All Eyes on HUD’s 221(d)(4) Loan Program Serving Apartment Owners

By Stephen Chasteen

Today, the U.S. Department of Housing and Urban Development (HUD) remains a reliable lender to multifamily, senior housing and healthcare real estate owner/operators. In the multifamily arena specifically, HUD offers a program many owner/operators take advantage of – HUD’s 221(d)(4) Loan Program. Here we explore the eligibilities and benefits of this advantageous loan offering for apartment properties.

The 101 Basics of HUD 221(d)(4)

This program serves multifamily community borrowers who are both a single-asset and a single-purpose entity. The program finances new construction as well as substantial rehabilitation of family apartments. Market-rate, affordable, and rental-assistance properties may all qualify under the program, however there are additional requirements to note, and which pertain to the category the real estate falls into. These requirements include:

• Affordable Housing Projects: These must have a recorded regulatory agreement in effect for at least 15 years after final endorsement AND meet at least the minimum Low Income Housing Tax Credit restrictions of 20% of units at 50% of the Area Median Income (AMI) or 405 of units at 60% AMI.
• Mixed Income Projects: These may qualify if they meet the above criteria.
• Rental-Assisted Properties: These assets must have 90% of their units supported by project-based rental assistance.

 The Loan Terms

Key details of the loan terms include:

• No limits on loan amount.
• Maximum Mortgage Limits: The lesser of:

- 85%, 87% or 90% of HUD’s estimated cost, plus land as-is value for market-rate, affordable or rental-assisted properties, respectively.

- Debt to be serviced by 1.176x, 1.15x or 1.11x of net income for market-rate, affordable or rental-assisted properties, respectively.

- HUD statutory per unit limits.

- 100% of mortgageable transaction costs less grants, public loans and tax credits.

 Key Program Benefits

In addition to being a reliable source of finance, even during counter-cyclical periods in a real estate cycle, there are numerous benefits of the program to borrowers. These include:

• Fully non-recourse during both construction and permanent phases of financing.
• Low interest rate risk; Interest rate is set at initial closing for construction and permanent loan phases.
• Amortization and Term consists of the construction period plus a maximum of 40 years or 75% of remaining economic life.
• 85% loan-to-cost for market-rate transactions, requiring borrowers to provide less equity that traditional construction loans.

For detailed information on the loan program, including for mortgage insurance premiums, escrows, federal labor standards, rate lock deposit, third-party report requirements, closing expenses and more, review our HUD 221(d)(4) flyer here.

About the Author

Stephen Chasteen is Managing Director, FHA/HUD Platform Manager - of Real Estate Capital Markets for Regions Bank, the nationwide senior housing, multifamily and commercial real estate lender. Visit Regions Real Estate Capital Markets.

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