blackburne & Sons has been in business for 37 years, and we have suffered through three commercial real estate crashes of 45%.


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When real estate values fall 20% to 45%, the losses to these hard money mortgages funds start to mount. Once the investors start to smell these losses, they panic and demand their money back. Millions of dollars flow out of these mortgage funds, and hardly a penny flows back into them.

Soon the Sponsor has no new money with which to lend, so his loan fee income virtually disappears. This last sentence is so important that I ask you now to please read it again. Remember, this loan fee income used to constitute 70% of the Sponsor's income. Without nearly enough income to pay salaries, rent, and overhead, the Sponsor is eventually forced to close his doors.


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Without the sponsor to shepherd the collection efforts- making collection calls, filing foreclosure, getting borrowers out of Chapter 11 Bankruptcy, hiring attorneys, hiring foreclosure companies, hiring contractors, hiring property cleanup crews and hiring real estate brokers - this portfolio of once decent loans invariably gets crushed. Eventually the government moves in to clean up the mess. Greedy attorneys, trustees, and accountants then feast, the investors get fleeced.



Am I exaggerating? There were aound 150 hard money mortgage funds in business before the Great Recession. Fewer than six survived. The next time you get solicited to invest a large portion of your retirement funds into a mortgage pool yielding 10%, ask the Sponsor, "Was the fund operating in 2007?"

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Topics: Mortgage Funds

Feedback From the Crittenden Conference

Posted by Tom Blackburne on Wed, May 10, 2017

The Crittenden Real Estate Finance Conference is one of the most prestigious conferences in the entire commercial real estate finance industry.  Folks, these are the Big Boys.  They talk casually about deals with capital stacks (a first mortgage plus a mezzanine loan plus preferred equity plus joint venture equity plus the developer's equity contribution) as large as $100 million.  My son, Tom Blackburne, and I attended this conference last week.  Here are his observations:

May 8, 2017  

I recently attended a Crittenden Conference in Costa Mesa, CA, where all the big-wigs (Citi, Wells Fargo, Blackstone, etc.) spoke about the state of the current market and gave their projections on the future. To no surprise, just about every panel that spoke discussed what opportunities they are seeing in the marketplace.  Retail is on the out, because the "Amazon Effect" is well underway.  There is no longer a high need for retail space when e-commerce is dominating the industry.  Even companies like Wal-mart are now shipping groceries to your doorstep.  As a result, the shipping (trucks, boats, planes, etc.) industry is hot and projected to increase in the foreseeable future.


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My dad asked the panel about a new term they were frequently using - Last Mile Retail.

Last Mile Retail is the latest topic buzzing through discussions of industrial real estate. It refers to the final stage of online purchasing and the travel of goods to the buyer from a distribution center. The obvious benefit is short lead-time delivery options for retailers/wholesalers to transport products to consumers at their place of business or residence.

Industrial is also hot.  Opportunistic lenders and investors should really be considering multi-tenant industrial properties in primary and secondary markets, especially in gateway and 24-hour cities.  C-Loans is also looking to capitalize on the opportunities presented in the current marketplace by adding lots of these new private bridge/construction lenders, unregulated family offices, etc. to our portal!

At the conference, there was an overarching sense of optimism, despite the obvious uncertainty of what to expect.  The Trump factor, I thought, would be a big topic and area of concern, but I was wrong. Everyone who spoke, shared the same opinion: Trump's regime will only have a marginal affect on the real estate market as a whole.  Trump plans to look at the current regulations affecting the banks and other regulated lenders, but even if he makes some changes, the Regulators (the companies doing the actual auditing) will be very slow in changing their practices and mentalities.


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On this point, the most highly discussed topic was Construction Lending.  It is incredibly difficult to get conventional construction financing right now, because of the HVCRE requirement.  This is a term you need to remember: High Volatility Commercial Real Estate.  HVCRE has put restrictive stipulations on what is considered equity, amongst many other restrictions, in response to the Great Recession.  One-third of all community banks that failed in the last downturn were due to bad A&D lending practices.  There are 2,500 fewer banks now than in 2008.  Who is capitalizing on this gap in the marketplace?  Private, unregulated construction lenders.  Can anyone guess how many new small banks were formed in 2016?  Just one. 

The other major topic of the conference was the dichotomy of the mortgage broker's mind set.  What I mean here is that a broker working a lead has two factors driving him one direction or the other: Certainty of Closing or Easiness/Speed of Processing.  Good brokers will look at a deal and instantly know which direction to take.  Some guys default to the lenders who move the quickest.  While other guys stay loyal and bring deals to their lenders that they know close loans.  This is where Blackburne & Sons, our sister company, makes its name. 


Blackburne & Sons has never been the quickest, but you bet damn sure they close loans.  They were one of the few small-balance hard money lenders actually closing loans during the Great Recession. In large part to the leadership and wise underwriting of Angelica Gardner, the EVP, and the unrelenting nature of Alicia Gandy, the longest tenured employee and hardest working loan officer in the company. 

Private-money lenders like Blackburne & Sons are not competing with community banks anymore.  They are competing with unregulated private bridge lenders that close loans quickly.  Many of which, can be describe as non-prime, wall street lenders.  Please read my father's blog for more information on this type of lender, which you can find here. Blackburne & Sons has been in business for 37 years and will remain in business for a very long time, because of the concept of Certainty of Closing.


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My final note on the Crittenden Conference: If you know my father, George Blackburne, and have read any of his work, then you will know the number 1 lesson in all CREF is that, "Bankers make loans to their friends."  What he means here is that banking is relationship-driven.  Banks only want to lend money to repeat customers, people whom they have a previous relationship with.  Remember this concept before asking Wells Fargo for a new construction loan.


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On a different note, I want to take this time to publicly thank Michael (Mick) Carlson for his years of managing C-Loans effectively.  Mick has now moved on to bigger and better things, and we genuinely appreciate his service and wish him the best of luck.  Going forward, I, Tom Blackburne, will be your point of contact for all things C-Loans.  Please reach out to me for any help with your lending parameters, questions, or even for a simple introduction.  I appreciate your time and hopefully together, we can collectively make C-Loans more profitable this year, and in turn have more loans for you to close!





Thomas H. Blackburne 
General Manager
(574) 210-6686 Best
(916) 338-2328


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Topics: Crittenden Conference