SECTION 223 (f) FHA INSURED FINANCING

FOR ACQUISITION OR REFINANCE OF EXISTING MULTIFAMILY RENTAL HOUSING

SECTION 223 (f) FHA INSURED FINANCING FOR ACQUISITION OR REFINANCE OF EXISTING MULTIFAMILY RENTAL HOUSING

 

Program:

Used for refinance or purchase of multifamily rental housing nationwide.  The program allows for low or moderate rehabilitation of the property, a term that will typically allow up to $10,000-$13,000 per unit in rehabilitation, subject to certain limitations that need to be discussed more in depth.

Eligible Projects:

Property must be three years of age or older.  If constructed with HUD-insured mortgage, the property is eligible at the expiration of the latent defects warranty period and is exempt from the three year rule.

Loan Features:

  • No rent restrictions or tenant income requirements
  • Low fixed interest rates, negotiable pre-payments
  • Up to 35 year term fully amortizing
  • Up to 85% loan to value ratio
  • Up to 80% loan to value if there is an equity takeout event as part of the financing.
  • Non-recourse loan subject to carve-outs in the new loan documents.
  • Assumable with approval of FHA
  • No limitations on owner’s return.  FHA wants you to make money.
  • Includes minor repairs and an initial deposit to reserve for replacements as determined by the Property Condition Report
  • 1.176% debt service coverage

Mortgage Amount:

The mortgage is limited to the lesser of:

Market Rate Acquisitions

  1. 83.3% of fair market value after repairs
  2. 83.3% of net income capitalized by loan constant
  3. 83.3% of acceptable transaction costs
  4. Per unit statutory limits as established by HUD
  5. 83.3% of fair market value after repairs
  6. 83.3% of net income capitalized by loan constant
  7. The greater of :

Market Rate Refinances

a).  100% of acceptable transaction costs b).   80% of fair market value

  1. Per unit statutory limits as established by HUD

Transaction Costs:

The maximum possible loan will be:

a).  85% of the Purchase price plus eligible costs or b). 85% of value if needed to cover the existing debt costs and other eligible mortgageable costs

  • Minor repairs and replacements including not more than one major building component.  This is a term of art unique to FHA that needs to be discussed further.
  • Appraisal, Engineering/Property condition, and Environmental Inspection Reports are required and paid for up front but can be reimbursed at closing.
  • First Year Mortgage Insurance Premium (90 bps) is collected from loan proceeds at close
  • Financing and Placement Fees are not allowed to exceed a maximum of 3.5% (5.5% for Bond financed transactions)
  • Legal, Organizational, Title & Recording, and Survey Fees are also financed.
  • Initial Deposit to Replacement Reserves is derived from the Property Condition Report
  • HUD Application Fee of 0.30% ($15,000 on a $5 million loan application)
  • HUD Inspection Fee, typically 1% of repair estimate, if repairs are included

Secondary Financing:

Private Secondary Financing:

  • Secondary financing from a private lending can be combined with the FHA loan to provide financing up to 92.5%.
  • The Secondary debt source must be evidenced by unsecured promissory note and may not be secured by a lien on the property.
  • Private secondary debt may be used to help cover the equity or to cover non-mortgageable costs or both. Non-mortgageable costs must be certified to by the funding source of the secondary debt as being reasonable and necessary to complete the project.
  • Mezzanine financing, provided by a private lending source and usually secured by a pledge of partnership interests (rather than by a secondary lien on the real estate) must be fully disclosed to and approved by HUD during the application process. Any mezzanine debt that remains from a previous financing of the property is subject to the secondary financing guidance for private sources in this section. Repayment of mezzanine financing can only be made from surplus cash and the mezzanine loan cannot mature before the term of the FHA insured.
  • Repayment of private secondary financing, including interest, must be soft and be made solely from 75% of available surplus cash

Government Secondary Financing:

  • When the secondary financing is from a federal, state or local governmental source, the subordinate loan is evidenced by HUD Form 9240M,  secured by a promissory note and mortgage lien as is prescribed by the governmental funding source and reviewed and approved by HUD.
  • Secondary financing or grants lent to the property as a secondary loan may be used to cover up to 100% of the applicable SOA equity requirements.
  • When added to the HUD mortgage and required equity contribution, the secondary financing, used to finance non-mortgageable costs, may exceed 100% of the project‘s Fair Market Value (FMV) or Replacement Cost.
  • Repayment of the Government secondary financing, including interest, must be soft and be made solely from 75% of available surplus cash.

Information we need to provide a Preliminary Loan Sizing:

  1. Project Description including unit mix with square footages, amenities, land acreage
  2. Location Map
  3. Current Rent Roll with summary of any concessions for the past year to date
  4. Year–to-Date Operating Statements, and if available, last three years of Income and Expense Statements
  5. Summary of existing debt or copy of Purchase Agreement
  6. List and cost estimates for any repairs and replacements
  7. Any Available Market Studies, Appraisals, environmental and/or Engineering Reports

HUD-Sections-223(F)

SECTIONS 220 & 221(d) 4 FHA INSURED FINANCING

FOR NEW CONSTRUCTION OR SUBSTANTIAL REHABILITATION OF MULTIFAMILY RENTAL APARTMENTS

SECTIONS 220 & 221(d)4 FHA INSURED FINANCING FOR NEW CONSTRUCTION OR SUBSTANTIAL REHABILITATION OF MULTIFAMILY RENTAL APARTMENTS

Program:

The 221(d) 4 program provides funds for new construction or substantial rehabilitation of multifamily rental or cooperative housing nationwideSection 220 provides mortgage insurance for housing projects located in an urban renewal area meeting certain criteria.

 

Eligible Projects:

Property must be 5 or more dwelling units.  Projects specifically designed for the elderly or limited to elderly occupancy are not permitted under Section 220.  Under Section 220 commercial space may not exceed 20% of gross project area, with commercial income not to exceed 30% of gross project income.  Under the 221(d) (4) program commercial space may not exceed 10% of the gross project area, with commercial income not to exceed 15% of the gross project income.

 

Loan Features:

  • No rent restrictions or tenant income requirements
  • Low fixed interest rates, negotiable pre-payments
  • Up to 40 year term fully amortizing
  • Up to 85% loan to value ratio
  • Non-recourse during both construction and permanent loan stages, with loan carve-outs
  • Assumable with approval of FHA
  • No limitations on owner’s return
  • Combined construction/permanent loan; interest rate is locked in at initial construction loan closing

 

 Mortgage Amount:

The mortgage amount is limited to the lesser of:

  1. 85% of replacement cost value
  2. 85% of net income capitalized by loan constant
  3. 85% of certifiable transaction costs
  4. Per unit statutory limits as established by HUD

Transaction Costs:

  • Purchase price of land/buildings or existing debt
  • Certified construction costs, bond premium and other fees
  • Architectural fees for design and supervision
  • Appraisal, Engineering, and Environmental Inspection Reports
  • Financing and Placement Fees not to exceed 3.5% (5.5% for Bond financed transactions)
  • Mortgage Insurance Premium during construction
  • Interest, insurance and real estate taxes during construction
  • Legal, Organizational, Audit, Title & Recording, and Survey Fees
  • HUD Application Fee of 0.30%:  (.15%) due at Pre-Application; (.15%) due at Firm Application
  • HUD Inspection Fee of 0.50%
  • 1.176% debt service coverage

 

Secondary Financing:

Secondary financing (subordinate liens), grants and tax credits from a Federal, State or local government agency or instrumentality may be used to cover up to 100% of the equity requirement and also to finance non-mortgageable costs. The aggregate amount of the HUD insured first mortgage and any approved subordinated liens may exceed 100% of HUD’s Project Replacement Cost.  Non-mortgageable or non-HUD replacement cost items covered by the secondary financing must be certified by the source provider as reasonable and required to complete the project.

 

Builder’s and Sponsor’s Profit and Risk Allowance (“BSPRA”):

Under Sections 220 and 221(d)(4) a BSPRA is included in the mortgage and may be used as a credit against the borrower’s required equity contribution where there exists an identity of interest between the borrower and general contractor.  This is equal to 10% of the hard and soft costs of the transaction and can increase your leverage.

 

Preliminary Review Information:

Project description including unit mix with square footages, amenities, and land acreage

  1. Location map
  2. Proposed operating budget
  3. Estimate of site value.  If Rehabilitation – summary of existing debt or copy of purchase agreement
  4. Construction Estimate including other fees, off-site costs, architectural design and supervisory fees
  5. Description of ownership structure
  6. Any available Market Studies, Appraisals, Environmental and/or Engineering Reports