Background

This luxury townhouse-style development has attached two-car garages for every apartment unit. The project also offers a large clubhouse, fitness center, pool and outdoor fireplace. The ownership was syndicated and the general partner was experienced in commercial real estate development and FHA programs. The replacement cost of the project was $20.6 million.

The Challlenge

This replacement cost included a $1.7 million FHA developer fee that covered all project equity and reserve requirements. The borrower entity owned the land outright with no debt. For that reason, the borrower entity received a cash payment at the closing for the land value in excess of cash closing requirements.

Outcome

Since this transaction closed, HUD has placed restrictions on borrowers taking closing cash on new construction projects. However, where there is significant net land value, it still is possible for developers to come to the closing with little or no cash and receive a net cash payment once construction is complete.