HUD FHA 221(d)(4) Transaction FAQs

HUD FHA 221(d)(4) New Construction and Substantial Rehabilitation transactions involve a great deal of planning. In order to understand everything that goes into these transactions, from third party reporting, to restrictions on cash distributions, monthly escrows, and more, review the below frequently asked questions.

HUD FHA 221(d)(4) New Construction and Substantial Rehabilitation Transactions Questions

Questions & Answers

What are the advantages of the 221(d)(4) construction loan for multifamily apartments?

•    Pay interest only during construction period at the same rate of the permanent loan
•    Secure both the construction and permanent loan at the same time
•    Non-recourse

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What items should a developer have ready to provide for an analysis?

•    Prior multifamily or HUD experience of the development team members which include the borrower/developer, general contractor and management company
•    Include detailed Proforma Operating Statements with as much information as possible on number of units, unit mix, rent projections, and expense projections
•    Estimated construction costs of the project
•    Market research or market study reflecting the demand for additional units that can be quickly absorbed after construction is completed

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What 3rd party reports will be ordered by the lender?

•    Appraisal
•    Market Study
•    Environmental Site Assessment
•    Architectural Plan & Cost Review

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What is the Davis-Bacon Act and how does it apply to FHA?

The Davis-Bacon Act requires the payment of wages that prevail in the locality on projects of a character similar to the work that will be performed on direct federal contracts. The National Housing Act (§ 212) requires Davis-Bacon compliance on multifamily projects assisted with FHA mortgage insurance under Section 221(d)(4).

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Is a working capital escrow required?

Yes, a working capital escrow of 4% of loan amount is required (2% allocated to construction contingency and 2% to working capital expenses).

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What is the approximate timing for a HUD/FHA 221(d)(4) construction loan?

The timing usually takes about 6 to 8 months assuming a MAP one-stage application and about 9 to 12 months assuming a MAP two-stage application (subject to deal specifics).

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Are HUD/FHA 221(d)(4) transactions based on Loan-to-Value (LTV) or Loan-to-Cost (LTC)?

They are based on Loan-to-Cost. (LTC) is a ratio used to determine how much of a development project will be financed by debt versus equity. LTC is defined as the value of the loan divided by the cost of the project. The Loan-to-Value (LTV) is the ratio of the value of a loan to the market value of the property, as opposed to the cost of construction for a project.  LTV is the mortgage amount divided by the appraised value of the property.

Cost Driven Mortgage Limits for HUD/FHA 221 (d)(4)

Market Rate 85% Loan-to-Cost
Affordable 87% Loan-to-Cost
90% or Greater Rental Assistance 90% Loan-to-Cost

 

*Note: Loan amounts in excess of $75MM have higher Debt Service Coverage Ratio (DSCR) limits and decreased Loan-to-Value (LTV) limits.

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Can market rate properties qualify for a FHA/HUD 221(d)(4) construction loan?

Yes. Many class A and B market rate multifamily apartment developments qualify. HUD is known for providing programs that provide financing programs for Section 8, affordable housing, and elderly and disabled, many of their programs can be taken advantage without these components.

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Are there any restrictions on cash distributions?

Yes. Cash flow distribution allowed up to two times per year upon HUD approval of audit. Submission of annual audited financial statements is required.

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Are HUD FHA 221(d)(4) transactions assumable?

Yes. The loan is fully assumable with approvals from both the lender and HUD and assumption fee of 0.05% of the original loan amount.

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What type of monthly escrows are required?

Monthly escrows are required for property insurance, real estate taxes, reserves for replacement and mortgage insurance premiums.

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Are there any commercial space and income limitations?

Yes. The maximum allowable percentage of total net rentable area is 25%, and the maximum allowable percentage of effective gross income is 15%.

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What are a few important factors that HUD considers in their pre-application review?

•    That there is demand for the units proposed and there is not an oversupply in the current proposed market, as well as other proposed units coming online.
•    Environmental remediation at the site that there is removal of pollution or contaminants from environmental media such as soil, groundwater, sediment, or surface water.

 

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What are the requirements to meet to qualify for substantial rehabilitation?

The repairs, replacements, and improvement costs for an existing multifamily apartment property must be more than:

  • 15% of the property’s replacement cost after of all work is completed OR
  • Renovation costs of more than $15,000 per unit as adjusted by the local HUD office OR
  • The cost of replacing two or more buildings, regardless of the cost

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What Third Party reports are required?

  • Appraisal
  • Market Study
  • Environmental Report
  • Projected Capital Needs Assessment

A review of the architectural documents and final construction by a HUD approved third party contractor is also needed.

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