Do FHA/HUD 221(d)(4) loans allow for commercial development?
In today's market, many real estate developers want to mix both residential and commercial development into the same project-- for example, a multi-story residential apartment building, with a ground floor zoned for shops and restaurants. FHA/HUD 221(d)(4) loans can allow a developer to do this-- but only in specific situations.
- Using FHA/HUD 221(d)(4) Loans for Commercial Development
- FHA/HUD 221(d)(4) Loan Commercial Limits
- Freddie Mac®'s Small Balance Loan (SBL) Program Allows for Higher Commercial Limits
- To learn more about FHA/HUD 221(d)(4) loans, fill out the form below and an HUD loan specialist will get In touch.
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Using FHA/HUD 221(d)(4) Loans for Commercial Development
In today's market, many real estate developers want to mix both residential and commercial development into the same project. For example, a multi-story residential apartment building, which has a ground floor zoned for shops and restaurants. HUD multifamily construction loans such as the HUD 221(d)(4) loans can allow a developer to do this, but only in specific situations.
FHA/HUD 221(d)(4) Loan Commercial Limits
While commercial space is allowed on projects using HUD 221(d)(4) loans, it must be limited to a relatively small amount of the property. Specifically, it is limited to 25% of the property’s net rentable area or 15% of the the property’s underwritten effective gross income (up to 30% of underwritten EGI permitted in urban renewal areas under Section 220). So, for example, if you had a ten story residential building, two stories might be commercial, and the rest residential.
Freddie Mac®'s Small Balance Loan (SBL) Program Allows for Higher Commercial Limits
While the FHA/HUD 221(d)(4) loan program may not work for developers who want to rent or lease a large amount of their building out for commercial purposes, another program, the Freddie Mac Small Balance Loan (SBL) program might. This program allows developers to use 40% of their building, or get 40% of the project's income from commercial uses. While the program's loans are capped at $5 million, more than 40% of the project can be approved for commercial use with an additional review.
To learn more about FHA/HUD 221(d)(4) loans, fill out the form below and an HUD loan specialist will get In touch.
Related Questions
What are the requirements for an FHA/HUD 221(d)(4) loan?
The requirements for an FHA/HUD 221(d)(4) loan include a full scope of third party reports (environmental assessment, market study, appraisal, etc.), annual review, a bonded and licensed general contractor, and compliance with Davis Bacon wage requirements.
In addition, borrowers must have a maximum LTV of 85% for market-rate properties, 87% for affordable properties, and 90% for properties with 90% or more low-income units. A bonded, licensed, and insured general contractor must also execute a GMP contract.
What types of commercial development are eligible for an FHA/HUD 221(d)(4) loan?
The types of commercial development eligible for an FHA/HUD 221(d)(4) loan are limited to 25% of the property’s net rentable area or 15% of the the property’s underwritten effective gross income (up to 30% of underwritten EGI permitted in urban renewal areas under Section 220). For example, if you had a ten story residential building, two stories might be commercial, and the rest residential. Learn more about HUD 221(d)(4) loan commercial limits.
What are the advantages of an FHA/HUD 221(d)(4) loan?
The FHA/HUD 221(d)(4) loan offers many advantages for multifamily investors and developers. These loans provide the industry’s longest-term form of fixed-rate construction and substantial rehabilitation financing, with terms of up to 40 years (43 years with the 3-year construction period). Additionally, these loans are non-recourse, fully assumable, and offer high leverage.
In comparison to other financing options, FHA/HUD 221(d)(4) loans are more cost-effective and efficient. For example, it’s difficult for investors and developers to find financing that will cover both the construction and post-construction period for a multifamily property, all in one loan. In most cases, multifamily investors and developers will have to take out an expensive bank loan, which will only permit up to 75% LTC in most cases. After, they’ll need to refinance into a permanent loan, which will often come in the form of CMBS financing, Freddie Mac, Fannie Mae, or even a HUD multifamily refinancing loan, such as the HUD 223(f) loan. Having to deal multiple closings can be expensive, as appraisals, third-party reports, legal, and other costs will be repeated twice in the span of a year or two.
For more information on HUD multifamily loans, please fill out the form here and a HUD lending expert will get in touch.
What are the maximum loan amounts for an FHA/HUD 221(d)(4) loan?
The minimum loan amount for an FHA/HUD 221(d)(4) loan is $4 million, and there is no maximum loan amount.
What are the interest rates for an FHA/HUD 221(d)(4) loan?
The interest rates for an FHA/HUD 221(d)(4) loan are fixed throughout the life of the loan. This means that investors and developers using HUD loans can rest easy knowing that their interest rates won't suddenly rise. As a result, estimating annual profit margins is significantly easier. The interest rates for FHA 221(d)(4) loans are incredibly competitive. For more information, please visit this page.
What is the repayment period for an FHA/HUD 221(d)(4) loan?
The repayment period for an FHA/HUD 221(d)(4) loan is 43 years, including a maximum 36 months for construction and an additional 40 years of fully amortizing, fixed-rate payments. HUD 221(d)(4) Construction & Rehab Loans and HUD 221(d)(4) Loans.