HUD’s FHA 223(f) multifamily loan insurance program has gained popularity over recent years, most recently spurred by the 2008 Credit Crunch. Even with all the popularity it gained it still remains grossly misunderstood and even unknown, yet it provides for financing that is always a longer term, longer amortization and at a lower interest rate than Fannie Mae, Freddie Mac and CMBS loans… even life company multifamily loans.
In the past FHA 223(f) loans garnished a reputation as being solely for non profits, low income housing and affordable housing projects; as such many market rate multifamily owners/operators have, and continue to, miss out on the industry’s most affordable (and highest leverage) financing mechanism. HUD 223(f) insured loans carry the stigma, and rightfully so, of taking longer to originate. That is true as average origination times remain around 4 months from application to closing; but if you’re not in a great hurry that is only 60 days longer than the average amount of time it takes to close a Freddie Mac multifamily loan or even a Fannie Mae D.U.S. multifamily mortgage.
FACTS TO CONSIDER
HUD provides a full checklist of requirements, however much of the checklist and process is managed in-house. Here you can see the full HUD 223(f) checklist. Below, however is a fairly complete synopsis of the outline of the 223(f) FHA insured loan program.
35 Years fixed and fully amortizing interest rates of of January, 2016 are ranging between 4.10% and 4.75% which account MIP in the rate.
To be eligible the property must be at least three years old or, if it was substantially rehabilitated, it must also be at least three years ago. Standard repairs are allowed.
Monthly funding of replacement reserves is required with initial funding of replacement reserves sometimes as much as $1,000 per unit for older properties.
An annual audit of operations is required.
Minimum loan amount is $2,000,000 with exceptions made on a case-by-case basis.
ELIGIBLE PROPERTIES
The purchase or refinance of detached, semidetached, row, walkup, and elevator-type multifamily properties including market rate, low-to-moderate income and subsidized multifamily, cooperative housing and affordable housing properties with at least 5 units.
COMMERCIAL SPACE LIMITATION
Commercial and retail space is limited to the lesser of 20% of the net rentable area or 20% of the effective gross income.
ELIGIBLE BORROWERS
Single asset, bankruptcy remote, for profit or non-profit entities.
LOAN AMOUNT/LEVERAGE/DSCR
The loan amount will be maximum proceeds subject to the lesser of:
83.3% LTV or the amount of debt that can be serviced by 83.3% of net operating income for Market Rate Properties.
85% LTV or the amount of debt that can be serviced by 87% of net operating income for Affordable Housing Properties.
87% LTV or the amount of debt that can be serviced by 90% of net operating income or more for Rental Assistance Properties.
For Refinances: The greater of 80% LTV or 100% of the total cost of refinancing the existing indebtedness and other mortgageable transaction costs.
For Purchases: 100% of mortgageable transaction costs less the portion of grants, public loans and tax credits applied.
Statutory per unit limits applied.
OCCUPANCY
Properties must have an average actual occupancy of at least 85% for the 6 months prior to application and maintained throughout the process until funding. Maximum underwritten occupancy for market rate properties is 93% and for affordable properties and rental assistance properties it is 95%.
ESCROWS
Replacement reserves required in accordance with HUD guidelines (minimum of $250 per unit per year) will be established by a PCNA report. An initial deposit will be required at closing which can be funded by the mortgage proceeds.
Taxes and insurance escrowed monthly.
REPAIRS AND IMPROVEMENTS
Repairs, deferred maintenance and capital improvements for up to the greater of 15% of the property value, $6,500 per unit (adjusted for high cost areas), or 20% of the mortgage proceeds can be included in the loan amount subject to leverage and DSCR limitations.
MORTGAGE INSURANCE PREMIUM
Mortgage insurance premium is paid annually. In the above example of a rate between 4.10% and 4.75%, those interest rates already include the estimated HUD required MIP. At origination, 1% of the loan amount is due to HUD at closing from loan proceeds as the first year MIP. It is 0.60% annually thereafter with an adjustment to 0.45% for affordable properties.
TERM & AMORTIZATION
Fixed and fully amortizing for up to 35 years, not to exceed 75% of remaining economic life of the property.
INTEREST RATE
Interest rates are fixed throughout the life of the loan and determined by prevailing market conditions. As of January 2016, interest rates on HUD 223(f) insured loans are generally ranging from 3.10% to 4.10% before accounting for the required MIP adjustment.
RECOURSE
All loans are non-recourse to key principals subject to standard carve-outs.
ASSUMABILITY
All loans are fully assumable subject to FHA approval and a fee of 0.05% of original FHA loan amount.
PREPAYMENT
Generally, for best pricing, 10 years of call protection structured as a 2 year lockout followed by a step down from 8%. There is no prepayment penalty if loan is assumed.
SYNOPSIS OF COSTS
Application Fee: Generally $25,000 to cover 3rd party reports and due diligence including:
Appraisal
Phase 1 environmental
PCNA
Market study
FHA application fee: 0.30% of the loan amount.
FHA inspection fee:
$30 per unit where the repairs are more than $100,000 in total but $3,000 or less per unit.
The greater of $30 per unit or 1% of cost of repairs if the repairs required are greater than $3,000 per unit.
Finance and Permanent Placement Fees: Typically capped at 3.50% of the loan amount paid from mortgage proceeds.
Good faith deposit (rate lock and commitment): 1% of loan amount paid at time of commitment and refunded at closing.
Lender’s legal, title, and other standard borrower closing costs.
TIMING
FHA 223(f) insured loans generally take 100 – 150 days to close subject to deal specifics.
ADDITIONAL HUD REQUIREMENTS AND ITEMS FOR CONSIDERATION
Loans over $50,000,000 may be subject to more conservative leverage and DSRC constraints.
FHA 223(f) can be used in conjunction with LIHTC.
FHA 223(f) can be used to refinance or acquire properties that involve Section 202, Section 236 and Section 8 funding.
A PCNA (Project Capital Needs Assessment) will be required every ten years.
If a HUD 221(d)(4) loan isn’t right for your multifamily development or substantial rehabilitation project, please visit http://www.multifamily.loans for more options that include bank financing, life company financing, Fannie Mae, Freddie Mac and more.
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