What types of borrowers are eligible for HUD/FHA 221(d)(4) loans?
If you're looking to construct or renovate a multifamily real estate project using a HUD/FHA 221(d)(4) loan, how do you need to structure your company to be eligible for a loan? In most cases, HUD/FHA 221(d)(4) loan borrowers should be structured as single-asset/single-purpose, bankruptcy-remote entities, which can be owned or operated by nonprofit or for-profit groups.
HUD/FHA 221(d)(4) Borrower Eligibility
If you're looking to construct or renovate a multifamily real estate project using a HUD 221(d)(4) loan, how do you need to structure your company to be eligible for a loan? In most cases, HUD/FHA 221(d)(4) loan borrowers should be structured as single-asset/single-purpose, bankruptcy-remote entities. These can be owned or operated by nonprofit or for-profit groups.
Single Asset and Single Purpose Entities
A single purpose entity (SPE), sometimes referred to as a special purpose vehicle (SPV) is "a legal entity created for one very limited, particular task." Usually, an SPE is part of a larger company or corporation. The purpose of an SPE is to isolate the liability of the entity's business from that of the larger company. And, while the SPE is usually funded by capital from the parent company, the more the two entities can be isolated, the greater degree of legal protection. Most single-purpose real estate entities will hold one property as their only asset, which would also make the entity a single-asset entity. Often, another company may be responsible for operating and managing the property.
Bankruptcy Remote Entities
A bankruptcy remote entity is a company, often within a larger group of companies, that is legally shielded (to a certain extent) from the bankruptcy of the other companies (and vice versa.) Lenders, as well as the FHA/HUD, prefer bankruptcy remote entities because the entity has a much lesser change of defaulting on its loan commitments, even if the entity's parent company files for bankruptcy. While bankruptcy remote entities are not bankruptcy proof, it's usually much more difficult for creditors to "pierce the corporate veil" and seek repayment of debts from the parent company.
Bankruptcy remote entities are almost always single purpose entities, but not all SPEs are bankruptcy remote. In general, groups will have to take special precautions to make sure an entity is truly bankruptcy remote. This includes ensuring that the SPE has "one director, general partner, managing member or controlling person who is not otherwise affiliated or associated with the borrower."
It's important to realize that both SPEs and bankruptcy remote entities can be operated by either for-profit or non-profit groups, and either can use them to potentially get FHA 221(d)(4) financing.
To learn more about getting A HUD 221(d)(4) loan for your multifamily project, fill out the form below and a HUD mortgage specialist will get in touch.
What are the requirements for a borrower to qualify for a HUD/FHA 221(d)(4) loan?
To qualify for a HUD/FHA 221(d)(4) loan, borrowers must meet the following requirements:
- Full scope of third party reports (environmental assessment, market study, appraisal, etc.)
- Must undergo annual review
- Bonded and licensed general contractor
- Must be in compliance with Davis Bacon wage requirements
For a full checklist of requirements, please refer to this document.
What types of properties are eligible for HUD/FHA 221(d)(4) loans?
HUD 221(d)(4) loans are available for a variety of multifamily property configurations, including row homes, walkup apartments, detached, semi-detached, and elevator-type multifamily properties. This includes market rate and low-to-moderate income housing, subsidized affordable housing properties and multifamily, cooperative housing with a minimum of 5 units.
If you're interested in getting a low-cost, non-recourse, fixed-rate loan for a multifamily real estate development, a HUD 221(d)(4) loan could be a great option. But what kind of properties can you build or renovate with this kind of HUD multifamily loan?
What are the advantages of a HUD/FHA 221(d)(4) loan?
The HUD/FHA 221(d)(4) loan offers a number of advantages for multifamily investors and developers. These include:
- Non-recourse financing
- Fully assumable
- High leverage
- Fixed-rate financing
- Terms of up to 40 years (43 years with the 3-year construction period)
These loans are also much more cost-effective than other forms of financing, as they allow investors and developers to access both the construction and post-construction period for a multifamily property in one loan. This eliminates the need for multiple closings, which can be expensive due to the cost of appraisals, third-party reports, legal fees, and other costs.
For more information on HUD/FHA 221(d)(4) loans, please visit this page.
What are the maximum loan amounts for HUD/FHA 221(d)(4) loans?
The maximum loan amount for HUD/FHA 221(d)(4) loans is not limited. According to HUD 221(d)(4) Loans: What You Need to Know, there is no upper limit for the program. However, larger loans may be subject to stricter requirements, such as debt service coverage ratio (DSCR) and loan-to-cost (LTC) ratio. Additionally, according to HUD 221(d)(4) 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.
What are the terms and conditions of a HUD/FHA 221(d)(4) loan?
HUD 221(d)(4) loans are a type of FHA multifamily loan that can be used to finance the construction or rehabilitation of multifamily properties. The loan is typically used to finance the purchase of land, construction costs, and permanent financing. The loan is fully amortizing and has a 40-year term with a fixed interest rate. The loan is non-recourse and has no prepayment penalty. HUD 221(d)(4) loans are available for market-rate and affordable housing projects. To learn more about the loan program's terms and qualifications, please refer to HUD's full checklist of requirements.
What are the fees associated with a HUD/FHA 221(d)(4) loan?
The fees associated with a HUD/FHA 221(d)(4) loan include an application fee of usually $25,000 to cover lender due diligence and third-party reports, including an appraisal, phase 1 environmental, construction cost review, market study, and plans and specs review. Additionally, there is an FHA exam fee of 0.30% paid as 0.15% at pre-application and 0.15% at application, an FHA inspection fee of 0.50% paid from mortgage proceeds, financing and placement fees typically capped at 3.50% of the loan amount paid at closing from mortgage proceeds, a good-faith deposit (rate lock and commitment) between 0.50% and 1% of the loan amount paid at the time of commitment and refunded at closing, and lender's legal, title, and other standard borrower closing costs.