The definition of substantial renovation for HUD and FHA loans is one of the following situations:

• Required replacements, repairs, and improvements that involve the replacement of two or more major building components
• Rehabilitation costs exceed the greater of:
  • 15% (exclusive of soft costs) of the property's replacement cost/ fair market value after required repairs, replacements, and improvements
  • $6,500 per dwelling unit (adjusted by HUD's authorized high-cost percentage)
  • 20% of mortgage proceeds for rehabilitation expenses

Source: HUD Glossary of Multifamily Affordable Housing Preservation Terms

The requirements for a substantial renovation for HUD and FHA loans depend on the type of loan. According to HUD223f.loans, when it comes to HUD multifamily loans, such as the HUD 223(f) loan, substantial renovation of a property occurs when either:

• The required repairs and improvements of a HUD-assisted multifamily rental housing involve replacing two or more major building components, OR
• Rehabilitation costs exceed the greater of:
  • 15% of the property's replacement cost (fair market value - exclusive of soft costs) after completion of all required repairs, replacements, and improvements OR
  • $6,500 per dwelling unit (adjusted by HUD's authorized high cost percentage) OR
  • 20% of the mortgage proceeds applied to rehabilitation expenses

According to hud221d4.loan, substantial rehabilitation of HUD-assisted multifamily rental housing occurs in one of the following circumstances:

• “when the required repairs, replacements, and improvements involve the replacement of two or more major building components, or
• “the costs of the rehabilitation exceed the greater of 15 percent (exclusive of any soft costs) of the property's replacement cost (fair market value) after completion of all required repairs, replacements, and improvements; or $6,500 per dwelling unit (adjusted by HUD's authorized high cost percentage); or 20 percent of the mortgage proceeds applied to rehabilitation expenses.”

To learn more about HUD multifamily construction loans like the HUD 221(d)(4) loan, fill out the form below and a HUD lending expert will get in touch.

The benefits of a substantial renovation for HUD and FHA loans are that they can help to improve the quality of multifamily rental housing. According to HUD, substantial renovation of a property occurs when either:

• The required repairs and improvements of a HUD-assisted multifamily rental housing involve replacing two or more major building components, OR
• Rehabilitation costs exceed the greater of:
  • 15% of the property's replacement cost (fair market value - exclusive of soft costs) after completion of all required repairs, replacements, and improvements OR
  • $6,500 per dwelling unit (adjusted by HUD's authorized high cost percentage) OR
  • 20% of the mortgage proceeds applied to rehabilitation expenses

Substantial renovation can help to improve the quality of multifamily rental housing, making it more attractive to potential tenants and increasing the value of the property. To learn more about HUD multifamily construction loans like the HUD 221(d)(4) loan, click here.

The risks associated with a substantial renovation for HUD and FHA loans include the potential for cost overruns, delays in construction, and the need for additional financing. Additionally, there is the risk that the property may not meet the requirements of the loan program, or that the loan may not be approved. It is important to carefully consider the risks associated with a substantial renovation before taking on such a project.

For more information on the risks associated with a substantial renovation for HUD and FHA loans, please see the following sources:

• Substantial Renovation and the HUD 223(f) Loan Program
• Substantial Renovation and the HUD 221(d)(4) Loan Program

The costs associated with a substantial renovation for HUD and FHA loans depend on the type of loan. For HUD 223(f) loans, the costs of the rehabilitation must exceed the greater of 15% of the property's replacement cost (fair market value - exclusive of soft costs) after completion of all required repairs, replacements, and improvements; or $6,500 per dwelling unit (adjusted by HUD's authorized high cost percentage); or 20% of the mortgage proceeds applied to rehabilitation expenses. For HUD 221(d)(4) loans, the costs of the rehabilitation must exceed the greater of 15% of the property's replacement cost (fair market value) after completion of all required repairs, replacements, and improvements; or $6,500 per dwelling unit (adjusted by HUD's authorized high cost percentage); or 20% of the mortgage proceeds applied to rehabilitation expenses. To learn more about HUD multifamily construction loans like the HUD 221(d)(4) loan, contact a HUD lending expert.

The best practices for a substantial renovation for HUD and FHA loans involve replacing two or more major building components, or having rehabilitation costs exceed the greater of 15% of the property's replacement cost (fair market value - exclusive of soft costs) after completion of all required repairs, replacements, and improvements, $6,500 per dwelling unit (adjusted by HUD's authorized high cost percentage), or 20% of the mortgage proceeds applied to rehabilitation expenses. Additionally, the HUD 221(d)(4) loan could be the best option for financing a substantial rehabilitation of a property, as it offers 40-year fully amortizing terms with low, fixed interest rates and leverage up to 85% for market-rate properties (and higher for affordable communities). The main eligibility restriction is that the cost of the rehab must be more than 15% of the property’s replacement cost.

For more information, please see Substantial Renovation and the HUD 223(f) Loan Program and How to Renovate Your Apartment Complex.