Emerging Trends: Office-to-Residential Conversion

At their fall meetings in Los Angeles earlier this month, the Urban Land Institute unveiled their annual Emerging Trends in Real Estate® for the US and Canada for 2024. Like the fall meetings themselves, ULI’s Emerging Trends is filled with uncertainty about the current state and near-term future of commercial real estate. The office sector – and downtown office properties in particular - are struggling amidst rising interest rates, oversupply, and changing patterns of work. An investment banker quoted in Emerging Trends summed it up this way:

“The fortress investments, the super secure investments in real estate—what the heck happened? Where did they go? Malls and office buildings were the storehouses of value, the great inflation hedges. And now the only thing that has really stood up over time has been multifamily.”

Faced with a seeming sea change in office, much of the discussion at the ULI fall meetings centered around the future of office and the downtowns in which they are located. Office-to-residential conversions were on everyone’s mind, and again, the path forward was uncertain.

A recent article in the Wall Street Journal entitled “Turning Offices Into Apartments Is Getting Even Harder”, pointed to the challenges of office-to-residential conversion – financing, construction costs, and slow approvals, among many others. And then, there are the challenges inherent in office floor plates ill-suited to residential uses and the risks inherent in major rehab projects.

Still, the Journal article cites CBRE as seeing a sharp increase in office conversions in the coming year. While some developers will wait for the value of underutilized office buildings to fall to their land value or purchase properties from lenders’ REO portfolios, many are finding creative ways to convert office to residential.

The ULI fall meetings included presentations by developers and design firms such as Los Angeles-based architects OMGIVNING on how even 1980s vintage office buildings can be converted to high-end multifamily properties.

Not too long ago, “return to cities” was the watchword in CRE and multifamily. The pandemic reversed those trends. Now, even in uncertainty, developers are looking for opportunity in multifamily office-to-residential conversion. The future of cities and their downtowns may depend on it.

To discuss your options or plans for your next multifamily project, AGM is ready to listen and lend.

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About AGM Financial

Founded in 1990, AGM is a leading FHA lender and GNMA seller/servicer. From new construction and substantial rehab to acquisition or refinance — for both market-rate and affordable projects — AGM gets the deal done. Family-owned with over 30 years of experience, the firm has closed over $10 billion in FHA-insured multifamily project loans nationwide. We underwrite, fund, and service all of our loans. Developers and owners can count on AGM to be accessible, transparent, consistent, and ready to lend. From new construction to substantial rehabilitation to acquisition and refinance — for both market-rate and affordable projects — we can get the deal done. To learn more about AGM, call 800.729.4266 or visit agmfinancial.com.

7 Crystal Merit Awards for ONE and TWO LIGHT Luxury Apartments

Congratulations to The Cordish Companies on the One Light and Two Light Luxury Apartments for receiving SEVEN Crystal Merit Awards by the Apartment Association of Kansas City during their annual awards banquet. The Crystal Merit Awards event honors the best in multifamily development and management and recognizes outstanding individuals, teams and properties for their accomplishments and service in the industry.

Among the seven awards received, Two Light was named PROPERTY OF THE YEAR. Additional recognitions include:

• Best Social Media Presence of the Year – One Light

• Clubhouse/Leasing Office of the Year – Two Light

• Property Website of the Year – Two Light

• Assistant Manager of the Year: Sonya Guzman – Two Light

• Best Resident Activities of the Year – One Light & Two Light

• Resident Services/Concierge of the Year: Adeola Ajayi – One Light & Two Light

This is great news for the entire residential team at The Cordish Companies!

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About AGM Financial

Founded in 1990, AGM is a leading FHA lender and GNMA seller/servicer. From new construction and substantial rehab to acquisition or refinance — for both market-rate and affordable projects — AGM gets the deal done. Family-owned with over 30 years of experience, the firm has closed over $9 billion in FHA-insured multifamily project loans nationwide. We underwrite, fund, and service all of our loans. Developers and owners can count on AGM to be accessible, transparent, consistent, and ready to lend.  From new construction to substantial rehabilitation to acquisition and refinance — for both market-rate and affordable projects — we can get the deal done. To learn more about AGM, call 800.729.4266 or visit agmfinancial.com.

Transformative Baltimore Project completed with HUD Support and first mortgage originated by AGM

HUD recently announced the completed construction of Marshall Gardens in Baltimore, Maryland. This project was sponsored by The Community Builders, Inc., a leading non-profit affordable and mixed-income housing developer.

This affordable multifamily development was made possible through a HUD insured loan along with 9% LIHTC and several supplemental loans (details in HUD’s Press Release). The community contains 87 units located throughout three city blocks, including five fully rehabbed row houses plus the new construction of 27 rental apartments and 55 row homes.

Additional details in HUD’s Press Release here.

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About AGM Financial

Founded in 1990, AGM is a leading FHA lender and GNMA seller/servicer. From new construction and substantial rehab to acquisition or refinance — for both market-rate and affordable projects — AGM gets the deal done. Family-owned with over 30 years of experience, the firm has closed over $9 billion in FHA-insured multifamily project loans nationwide. We underwrite, fund, and service all of our loans. Developers and owners can count on AGM to be accessible, transparent, consistent, and ready to lend.  From new construction to substantial rehabilitation to acquisition and refinance — for both market-rate and affordable projects — we can get the deal done. To learn more about AGM, call 800.729.4266 or visit agmfinancial.com.

HUD Picks up the Pace!

HUD recently announced the hiring of NuvoSum, a third-party underwriter, to provide underwriting support to help clear the backlog of multifamily applications. An unprecedented influx of applications for mortgage insurance has been driven by historically low interest rates on long-term nonrecourse FHA financing. This resulted in a long line of borrowers waiting for commitments. The contract was awarded in mid-December 2021 and is already yielding results by reducing delays in several regions of the country.

NuvoSum will underwrite 223(f) and 223(a)(7) refinance applications. HUD will retain underwriting for those which require review by their National Loan Committee and projects with new tax credits or significant rehab – so-called “heavy (f)s”. Expanding their processing capacity with NuvoSum is speeding the review of refinances and freeing HUD staff to process 221(d)(4) applications for new construction and rehab projects. This really is good news for borrowers.

If you have a new construction/rehab project or are looking to refinance an existing deal, this is a great time to get started.

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About AGM Financial

Founded in 1990, AGM is a leading FHA lender and GNMA seller/servicer. From new construction and substantial rehab to acquisition or refinance — for both market-rate and affordable projects — AGM gets the deal done. Family-owned with over 30 years of experience, the firm has closed over $9 billion in FHA-insured multifamily project loans nationwide. We underwrite, fund, and service all of our loans. Developers and owners can count on AGM to be accessible, transparent, consistent, and ready to lend.  From new construction to substantial rehabilitation to acquisition and refinance — for both market-rate and affordable projects — we can get the deal done. To learn more about AGM, call 800.729.4266 or visit agmfinancial.com.

Good news from HUD! COVID Escrows Are No More!

HUD has published Mortgagee Letter (ML) 2022-03 ending all of the temporary COVID-19 escrow requirements imposed in April 2020 by ML 2020-11, which was a response to the potential economic impact of the pandemic.  In recent months, it has become clear that most multifamily markets have weathered the storm, and many are stronger now than before the pandemic began. HUD has reevaluated the escrow requirements and concluded that they are no longer necessary. Loans that already closed with the escrows in place will continue to follow the prior policy. 

Lopa Kolluri, Principal Deputy Assistant Secretary for the Office of Housing and FHA, said “Mortgages in FHA’s Multifamily insurance portfolio experienced fewer challenges than expected. Because of this, we are in a position to unleash multifamily development capital by lifting these underwriting safeguards.”

This is great news for borrowers and we thank HUD for taking this action.

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About AGM Financial

Founded in 1990, AGM is a leading FHA lender and GNMA seller/servicer. From new construction and substantial rehab to acquisition or refinance — for both market-rate and affordable projects — AGM gets the deal done. Family-owned with over 30 years of experience, the firm has closed over $9 billion in FHA-insured multifamily project loans nationwide. We underwrite, fund, and service all of our loans. Developers and owners can count on AGM to be accessible, transparent, consistent, and ready to lend.  From new construction to substantial rehabilitation to acquisition and refinance — for both market-rate and affordable projects — we can get the deal done. To learn more about AGM, call 800.729.4266 or visit agmfinancial.com.

RealAtom's New Lender Podcast with AGM's Steve Rudow, SVP

Watch and listen here.

Stephen Rudow, SVP of AGM Financial Services, Inc. discusses HUD's attractive underwriting criteria and large loan sizing with Host Tyler White of RealAtom's New Lender Podcast. Learn how a HUD-insured mortgage is a great option to finance your property.

“The HUD-insured mortgage is a great option to finance your property”

FHFA Public Listening Session - Invited Speaker: Myles Perkins

On April 30, 2021: FHFA hosted a public listening session to receive input and feedback on how small multifamily lenders, such as depository institutions, CDFIs, credit unions, and housing finance agencies, might gain access to Fannie Mae and Freddie Mac multifamily products.

Myles Perkins, President of AGM Financial Services, was a speaker and provided the following insights:

AGM is a privately held nonbank FHA multifamily lender based in Baltimore. We've financed more than $8 billion of FHA insured loans. We have 21 employees and have been in business for 30 years.

We're going to originate and close about $1 billion of financing this year, which will likely put us in the top ten for FHA lenders. But most of our competitors are larger financial institutions who also have GSE platforms. We've always been interested in obtaining access to the GSE programs, but whenever we’ve reached out to the GSE multifamily contacts, we haven't made much progress. And our understanding is that Fannie and Freddie have not been issuing new multifamily licenses, except on rare occasions in the last 10 to 15 years.

It's our hope that FHFA will issue direct guidance that Fannie and Freddie must serve with equal pricing qualified small lenders. The GSEs actively encourage and approve qualified small lenders in the single family space. If the FHFA does not issue new policy, small multifamily lenders will remain shut out from GSE access and execution.

Our clients range in scope and size, but we have a large number of nonprofit clients who focus on affordable housing. We've financed more than 30 RAD deals for housing authorities across the country, and more than 40 4% LIHTC projects in Maryland alone. And when I say LIHTC, I mean Low Income Housing Tax Credits, I want to be clear with the audience.

While we have many large, sophisticated clients, we also have smaller clients who fly under the radar of larger financial institutions. The FHA product is an excellent program, but it can often take six to nine months or longer to obtain a commitment or rate lock. Fannie and Freddie executions can often be done and closed in 90 days or less.

The capital markets have been extremely volatile for the last 15 years. Rates can move dramatically. And the uncertainty of timing execution with FHA is very difficult on projects that are affordable, and often debt service constrained. A spike in rates could easily reduce loan proceeds, which are often needed to inject capital into apartments.

To get a sense of what I mean by affordable, the most common type of low income housing tax credit deals are designed for residents who are making 60% of area median income. In Baltimore, the income at 60% AMI for one person is $42,000 a year. And the maximum rent for that person in a LIHTC project is $1,060 inclusive of utilities. And $990 exclusive of utilities.

So anyone who's familiar with kind of the northeast and Baltimore can see it serves people who are working, but at the lower income scale, and who need access to quality affordable housing at reasonable rents. This reduced type of rent level isn't possible without the subsidy from the LIHTC because these rents wouldn't support the costs of construction for new apartments.

For FHA, we have a refinance program called a 223-F, which is a 35 year fully amortizing fixed rate mortgage. It's a nice product, but it doesn't fit all transactions and isn't that flexible. Whereas, Fannie and Freddie can offer five, seven, ten, 12 year terms, often fixed or floating, sometimes as interest only periods.

For affordable housing projects, that flexibility allows the borrower to maximize the plan that benefits the residents the most. We see the need for affordable housing in all the markets that we’re active. And the ability to offer GSE debt would mean that owners can move more quickly, invest more capital and preserve more affordable housing.

I think on the surface, it's hard sometimes to see the direct connection to the resident. But the way a project is financed has tangible effects on the ability to put LIHTC place, make repairs, and provide quality home for residents.

I think that's really the key here is that we're local, we're in small markets, and we have smaller clients who aren't often serviced by larger financial institutions who are focused on larger projects, larger clients, larger sponsors. And so I think having additional access to the GSEs for smaller lenders would enable more capital to flow to smaller, affordable nonprofit projects, which directly impact residents.

To learn more about your options with FHA then contact AGM’s Origination Team.

HUD Releases Revised MAP Guide

HUD refined and updated their guidance for underwriting and processing applications for FHA-insured Multifamily loans. The Guide has two new chapters on Energy Conservation and Closing Procedures. Implementation is optional until March 18, 2021.

To see how AGM can make your deal work for you, contact Steve Rudow at 443.573.2061 or srudow@agmfinancial.com

AGM Update: HUD Multifamily Finance During COVID-19

On 1/4/2021, HUD published answers to several new questions and answers, expanding and revising their guidance during the COVID-19 emergency.

We recommend Borrowers read all of HUD’s guidance and remain in frequent contact with their Lenders. AGM’s website features links to HUD’s COVID-19 related publications for your convenience. Highlights from the new Q&A’s include: 

• Allows the use of property common areas and parking lots for flu and/or COVID-19 vaccinations and testing by healthcare service providers.

• SBA PPP and EIDL loans are subject to the Department’s standard subordinate financing requirements.

• Reminder that the CDC eviction moratorium was extended through January 31, 2021.

• 10-year CNA updates are postponed for certain properties.

• Additional flexibility for Site inspections for CNAs and lenders was extended to May 31, 2021.

• Additional time is allowed for RAD projects to sign tenant leases after conversion.

• Added guidance on the calculation of cash-out escrows for “3-year” Section 223(f) refinances with a COVID escrow.

We hope you and your colleagues, friends and family stay safe and healthy as we all try to limit the impact of COVID-19.

Thank You MD DHCD!

Great news! Maryland DHCD has restored the “Taxable/Tax Exempt” bond structure for all 4% LIHTC projects with state subordinate debt and HUD-insured mortgages. See MF Housing Notice 20-15.

What's on Your Plate? "Order from the HUD Menu", Scotsman Guide Article, August 2020

Read Scotsman Guide - August 2020 article, "Order from the HUD Menu. This Agency provides many options for funding apartment deals" by author and AGM Originator, Steve Rudow. Read Article Here.

AGM Update 8.6.2020: HUD Multifamily Finance during COVID-19

HUD recently published answers to several new questions and answers, expanding and revising their guidance during the COVID-19 emergency.   

We recommend Borrowers read all of HUD’s guidance and remain in frequent contact with their Lenders. AGM’s website features links to HUD’s COVID-19 related publications for your convenience. Highlights from the new Q&A’s include: 

• HUD addressed several issues for Owners and Agents including tenant testing for COVID-19, a tenant’s positive test results, house rules to require face coverings, and tenant income calculations.

• Clarification that eviction prohibitions apply to the entire time a mortgage is under forbearance, including any extensions.

• Audited Financial reporting deadlines have been extended from June 30, 2020 to September 30.

• Income Certification procedures during the COVID-19 emergency for tenants with HUD assistance were revised and clarified in several Q&A’s; electronic signatures from applicants are acceptable.

• With certain conditions, HUD has relaxed the inspection requirements for Lenders and CNA needs assessors until the earlier of September 30, 2020 or when the COVID-19 national emergency is lifted. Certain minimum unit sampling and additional due diligence is required. This includes the RAD program.

• HUD’s Asset Management is permitted to accept electronic signatures on all subsidy administration documents. For real estate transactions, the HUD closing attorney will have to advise if electronic signatures are acceptable in the recording offices of the local jurisdiction. Documents not being recorded may be signed electronically (also see Notice H 20-4).  

We hope you and your colleagues, friends and family stay safe and healthy as we all try to limit the impact of COVID-19.

AGM’s website features links to HUD’s COVID-19 related publications for your convenience.