Commercial Real Estate Division
Commercial Real Estate - HUD FHA 221(d)(4)
HUD FHA Section 221(d)(4) Construction Loan for Multifamily Properties Program Guidelines:
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Eligible Properties:
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The 221(d)(4) (for profit) and 221(d)(3) (non-profit) programs provide loans for the construction or rehabilitation of detached, semidetached, row, walk-up, or elevator-type rental or cooperative housing containing 5 or more units. Independent living facilities may qualify as long as all services are optional and fees from services and meals are not included in underwritten rents.
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The program is available for market rate rental housing or for properties accepting rental assistance, either tenant based or project based.
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Commercial space permitted up to 10% of gross rent-able square feet and a maximum of 15% of gross rental income.
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HUD FHA 221(d)(3):
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In 2013, HUD has suspended the Section 221(d)(3) program unless the subject property receives Low Income Housing Tax Credits (LIHTC). Without LIHTC the program would require positive credit subsidy which is Congressionally appropriated and higher Mortgage Insurance Premiums (MIP).
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Statutory Mortgage Limits:
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The (d)(4) and (d)(3) programs have statutory mortgage limits which vary according to the size of the unit, the type of structure, and the location of the project.
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Prevailing Wage Standards:
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Contractors for new construction and substantial rehabilitation projects must comply with prevailing wage standards under the Davis-Bacon Act. Section 221(d)(3) mortgages require appropriated credit subsidy, which is limited.
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Insured Mortgage Amounts:
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Maximum loan amount will be the lesser of:
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1. A total percentage of eligible development cost, including as is value of land for new construction and as is value of property for substantial rehabilitation, as follows:
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​83.33% for market rate transactions
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87% for affordable transactions
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90% for projects with 90% or greater rental assistance
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​FHA mortgage statutory per unit limits adjusted for local high cost factor;
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An amount that achieves a minimum debt service coverage, as follows:
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​1.20 DSC for market rate properties
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1.15 DSC for affordable transactions
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1.11 DSC for projects with 90% or greater rental assistance
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​Cost of offsite improvements, FF&E, marketing, construction contingency and operating deficit reserve excluded from loan amount.
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Maximum CLTV:
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100% is possible with Joint Venture
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Substantial Renovation:
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Cost of improvements must exceed:
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​$6,500 per unit (adjusted for local high cost factor);
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5% of the “as rehabbed” appraised value.
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​Replacement of 2 or more major building systems is required.
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Eligible Locations:
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All 50 states, Puerto Rico, U.S. Virgin Islands, Guam.
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Fixed Rate Term:
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Actual construction period plus 40 years (fully amortizing with interest only payable during construction period).
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Minimum DSCR:
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1.20.
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1.15 for affordable properties.
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1.11 for project based rental assistance properties.
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Minimum Occupancy:
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Underwritten to a maximum of 93% occupancy.
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Prepayment Penalty:
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Negotiable - typically a two-year lock out followed by a step down premium (e.g. 8,7,6,5,4,3,2,1).
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Guarantee:
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Non-recourse for most loans subject to standard carve-outs.
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Assumable:
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Yes, subject to lender approval.
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Escrows:
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Replacement reserves required in accordance with HUD guidelines;
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Taxes and Insurance escrowed monthly (post construction);
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Working Capital Reserve equal to 4% of loan amount (post in cash or LOC);
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Operating Deficit Reserve equal to 3% of loan amount, or greater as determined by HUD at commitment (post in cash or LOC).
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Third Party Reports:
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Appraisal, Market Study, Complete Project Construction Cost Breakdown, and Plans and Specs Review are required.
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Sponsor Requirements:
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Experienced owner operators.
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Minimum credit and financial capacity requirements.
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HUD experienced development team highly recommended.