For much of the past couple of years, market-rate developers have relied on FHA 221(d)(4) constructions financing to start new projects. Without the HUD program, it’s hard to imagine many deals being started in this cycle at all.

While new requirements, a full pipeline, and an overwhelmed staff have stymied many developers seeking FHA financing, there is good news. On a very limited basis, the developers who spoke on alternative construction financing sources at the MFE Conference in Las Vegas last week say that they are starting to get conventional financing.

The Dinerstein Cos., a Houston-based developer, has started four conventional projects in 2010 and has another six in the pipeline for 2011. And Atlanta-based Wood Partners, a company that faced some serious challenges during the downturn, has recovered to start six projects this year. Four of those are backed by conventional financing. “We’ve seen a real positive turn in the past six months,” says Joe Keough, Wood’s CFO.

Brian Dinerstein, a partner at The Dinerstein Cos., says he thinks it’s possible to get deals that are $28 million or less. Go higher than that and things get trickier. He says in that deal range he can get leverage at around 65 percent, though some recourse is required.

Keough says getting deals started in this tough debt financing environment by putting more equity in deals (40 to 45%). “In our opinion, the deals we start in 2010 and 2011 will be some of the most profitable we do in this environment, and we as a company will generate significant profit for our equity partners and with Wood, even at lower leverage levels.”

In fact, Keough says the company has started deals with lower leverage, like a project in San Diego where it only financed $55 million of a $90 million total project costs, to get the construction debt “ball” rolling for future deals. After the company announced the San Diego deal via a press release, Keough says a number of other lenders called wanting to be involved in future projects.

Both Jack Bauer, a senior vice president in Grandbridge Real Estate Capital’s McLean, Va., office, and Keough told attendees that the key to get construction financing was having a solid balance sheet. “Get your arms around your portfolio, understand all of your assets, and be prepared to explain them to your lenders,” Bauer says.

FHA Struggles Remain
For years, FHA was a little-used market-rate construction financing vehicle. Then the financial markets collapsed in late 2008, and the federal government didn’t look like such a bad option for construction financing. “FHA [usage] is off the charts compared to two years ago,” Bauer said.

That’s meant that there are some backups. Bauer said last year it took nine to 12 months to get an FHA loan done. Now, the best case is 12 months. Robert Greer, the panel moderator and president of Marlton, N.J.,-based Michaels Development Co., sees the same issues. “FHA is the best debt to get if you have a year to play around with HUID,” he said.

Still, FHA does offer attractive terms. That’s why Keough wants to use the program as much as possible in the next 18 months, knowing that the process limits the amount of work he can do with HUD. "It’s tremendous debt, but it’s not something you can build your company around,” Keough says.

But one attendee, Peter A. Wessel, first vice president and senior loan originator at the Denver office for Love Funding, did stand up to defend FHA. He says the agency received a number of new applications before it changed it standards around Labor Day. “This is a case of indigestion, where FHA has to swallow a lot of new applications,” he said.

Wessel went on to say that new process, where applicants would get an early meeting with HUD to determine a project’s viability and would have to pay an application fee (which would limit those speculative applications in the pipeline), could ultimately help.

Whether it’s from an improved FHA or new sources of construction financing, Keough still thinks financing is the key for Wood to make a major dent in its 6,000-unit pipeline. “Construction financing is still the critical piece of getting it done,” Keough says.

There could be other sources coming along, too, but those aren’t as developed. “We’re seeing interest from regional banks and life insurance companies, but those are in their infancy,” Bauer says.