FHA HUD Section 221(d)(4) – Construction or Substantial Rehabilitation of Multifamily Properties

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Eligible Properties
Market rate, low-to-moderate income and subsidized multifamily properties.

Commercial Space Limitation
Limited to 25% of net rentable area and 15% of underwritten effective gross income (up to 30% of underwritten EGI permitted in Urban Renewal and Opportunity Zones).

Minimum Scope of Work
All new construction plus renovation of existing buildings that meet one of the following conditions.
a) Renovation costs more than $15,000 per unit times a local cost factor (typically 190%-270%).
b) Renovation will replace more than 50% of two or more building systems: electrical, plumbing, mechanical, building envelope, structural.

Davis Bacon Wages
Payment of prevailing wages, as determined by the Department of Labor, is required for all contractors and subcontractors.

Single-asset, special-purpose entity, either for profit or nonprofit.


Interest Rate
Single fixed rate for both the construction I-O period and the permanent loan term, determined by market conditions at time of rate lock. Rate lock deposit is 0.5%, refunded at closing.

Loan Parameters
Loan amounts up to $75 Million.

Property Type Maximum Loan to Eligible Cost³ Maximum Debt Service Coverage
Subsidized¹ 90% 1.11x
Affordable² 87% 1.15x
Market Rate 85% 1.18x

Loan amounts $75 million and above, though HUD may impose more restrictive limits on loan amounts above $100 million.

Property Type Maximum Loan to Eligible Cost³ Minimum Debt Service Coverage
Subsidized¹ and Affordable² 80% 1.25x
Market Rate 75% 1.30x

¹At least 90% of the units covered by a project-based Section 8 contract.

²Regulatory Agreement in place with minimum set-aside (e.g., 40% of units at 60% AMI, or 20 % of units at 50% AMI) in effect for at least 15 years after the new loan close.

³Eligible cost includes hard costs and most soft costs plus the as-is value of project or land. Examples of ineligible costs include refundable reserves, preliminary marketing costs, and offsite improvements.

In addition, loan cannot exceed the programmatic per-unit maximum as adjusted by HUD for project location.

Additional Terms

Term and Amortization
Interest-only term during construction period and cost certification followed by 40 years fully amortizing.

Prepayment and Assumption
Negotiable, with best pricing for 10 years of call protection (can be a combination of lockout and/or penalty); loan is fully assumable subject to HUD approval.

Prior to construction, reserves for interest, taxes, insurance, working capital (2%-4% of the loan), and initial operating deficit; balances will be released to the borrower after 6 consecutive months of break-even operations.

Post construction, taxes, insurance and mortgage insurance premium will be escrowed monthly and a capital needs reserve maintained with monthly deposits in accordance with HUD guidelines on a property-specific basis (minimum $250/unit/year).

Mortgage Insurance Premium
0.65% annually (0.70% for urban renewal projects under Section 220, 0.25%-0.35% for affordable and subsidized properties, and 0.25% for properties with Green certification from a list of accepted Green standards); amount due during construction term paid up front at closing.

HUD Application Fee
0.15% of estimated loan amount due with submission of initial application, plus 0.15% due with final application (entire 0.30% due with final application for affordable and subsidized properties). HUD Application Fees are reduced for properties in Opportunity Zones.

Third Party Reports
Appraisal, Market Study, Environmental, and future Capital Needs Assessment, plus a review of the final construction and architectural documents by a HUD-approved third party contractor.

Varies by transaction, but typically 12 months from due diligence to closing.