Investor · Shawnee, KS · Member since 2010 · 13 posts · 10 votes
I am looking at a mixed use building development that I was told would qualify for HUD 221 D4 financing. I have seen the pro-forma and it appears that there is no cash down required, but a completed set of construction docs and some fees totalling about $500K. Does anyone know about this type of financing? I could maybe find the $500K from a private investor, but don't know if I would qualify for the loan.
Commercial Loan Officer · Southern Maine, ME · Member since 2009 · 782 posts · 415 votes
16y
Can you explain what you mean by mixed-use? The 221(d)4 program is geared towards the construction/rehab of multi-family projects and limits the any commercial use of the property to 10% of the total gross square footage.
To address your question. If you were to find 500k from an investor, the HUD lender would more than likely want to see the terms of the loan to ensure that lender could not jeopardize their position or that the terms of the loan adversely affect the numbers used to qualify you.
Also, you must have 125% of the amount of cash required to close the loan, so you need to know what that amount is well in advance. HUD loans are not cheap as there are many fees involved (replacement reserve is .6% of the total improvement costs, HUD application fee which is .3% of the loan amount, market study, phase 1, HUD inspection fee, annual audit, etc).
STILL, you get a 40 year non-recourse loan which no conventional lender can touch at up to a 90% LTV.
My concern would be the mixed-use aspect.
Investor · Shawnee, KS · Member since 2010 · 13 posts · 10 votes
16y
THe proposed development is a luxury apartments over retail building with an underground parking garage. The $500K covers the fees and the completed construction docs that HUD will require. What do you mean by must have 125% of the cash required to close the loan, and what do you mean by the lender wanting to know the terms of the lender? Do you mean the terms of the investor for the $500K? I'm thinking that I would give ownership stake in the development rather than make it a simple loan.
Commercial Loan Officer · Southern Maine, ME · Member since 2009 · 782 posts · 415 votes
16y
If your closing costs are 500k, then you would need 625k in funds. I've looked to find the guideline regarding that requirement on HUD's website, but haven't found it yet. That requirement comes from my lender, so I've never questioned it.
Regarding the 500K. If the lender sees you've borrowed the money to obtain the necessary funds to close, they will want to know the terms with which you borrowed those funds. You will almost certainly have to prove/show to them their funds are not at risk from the note being called, balloon payment, etc.
I don't want to speculate as to what the process would be in your situation, but I would definitely ask prior to you entering into an arrangement for the money.
I still don't know if your project qualifies for a 221 loan since you haven't mentioned how much square footage the commercial space occupies compared to the total square footage. I should also note that the commercial space cannot account for more than 15% of the total gross income for the property.
Not to rain on your parade, but I would suggest you obtain a market study from an entity familiar with HUD (this is critical). My lender would ask for a market study before lifting a finger, but every lender is different. If the market study does not show a need for more units, there is no need to go any further.
You also need to know if HUD is actively involved in other projects in the area. If they are, those units will be subtracted from the number of units outlined in the study.
Investor · Shawnee, KS · Member since 2010 · 13 posts · 10 votes
16y
The terms for the $500K, and thank you for letting me know that I would actually need $625K, will be of no risk to the lender. The funds are likely to come from a design build team of architects, engineers, and a construction firm. This money will be paid back from the loan proceeds which is already planned for in the construction budget. Also, a JV will have been entered into with a 30% to 40% split. Their % will be paid in prefered profit share with a preset IRR upon sale of property which is estimated at 5-7 years holding period. The pro-forma have been put together by a private party very familiar with the HUD financing and project requirements and does the meet the necessary ratios of sq footage and revenues. There are 2 independant feasability studies that have been conducted that say that there is a need for this type of development in this area, but I have not got my hands on those studies yet. My real question at this point is this. If I go out there and motivate the investors to get me the funds needed, all the construction docs, etc.. to get to the closing table, will I qualify for the loan? I don't have any skin to put into the game at this point, and have no real collateral either. What I do have is potentially the right connections to get to the closing table, but I don't want to use them up only to find out that I can't close anyway.
Also, the management is in place already as this is a part of a larger development, and I plan to hire a developer to with experience in this type of build to co-develop this with me. My experience is more in line with industrial project management and business development.
Commercial Loan Officer · Southern Maine, ME · Member since 2009 · 782 posts · 415 votes
16y
HUD is very good at eliminating potential deal killers upfront. Speaking from experience with my lender, the lender will heavily evaluate the loan prior to ordering the appraisal/phase 1/HUD inspection, etc. Once the preliminary analysis has been done, the lender should issue you an in-depth analysis of the numbers to you via a proposal (I can send you an example of one if you would like to see one).
Once the terms are negotiated (you "can" modify the PPP and replacement reserve account on some deals), and settled, you will be issued a contract. Once you engage the contract you will also be required to send the fee for underwriting the loan and for the 3rd party fees.
After the 3rd party reports come back, any revisions to the numbers will take place. Once that is done, the application will be sent to HUD along with the application fee (1/3 of 1% of the loan amount). The lender will underwrite the file according to HUD guidelines, so there should be no surprises once HUD receives the file.
Obviously, this "should" decrease the UW time, but these loans can take up to 9 months to close s making them an exercise in patience.
I would strongly suggest you link up with a MAP approved lender as that will further decrease the time to close your deal. A list of approved lenders can be found through a quick search.
Investor · Shawnee, KS · Member since 2010 · 13 posts · 10 votes
16y
I would love to see an example of the proposal if you don't mind sending me one. What do you think about my situation? If I can get the cash, do you think it has a chance to fly?
Commercial Loan Officer · Southern Maine, ME · Member since 2009 · 782 posts · 415 votes
16y
It's too hard to tell from the information provided, and I hate to speculate.
I'll say this though, HUD relies heavily on experience and the quality of the management company. Their loans are non-recourse, so the borrower's financials don't factor into the loan nearly as much as they do with recourse loans. They'll scrutinize the construction budget and proforma from every angle so make sure your numbers are spot on.
IF you set up a quality team, have a good lawyer who understands HUD on staff, can withstand the time it takes to close a loan, and have the necessary funds, you should have a ballgame.
Do your DD with regards to how much money you need, ask for the qualifications of the lender's underwriter and how many 221(d)4 loans they have closed. As I suggested, link up with a MAP approved lender. You are almost guaranteed to have a good lender if they're MAP approved.
Post your email address and I'll send you a HUD analysis for you to review.
Rental Property Investor · Mercer Island, WA · Member since 2008 · 22k+ posts · 14k+ votes
16y
No email addresses in posts, guys. Put those in your signature, or PM each other. You'll have to be colleagues if you're not. Click "follow", then check "send a colleague request".