The loan-to-cost ratio for HUD 221(d)(4) loans is 85% for market rate properties, 87% for affordable housing properties, and 90% for rental assistance properties.

Source: HUD 221(d)(4) Loans and HUD Multifamily Loans

The HUD 221(d)(4) loan program offers an incredible opportunity for multifamily investors and developers to access 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), these loans are also non-recourse, fully assumable, and offer high leverage.

In general, it’s extremely 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. This is especially the case since Fannie Mae and Freddie Mac do not provide financing for the construction of multifamily properties, only for property rehab, acquisition, and refinancing (and certain combinations thereof).

In most cases, multifamily investors and developers will have to take out an more 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. However, with a HUD 221(d)(4) loan, investors and developers can access the same long-term, fixed-rate financing for both the construction and post-construction period, all in one loan.

The eligibility requirements for a HUD 221(d)(4) loan include a maximum Loan-to-Value (LTV) ratio of 85% for market-rate properties, 87% for affordable properties, and 90% for properties with 90% or more low-income units. Additionally, a bonded, licensed, and insured general contractor must execute a GMP contract and the loan must undergo an annual review. The loan must also be in compliance with Davis Bacon wage requirements.

The maximum loan amount for a HUD 221(d)(4) loan is not limited. According to Apartment Loans, the minimum loan amount is $4 million, and exceptions are made on a case-by-case basis. Generally, most 221(d)(4) construction loans are $10 million and above. There is no maximum loan amount.

The maximum loan-to-cost ratio for a HUD 221(d)(4) loan is 85% for market-rate properties, 87% for affordable properties, and 90% for properties with 90% or more low-income units.

This information can be found on the Apartment Loans website, which states that the loan amount will be the maximum proceeds subject to the lesser of:

• 85% LTC (or replacement cost), 85% of net operating income, or 1.20 DSCR for market rate properties
• 87% LTC (or replacement cost), 87% of net operating income, or 1.15 DSCR for affordable housing properties
• 90% LTC (or replacement cost), 90% of net operating income, or 1.11 DSCR for rental assistance properties

Additional information can be found on the HUD Multifamily Construction Financing website, which states that HUD 221(d)(4) borrowers must have a maximum loan-to-value (LTV) ratio of:

• 85% for market-rate properties
• 87% for affordable properties
• 90% for properties with 90% or more low-income units

HUD 221(d)(4) loans offer up to 90% LTV for subsidized properties, up to 87% LTV for affordable properties, and up to 85% for market-rate properties. This is significantly higher than other financing options such as CMBS loans, which offer a maximum of 80% LTV (in exceptional situations), and are only partially amortizing. Life company loans offer 75%, but more often only provide up to 65%. And, Freddie Mac and Fannie Mae, while offering up to 80% in some situations, typically only offer 70% to 75% for fully amortizing, fixed-rate loans.

For more information, please visit HUD 221(d)(4) loans and CMBS loans.