USDA Financing for Multifamily Projects

While USDA loans have a measure of popularity in the residential mortgage sector, unbeknownst to them, many multifamily developers could benefit from USDA financing as well.

When it comes to multifamily development, it may be hard for developers and investors to gain traction and obtain funding for a project in a “rural” area. For many rural areas in the United States, while the area median income may be on the low side, the demand for rental properties and apartment housing is still reasonably high. Sure, the more popular affordable housing finance vehicles can be excellent starting points for investors looking to fund a rural development project, but are they truly the best option?

The United States Department of Agriculture, or USDA, is a federal agency that is in charge of regulating, overseeing, and enhancing the farming and agricultural industries in the United States. One lesser-known responsibility of the USDA is rural development, to which there is even a devoted branch of the organization focused strictly on that endeavor. As it turns out, the proliferation of affordable housing actually aligns perfectly with the USDA mission statement, and the Rural Development branch absolutely delivers.

Born from Title V of the Housing Act of 1949 and governed by 7 CFR § 3560, the USDA’s Multifamily Housing Direct Loan and Grant Program provides top-tier financing for rural projects. The USDA Rural Development branch’s various direct loan, rental assistance, and loan guarantee programs enable the organization to provide developers and investors of affordable housing projects with the necessary financial assistance required to develop quality multifamily housing in rural areas. Even though USDA loans are rarely discussed, the benefits of these loan products have been widely lauded in the residential mortgage sector, and the multifamily offerings are nothing to scoff at either.

Among these different loan programs are the Section 515 Rural Rental Housing Program and the Section 521 Rural Rental Assistance Program. The Section 515 Rural Rental Housing Program facilitates direct loans to eligible borrowers who are developing property in rural areas. Funding from the Section 515 program can be used for a variety of purposes including the construction, acquisition, rehabilitation, and development of multifamily housing.

To achieve maximum debt leverage when financing a development through the Section 515 program, developers should pay extra close attention to the “loan to total development cost ratio”. Under the program, the USDA is willing to lend up to 95%, 97%, or 102% of the appraised value or total development cost of the project, depending on the developer’s possible use of Low Income Housing Tax Credits in conjunction with the Rural Rental Housing Program. In addition to various restrictions on the use of funds, the affordability component of the Section 515 program is further strengthened due to the USDA RD branch’s requirement that a borrower of Section 515 Program funds encumber the underlying development with a restrictive covenant that requires compliance with predetermined rent restrictions.

In terms of affordability, another possible route developers can take is to use the Section 515 program in conjunction with the Section 521 Rural Rental Assistance Program. The USDA RD’s 521 Program allows developers to obtain project-based rental subsidies to assist tenants who are unable to afford rent in a development that was financed through the Section 515 Program. With the Section 521 program, The USDA will pay the developer the difference between a tenant’s monthly rent and their contribution to monthly rent, which is measured at 30% of the tenant’s adjusted income.

The USDA may not be the biggest name in multifamily finance, but for investors and developers looking into rural areas for their next project, USDA Rural Development programs may be the best source of funding.