Department of Housing and Urban Development Financing

Conventional wisdom tells us that, with markets in crisis, debt is virtually unavailable to investors and developers in the multifamily housing market. While the ability to obtain debt from private financial institutions has changed drastically, there remains a reliable source of financing for multifamily projects: the Department of Housing and Urban Development (HUD).

Section 221(d)(4) of the National Housing Act allows for-profit developers to obtain a mortgage loan in an amount up to the lesser of:

1. 90 percent of the HUD replacement cost estimate, OR
2. the amount that 90% of net operating income can debt service considering up to a maximum 95% stabilized occupancy rate.

Here are a few other criteria to consider in pursuing Section 221(d)(4) loans:

• Loans are non-recourse with respect to the borrower’s personal liability.
• Loans are assumable by a qualified buyer approved by the lender, subject to a 1% assumption fee.
• The subject property must remain rental property for five years from the date of the loan.
• The borrower must make monthly deposits into an escrow account for real estate taxes, special assessments, hazard insurance, replacement reserves and an amount equal to 1/2% of principal balance for mortgage insurance premiums.
  

It is important to bear in mind that the borrower has very little negotiating power when it comes to HUD loan documents. The documents therefore provide little flexibility for a borrower’s particular situation.

(This entry posted by Mark Polston, a member of the Real Estate Development group)

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