Detroit— Need financing for new construction? As commercial banks have shut down their funding of new construction, for the most part the largest and cheapest source of capital is the Federal Housing Administration’s (FHA) mortgage insurance program.
Financing insured under the FHA 221(d)(4) program for new construction or substantial rehabilitation provides fixed-rate financing for both the acquisition and construction of market-rate or affordable multifamily housing with no more than 10 percent of the total gross floor space dedicated to commercial use (20 percent for substantial rehabilitation projects). The loan rolls over from a interest only construction to a fixed rate, up to 40-years amortizing, permanent loan at the same interest rate at construction completion.
It is still surprising that many developers are not aware of this alternative financing program, administered by the Department of Housing and Urban Development (HUD), that will enable them to build market-rate new apartments at this time.
Developing a multifamily project using FHA financing is a very different from conventional projects. For example, a HUD-approved appraiser is required; HUD will conduct a strict proforma review—no “fudging the numbers” is accepted—and if there is another FHA 221(d)(4) project in the market, the project will not be approved unless that other project is already approved and stabilized.
HUD’s litmus test requires developers to first show demand in the marketplace, selecting sites in the sub-markets with 91 percent occupancy or higher, and few, if any, concessions.
The application must also include a full set of designs, projected rents, and estimated operating costs, among other requirements. The up-front architectural requirements, as a result, account for the largest piece of the package in a loan process that takes nearly five to six months to complete.
The developer will also need to work with a HUD-approved lender. The FHA application will take another 45 to 60 days to be approved (including a pre-application, which lets the developer know whether the project will have a high likelihood of approval).
It’s easier to obtain financing for simpler and smaller, up to 250-unit, wood-frame projects. It is more difficult to obtain financing for complicated, expensive projects because of the loan limits of $250,000 per unit, which knocks many high-end infill projects out of consideration.
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