The jobs are fantastic and being located near the heart of these communities is even better, but the areas are still challenged and there is still little appetite or demand from locals to own in these areas either as investors or owner occupants.From 2007 to really 20011/2012 it was not so much that the rents dropped because of value, it was the challenge of being able to get a qualified resident into a property and keep them there.  

Starting initially on the West Coast in San Francisco and other cities in California, companies like Waypoint, Invitation Homes, American Homes 4 Rent and Tricon began to enter the single family rental asset class with lots of cash and an appetite for disruption.

(depending on the lender this will be 6 months - a year)  If you're able to find off market distressed deals you can still find reasonable cashflow but still have the appreciation benefits of a bigger market.At the end of the day, it boils down to what your appetite and long-term strategy is.

@Jordan Fair It has nothing to do with any "laws", only the different risk appetites of individual lenders and their guidelines. 

Has anyone found any private lenders that have an appetite for such deals? 

All buyers have a different risk appetite. 

Call them up, ask to speak to their loan department and ask them what their appetite is for smaller commercial apartment buildings in the 6-8 unit range.Good luck.

However while it sounds like your CU has an appetite for helping you do 100% levered financing you should do as many as you can before they come to their senses :)..

You may find better luck/options with local banks/CUs or even private money in the subject property's market area, but with nationwide institutional lenders, you will find that most (if not all) have no appetite for them.

It's a balance between getting a project done, an appetite for fighting city inspectors, and pragmatic investments.