Market Rate vs. Affordable Properties in Relation to HUD 221(d)(4) Loans
One of the biggest questions that developers need to ponder before starting a HUD 221(d)(4) financed project is whether to include any affordable housing. Since a developer's goal is (naturally) to maximize profit, the obvious answer would be no. However, there are a variety of advantages to including at least some affordable units in a HUD multifamily construction loan project.
Benefits and Drawbacks of Affordable vs. Market Rate Properties
One of the biggest questions that developers need to ponder before starting a HUD 221(d)(4) financed project is whether to include any affordable housing. Since a developer's goal is (naturally) to maximize profit, the obvious answer would be no. However, there are a variety of advantages to including at least some affordable units in a HUD multifamily construction loan project.
Affordable Properties Typically Offer Better Loan Terms
As we describe elsewhere on this website, affordable HUD 221(d)(4) projects usually have better underwriting terms, as determined by LTC and DSCR:
For market rate HUD 221(d)(4) properties: Maximum LTC: 87%, Minimum DSCR: 1.15x:
This includes properties using LIHTC, with rents that are not equal to or more than 10% below the market.
For Affordable or Low-Income Properties: Maximum LTC: 90%, Minimum DSCR: 1.11x:
This includes projects using Section 202 loans (designed for low income elderly residents) and those which are using 90% or more rental assistance.
How to Determine Affordable Rent Rates
It is important to understand whether the financial benefits of increased leverage and programs like LIHTC offset the risks of offering lower rents to residents. To understand this, it is essential to know the exact rent rates a developer/owner needs to offer to qualify for affordable housing benefits. To determine AMI (area median income) for affordable properties, developers can visit the HUD income limits guide.
Related Questions
What is the difference between market rate and affordable properties in relation to HUD 221(d)(4) loans?
The biggest difference between market rate and affordable properties in relation to HUD 221(d)(4) loans is the loan terms. Affordable HUD 221(d)(4) projects usually have better underwriting terms, as determined by Loan-to-Cost (LTC) and Debt Service Coverage Ratio (DSCR).
For market rate HUD 221(d)(4) properties, the maximum LTC is 85% and the minimum DSCR is 1.176x. This includes properties using Low-Income Housing Tax Credits (LIHTC), with rents that are not equal to or more than 10% below the market.
For Affordable Properties, the maximum LTC is 90% and the minimum DSCR is 1.11x. This includes projects using Section 202 loans (designed for low income elderly residents) and those which are using 90% or more rental assistance.
For Low-Income Properties, the maximum LTC is 87% and the minimum DSCR is 1.15x. This includes properties which will have rent and income restrictions for at least 15 years, based on a Regulatory Agreement signed at closing. This agreement will stipulate that either 20% of the units will need to have a rent set at 50% of Area Median Income (AMI), or 40% of the units will need to have a rent set at 60% of the AMI and 10% below market rents. Alternatively, this option allows developers to get a Section 8 contract (if they're approved) for between 10% to 90% of the project's units.
For more information, please visit this page.
What are the benefits of investing in market rate properties with HUD 221(d)(4) loans?
Investing in market rate properties with HUD 221(d)(4) loans offers several benefits, including a 40-year loan term (+3 years construction, for a 43-year total), competitive, fixed interest rates, non-recourse, and a high LTV allowance (up to 90% for properties with significant rental assistance).
What are the benefits of investing in affordable properties with HUD 221(d)(4) loans?
Investing in affordable properties with HUD 221(d)(4) loans can provide many benefits, including more favorable terms for the loan. Properties financed with HUD 221(d)(4) loans are eligible for both the Low-Income Housing Tax Credit (LIHTC) and the Section 8 program, which provide housing subsidies to low-to-moderate and low-income residents. These properties receive more relaxed Loan-to-Value (LTV) and Debt Service Coverage Ratio (DSCR) requirements, meaning they can be more easily approved for financing. Additionally, HUD 221(d)(4) loans offer hugely favorable leverage, interest rates, and much more.
To learn more about HUD multifamily construction loans like the HUD 221(d)(4) loan, fill out the form and a HUD lending expert will get in touch.
What are the eligibility requirements for HUD 221(d)(4) loans?
The eligibility requirements for HUD 221(d)(4) loans 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. The loan must also undergo an annual review and be in compliance with Davis Bacon wage requirements.
What are the advantages of HUD 221(d)(4) loans for market rate properties?
HUD 221(d)(4) loans offer a variety of advantages for market rate properties, including favorable leverage, interest rates, and more. These loans are also non-recourse, meaning that the borrower is not personally liable for the loan. Additionally, HUD 221(d)(4) loans are assumable, meaning that the loan can be transferred to another borrower if the original borrower is unable to continue making payments. This makes the loan more attractive to potential buyers. Finally, HUD 221(d)(4) loans are fully amortizing, meaning that the loan is paid off over time, rather than in a lump sum.
For more information, please see this article and this article.
What are the advantages of HUD 221(d)(4) loans for affordable properties?
HUD 221(d)(4) loans offer several advantages for affordable properties. These include more favorable terms such as relaxed Loan-to-Value (LTV) and Debt Service Coverage Ratio (DSCR) requirements. Additionally, HUD 221(d)(4) loans are eligible for both the Low-Income Housing Tax Credit (LIHTC) and the Section 8 program, which provide housing subsidies to low-to-moderate and low-income residents.
For more information, please see the following sources:
- HUD 221(d)(4) Loan Program: Why Some Investors Avoid HUD 221(d)(4) Loans
- What is an Affordable Property?
- Market Rate vs. Affordable Properties in Relation to HUD 221(d)(4) Loans
- LIHTC (Low-Income Housing Tax Credits) in Relation to HUD 221(d)(4) Loans
- Section 8 & HUD 221(d)(4)
- HUD 221(d)(4) Loan Facts
- LTV (Loan-to-Value Ratio) in Relation to HUD 221(d)(4) Loans
- DSCR (Debt Service Coverage Ratio)
- HUD Multifamily Construction Loans