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HUD 221(D)(4) NEW CONSTRUCTION LOAN PRODUCT OVERVIEW

The HUD 221(d)(4) New Construction program provides a non-recourse, fully amortizing, fixedrate assumable mortgage. The loan is structured as interest-only during the construction period (initial endorsement) where upon completion of construction and up to two months for cost certification (final endorsement), amortization will begin for a 40-year term. This program also allows for the substantial rehabilitation of existing properties to included adaptive reuse.

Loan Amount:

The HUD loan amount will be limited to the lowest of the following criterion:

• 85% of: HUD approved mortgageable hard and soft construction costs plus the land value

• Amount based on Limitations per Family Unit

• Amount based on Debt Service Coverage (1.176x)

Interest Rate:

The interest rate can be locked upon HUD’s issuance of a Firm Commitment. The lender will work with Government National Mortgage Association (GNMA) investors to provide the borrower with the current market interest rate. A refundable rate lock deposit is required from the borrower that is to be credited at initial endorsement. The interest rate is locked for the entire term of both the construction period (plus two months for cost certification) and the 40-year permanent mortgage.

The construction and permanent interest are typically locked at the same rate. In certain circumstances, the GNMA investor may consider a split-rate where the construction interest rate is higher than the market rate allowing for a permanent rate to be below market. The availability of this option is dependent on the market conditions at the time of rate lock and whether this structure will be beneficial to the borrower.

Pre-Payment Period

The standard pre-payment penalty typically offered by GNMA investors is set for the initial ten years of the permanent mortgage. The most common structure declines 1% per year beginning at 10% in the first year. Alterations to this pre-payment structure can be negotiated with the GNMA investor based on the borrower’s needs. Any approved pre-payment penalty changes may have an impact on the market interest rate.

Rate Reset

Post Final Endorsement, if interest rates lower, there are options that allow the borrower to lower the interest rate of the 221(d) (4) loan. This can be accomplished through an Interest Rate Reduction (IRR), or via the HUD 223(a)(7) program. Based upon the interest rate at the time and what the current pre-payment penalty is for the loan, the lender will present both options to the borrower and discuss if either is a viable and/or recommendable option at that time as well as if there are any other options that the borrower is trying to accomplish for the property.

Mortgage Insurance Premium

HUD requires a Mortgage Insurance Premium (MIP) to be paid throughout the life of the mortgage to include the construction period. For HUD 221(d)(4) Market Rate New Construction loans the MIP is 0.65%. This amount is reduced to 0.25% for Market Rate properties achieving a HUD approved Green Building Certification that is based the architectural plans and specifications submitted to HUD prior to the issuance of the Firm Commitment. After Final Endorsement, annual scoring must be completed to assure that the property meets Green Requirements and if it does not, repairs must be completed to bring the property in compliance.

The construction period MIP, included in the mortgageable construction costs, is based on the construction term, and proposed permanent mortgage amount. The ongoing MIP is calculated on the outstanding mortgage balance and collected in each monthly debt service payment.

Working Capital Reserve

HUD 221(d)(4) loans require a non-mortgageable Working Capital Reserve escrow equating to 4% of the final mortgage amount. Half of this escrow (2%) is considered a construction cost contingency for cost overruns and approved change orders. The remaining half (2%) is set aside for excess soft costs of putting the project in operation. Any unused portion of the construction contingency escrow is refunded to the Developer at Final Endorsement. The Working Capital Reserve may be posted via cash or letter of credit at initial endorsement.

Initial Operating Deficit Escrow

An Initial Operating Deficit Escrow (IOD) is required on all applications for new construction to provide funding for operating expenses and debt service when net income is not available during the initial lease up and stabilization period. This escrow is non-mortgageable, and any unused portions will be returned to the Borrower. The Initial Operating Deficit Escrow may be posted via cash or letter of credit at initial endorsement.

Timing

The timing and steps for a 221(d)(4) New Construction transaction from the signing of the lender’s engagement letter through the closing of Initial Endorsement to begin the construction period are detailed below. There are multiple factors that may influence the typical timing for each stage to include, but are not limited to, the borrower’s experience with HUD transactions, completion of architectural exhibits, environmental concerns that may require additional investigation and other items associated with the construction of a multifamily community.

The HUD staff have specific timing requirements during their review process of both the pre-application and firm-application submission. Each review process is limited to 60 days from the assignment date to a HUD underwriter. Many variables can influence this timing and the HUD staff will provide ongoing communication with the lender for any additional items that may need to be addressed and timing to submit back to HUD.

The preparation of the project construction costs from the General Contractor for the stages below are particularly important for the Pre-application and Firm Application submissions. HUD is concerned with any large increases (greater than 5%) in the construction costs between the Pre-application submission and the Firm Application. The Concept Meeting estimated construction costs should be within a reasonable range based on the location and quality of construction.

Initial Stage: Approximately 3 months

Items to be provided by the borrower to prepare a Concept Meeting submission package:

1. Site location and site plan if available

2. Project description to include some detail on building and unit finishes and project amenities

3. Project Unit Mix and budgeted operating expenses

4. Construction cost budget (based on applicable Davis Bacon Wages)

5. Project team with resumes and HUD Experience. HUD is particularly interested in the project team’s experience

Pre-Application: Approximately 4-6 months

Items to be provided to HUD for the Pre-application:

1. Narrative Description of the Proposed Project

2. Lender underwriting of the concluded rents and expenses and construction hard and soft costs

3. Resumés showing experience of owners/sponsor and key principals

4. Resumes showing experience of the general contractor, architect and management company

5. Resumés of Lender’s underwriter, appraiser, and/or market analyst if not submitted prior to the pre-application

6. If Sponsor is a nonprofit, additional HUD specific supporting documents are applicable.

7. Preliminary sketch plans, consisting of:

• Site plan

• Typical unit and building layouts

• Ground floor and typical floor plans

• Wall section plan

Firm-Application:

with similar multifamily construction projects and their experience with the 221(d)(4) program. The project team is to include:

• Sponsor/Borrower Principals

• General Contractor

• Architect

• Management Agent

• Any available 3rd-party Reports

8. Market Study completed by HUD experienced market analyst with resume

9. Appraisal completed by HUD experienced appraiser with resume

10. Photograph(s) of the property and immediate area

11. Evidence of site control

12. Location maps

13. If commercial space is involved, show estimated percentage of total square feet and estimated total income

14. Copy of ground lease, if applicable

15. If state or local grants or loans are anticipated as a part of the project, evidence that such funds will be available

16. Phase I Environmental Site Assessment

Approximately 4-6 months to the Initial Endorsement Closing