The HUD Section 221(d)(4) program provides high leverage, long-term, fixed-rate multifamily financing – 85% of cost and a 40-year amortization. Debt service coverage requirements are a modest 1.17, loans are assumable, and did we mention they also are non-recourse?
There is a lot to like about Section 221(d)(4), but one downside has been the time it typically takes to complete a financing. For market-rate projects, HUD requires a three-step process, starting with a preliminary meeting, followed by a pre-application, then a firm commitment application. Given the rising interest rate and inflationary environment, the viability of a multifamily project often can depend upon closing the loan as quickly as possible to lock in a favorable interest rate and construction price.
HUD has acknowledged this and has taken positive steps to streamline the process for market-rate transactions. In May, HUD issued a memorandum indicating that they now will allow experienced developers and lenders to bypass the middle stage of the application process and proceed directly to the firm commitment stage. This option was slated to expire in September, but HUD extended it through March 31, 2023. This could be a momentous change in terms of expediting the timeframe to complete Section 221(d)(4) transactions – based on our prior experience, it potentially can shorten the schedule by 4 – 6 months. However, not all market-rate deals will qualify. Which ones will?
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