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HUD Multifamily Terms – Glossary


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Active Principal

HUD considers an active principal to be a person who is in the role of a consultant who has the expertise and experience that the borrower might be lacking to ensure quality management or completion of the project. The active principal is required to have an ownership interest (amount not specified) in the project and may or may not contribute equity. Click on this link to review HUD Multifamily Loan Requirements, and on this link to review just about everything about HUD Multifamily Loans.


Affordable Housing

HUD defines Affordable Housing as multifamily properties that meet either their minimum affordability requirements for Low Income Housing Tax Credits (LIHTC) or their requirements for Section 8 housing.


For the LIHTC program, the owner/borrower has to have 20% of the unit’s averaging incomes of 50% of area median income (AMI), or 40% of the units averaging incomes at 60% of AMI. Affordable requirements must be kept for a minimum of 15 years.


For a project with Section 8 tenants, it must have a Housing Assistance Payment contract covering 90% of the units with a minimum term remaining of 15 years.


HUD sets maximum LTV for affordable housing at 87%


Architectural and Cost Review

For the 221(d)(4) Loan for new construction and substantial rehabilitation, HUD requires a third-party architect to review the plans and specs to ensure that the project’s construction budget is accurate and in full compliance with HUD guidelines.                             


Architectural and Engineering Review

For the HUD 221(d)(4) Loan, the borrower is required to pay for a qualified architectural analyst with an architect experienced in multifamily construction to review the plans and specs and complete an architectural and Engineering review. This professional may also serve as the cost estimator for the architectural and cost review if their qualifications meet HUD requirements. Complete HUD Guidelines can be found here:


Area Medium Income (AMI)

The area median income is the average of all incomes in a given area called a Metropolitan Statistical Area (MSA). This is based on a four-person household. This number is updated every year by HUD and is used to determine maximum rents for HUD Multifamily Loans on affordable housing properties. 


Assumption of a HUD Multifamily Loan

HUD loans are assumable with a .50% fee and no prepayment penalty for the seller or buyer. The assumptor must qualify under the same requirements as the original borrower. The lender will require a creditworthiness review of the assumptor. Click on this link to review the Advantages of HUD Multifamily Loans, and on this link to review the Disadvantages of HUD Multifamily Loans



Basis Points (BPS)

As far as interest rates go, lenders think in basis points (bps). There are a hundred bps in one percent of interest. HUD Multifamily Loan Rates are based on the 10-year treasury yield called the index. These are converted to basis points. HUD then adds a spread onto the index also measured in basis points to determine the all-in rate. Click on this link to review today’s HUD Multifamily Loan Rates.


Builder’s and Sponsor’s Profit and Risk Allowance (BSPRA)

BSPRA is a form of paper equity that can be used to reduce the amount of cash due at closing on a HUD 221(d)(4) loan for multifamily construction by as much as 3 – 4%.  BSPRA is 10% of the replacement or hard cost of the building, excluding the value of the land. BSPRA is used in lieu of the general contractor fee. The GC is not paid the BSPRA in cash, but in exchange for an agreed amount of ownership in the project. But because up to 10% BSPRA is calculated in with all the other costs of construction and is financed with the loan the project costs are increased and thus the loan amount is increased. HUD encourages BSPRA because they view the contractor becoming an owner with the developer as the best way to ensure a successful project. 



Capital Improvement

A capital improvement is the replacement of a major component, system or permanent structural change that results in the increase of the property’s value. The IRS does not allow these upgrades to be deducted as repairs, however, they can be depreciated and thus save the property owner on taxes. Capital improvements increase the life of the property. Examples of capital improvements include, new roofing, decks, complete kitchen or bathroom renovations, new plumbing, electrical, and HVAC units. 


Commercial Space – Allowable for Mixed Use Properties

HUD does finance mixed use properties that combine commercial space with residential apartment units. The HUD 223(f) Loan for acquisition or refinance of and the HUD 221(d)(4) Loan for new construction or substantial rehabilitation of multifamily properties restricts commercial space to 25% of net rentable area, and not more than 20% of the effective gross income.   


Condominiums – Eligibility 

Condominiums that were once owned individually, but are currently operating as one apartment complex with 100% of the units owned by one ownership entity can be financed with a HUD 223(f) Loan. If 10% or less of the condominium units are individually owned and in one building, the HUD lender can apply for a waiver with HUD to allow this. 


Concept Meeting – with HUD

A mandatory meeting with HUD and the borrower will be scheduled by the lender to pre-flight the transaction. The scope and feasibility of the project will be reviewed. Analysis of the submarket including market rents, market occupancy, absorption rate and key principal’s experience will be reviewed. HUD usually responds within 5 business days with a letter supporting the transaction as proposed, supporting it with conditions, or denying it.


Construction Contingency

HUD requires a construction contingency on the 221(D)(4) Loan for new construction or substantial rehabilitation to provide for cost overruns not specified in the HUD approved construction budget and contract. On new construction this is 2% of the loan amount.  On substantial rehabilitation, this typically ranges from 10 – 15%. The construction contingency is considered a mortgageable expense.


Critical Repairs

The Project Capital Needs Assessment Report, the property condition report that HUD requires will identify all needed repairs as either critical or non-critical. Critical repairs are often health, safety and building integrity repairs that must be completed post-closing. HUD will allow some non-safety critical repairs to be completed after loan closing after approving a Corrective Action Plan with funds held back from loan proceeds until repairs are inspected. Non-critical repairs can be completed within 12 months of the loan closing.



Davis-Bacon Wages

The HUD 221(d)(4) Loan for new multifamily construction or substantial rehabilitation requires that all on site construction workers are paid the prevailing wage in that community as regulated by the Davis Bacon Act. To enforce this, HUD does not allow any construction including site work to be done prior to loan closing. Davis-Bacon Wages are most often higher than non-prevailing wages which can increase the labor cost of the project. Any components built offsite, including modular construction units are not subject to Davis Bacon Wage requirements. 


Debt Service Coverage Ratio (DSCR)

HUD loans are known to have the lowest Debt Service Coverage Ratio (DSCR) of all multifamily loan programs at 1.176, on market rate properties, 1.15 on affordable rate properties, and 1.11 on subsidized rent properties.


Developer Fee

As pertaining to the HUD 221(d)(4) Loan for new construction or substantial rehabilitation, HUD does not prohibit a developer from charging a developer fee, but does not consider it to be a mortgageable expense on market rent projects, but does consider it a mortgageable expense on Low Income Housing Tax Credit (LIHTC) projects with specific rules. For market rent transactions, HUD allows BSPRA to be included in the loan in lieu of a developer fee up to 10% of the cost of the project excluding the land. A developer fee and BSPRA cannot both be utilized.



Fair Market Rent (FMR)

HUD’s Office of Policy Development and Research publishes fair market rents annually for each Metropolitan Statistical Area (MSA) and county. The reports average all rents in the area. The purpose is to establish maximum rents for HUD programs most of which use a percentage of FMR as a factor of determining maximum rents for market rate apartment buildings. 


Federal Housing Administration (FHA)

FHA began in 1934 and was placed under the administration of HUD in 1965. FHA provides mortgage insurance on HUD multifamily loans. This not only guarantees HUD approved lenders from mortgage defaults, but also makes it possible for funds to be raised on Wall Street to fund these loans through the sale of Ginnie Mae bonds. These mortgage-backed security bonds have the highest credit rating of any bonds in the U.S. with the full faith and credit of the United States Government. FHA also oversees and guarantees low down payment and low credit score residential loans for moderate to low-income homeowners. Click on this link to learn about The Differences Between FHA and HUD Loans.


Firm Commitment

The Firm Commitment is a document written by HUD approving the loan with all conditions specified. Once this is issued and accepted by the borrower, the interest rate can be locked. The firm commitment is good for 180 days from its issuance. 


Firm Commitment Application

On average, it takes the lender about 2 months to complete the firm application and submit it to HUD. The application will include all third-party reports including market study (if applicable), appraisal, environmental phase I or phase II, property condition report (PCNA) and any other studies that are applicable. 


The appraisal will need to be updated every 120 days if more time than that has passed since the appraiser’s initial site inspection and HUD’s issuance of the firm application. Once received, under MAP guidelines, HUD has 45 – 60  days to respond. However, if they are backed up, it can take 90 days. 


Foreign Nationals

Foreign Nationals may participate as principals in the ownership of the property if the managing partner with decision making authority is a US Citizen or a foreign national lawfully residing in the United States with an immigration status granted by the U.S.  The single asset borrowing entity must be registered in the United States. A U.S. based developer and managing member of the project’s ownership entity must meet the U.S. Department of Housing and Urban Development’s (HUD) requirements for a domestic principal/manager.


Furniture, Fixtures and Equipment (FF&E)

HUD defines FF & E as movable items that are not a permanent part of the structure or its main systems of electrical, plumbing or other utilities. Reasonable amounts of FF and E can be financed with the loan.



General Contractor Requirements

For the HUD 221(d)(4) Loan, for new construction or substantial rehabilitation, the general contractor needs to have experience with a similar size and scope project. It is preferable that the contractor have prior HUD experience. The general contractor is required to provide a 100% performance bond or have 15% of the construction contract in working capital. A letter of credit is acceptable to fulfill this obligation. 


Ginnie Mae – (GNMA)

The Government National Mortgage Assocation (GNMA) known as Ginnie Mae is owned by the United States Government, and is overseen by HUD who guarantees the mortgage. Ginnie Mae, issues mortgage backed security bonds that have the same high credit rating as the U.S. government. These bonds are sold to investors on Wall Street and raise funds for HUD Multifamily Loans. 


Green Requirements

To qualify for lower mortgage insurance premiums, HUD multifamily financing requires that properties maintain an ENERGY STAR score of 75 or above. The property has to be inspected annually by a qualified energy professional, with 12 full months of data in the report. 


Gross Potential Income

Gross Potential Income is the total income a property can bring in if all units are occupied at the maximum scheduled rent, and all rents are collected. 



HAP Contract

A HAP contract is a Section 8 Housing Assistance Payment contract for an entire apartment complex of 5 units or more. Under the terms of the contract the tenant pays a portion of the rent limited by a percentage of their income, and a public housing agency pays the remainder as a subsidized housing assistance payment. The public housing agency signs a contract with the owner for 100% of the units in the apartment building and makes the rental assistance payments to the property owner. HUD oversees HAP Contracts and makes annual inspections to make sure the property is kept in good condition. 


HUD 221(d)(4) Loan

The HUD 221(d)(4) Loan is the highest leverage 85 – 90%, Non-Recourse multifamily construction loan in the United States. It can also be used for substantial rehabilitation. The loan starts out with up to a 3-year construction loan that rolls over seamlessly to a 40-year fixed fully amortizing permanent loan at the same rate as the construction loan.  Click on this link to learn just about everything you need to know about the HUD 221(d)(4) Loan, and on this link to review today’s HUD 221(d)(4) Rates.


HUD 223(a)(7) Loan

The HUD 223(a)(7) Loan is used to refinance an existing HUD multifamily or healthcare loan. The purpose is to lower the rate to current rates if they have come down and increase net cash flow. In many cases the amortization can be increased to 35 years again. Prepayment penalties on the original mortgage can be refinanced with the new mortgage. The process takes about 90 days and there is a nominal fee involved.


HUD 223(f) Loan

The HUD 223(f) Loan is one of the highest leverage 80 – 90% LTV Non-Recourse loans in the U.S., for the acquisition, refinance or minor rehabilitation of existing multifamily properties. It is known for having the lowest long term 35-year fixed rate with a 35-year amortization. Click on this link to learn more about the Minimum Loan Amount for the HUD 223(f), and on this link for all the terms and qualifications of the HUD 223(f) Loan and this link to review today’s HUD 223(f) Loan Rates.


HUD 232 Loan

The HUD 232 Loan program is used for the construction or substantial rehabilitation of residential healthcare facilities – Assisted Living, Memory Care, Independent Senior Living, and Licensed Nursing Homes. This loan starts out with an up to 3-year construction loan that rolls over to a 40-year fixed fully amortizing permanent loan at the same rate as the construction loan. This Non-Recourse Loan has one of the highest loan to cost ratios of 80 – 85%.  


HUD 232/223(f) Loan

The HUD 232 Loan is for the purchase, minor rehabilitation or refinance of residential healthcare facilities –  Senior Assisted Living, Memory Care, Independent Senior Living, and Licensed Nursing Homes. This Non-Recourse Loan has an 80 – 85% LTV, and can be fixed up to 35 years with a 35 year amortization. 


HUD 241(a) Loan

The HUD 241(a) Loan is low-rate supplemental financing in second position for existing HUD Loan Multifamily and Healthcare properties. The second position loan is co-terminus with the first position loan and must be used for property improvements or expansions. The loan can go up to the lessor of 90% loan to cost or 90% loan to value with a cumulative Debt Service Coverage Ratio (DSC) of 1.11 (first and second combined).


HUD Multifamily Regional Offices

HUD approves multifamily loans through five regional offices. 

  1. Southwest Region: Fort Worth (Regional Center) and Kansas City (Regional Satellite Office). Asset Management: Albuquerque, Des Moines, Houston, Little Rock, New Orleans, Oklahoma City, Omaha, St. Louis, San Antonio, Tulsa
  2. Midwest Region: Chicago (Regional Center), and Detroit and Minneapolis (Regional Satellite Offices). Asset Management: Cleveland, Columbus, Indianapolis, Milwaukee
  3. Southeast Region: Atlanta (Regional Center), and Jacksonville (Regional Satellite Office). Asset Management: Birmingham, Caribbean, Columbia, Greensboro, Jackson, Knoxville, Louisville, Miami, Nashville
  4. Northeast Region: New York (Regional Center), and Boston and Baltimore (Regional Satellite Offices). Asset Management: Buffalo, Charleston, District of Columbia, Hartford, Manchester, Newark, Philadelphia, Pittsburgh, Providence, Richmond
  5. West Region: San Francisco (Regional Center), and Denver (Regional Satellite Office). Asset Management: Honolulu, Las Vegas, Los Angeles, Phoenix, Portland, Seattle



Identity of Interest

HUD looks closely at what they call identity of interest to determine if there is any collusion between buyer and seller, lender and borrower, borrower and the general contractor, borrower and the architect, the general contractor and borrower or supplier, and more. Identify of interest means any relationship based on family, or friendship that can affect a financial outcome in the transaction. HUD mandates that all work relationships be at what is called “arm’s length”, which means there is not a relationship between the parties doing business together that can influence the financial outcome for either part.  


Initial Operating Deficit Escrow (IOD)

The IOD pertains to the HUD 221(d)(4) Loan for new construction or substantial rehabilitation. It is a non-mortgageable expense that is put into an escrow account to cover the cost of debt service from initial lease up through stabilized occupancy. This fund averages 6 months of loan payments but can be more for larger projects, or in submarkets where absorption is slow. A letter of credit can be used to fulfill this obligation. Once the project has enough net operating income to meet the minimum Debt Service Coverage Ratio, the borrower can apply to have the remaining IOD funds refunded. 


Interest Rates – HUD Multifamily Loan

HUD multifamily interest rates change daily and are the lowest rate long term rates in the United States for multifamily properties. HUD’s 35-year fixed rate is often lower than national bank and Fannie Mae 10 year fixed rates. Click on this link to review The Difference Between HUD and Fannie Mae. HUD Multifamily Loan rates are set to the real time 10-year treasury yield called the index. HUD adds a spread onto the index.  For example, if the Index is 3.75% and the spread is 2.00%, the all-in rate is 5.75%.  Most often when the treasury yield goes up, HUD perceives a great risk and raises the spread, and lowers the spread when the treasury yield comes down.  Click on this link to review today’s HUD Multifamily Loan Rates.


Interest Rate Reduction (IRR) Loan Modification

As long as your HUD Multifamily Loan is in good standing, should rates go down in the future, you can apply for an interest rate reduction and get the lower rate. This process takes 60 – 90 days and is at a nominal cost.   


Invitation Letter

The invitation letter on HUD Multifamily Loans is the first part of the HUD approval process for the HUD 221(d)(4) Loan for new construction or substantial rehabilitation.  After a favorable concept meeting with HUD, the lender will prepare the pre-application package for HUD and include any applicable third party reports. Once received HUD will take an average of 60 days to respond. If HUD responds favorably, they do so by sending the lender an invitation letter to apply for a firm commitment. Invitation letters are effective for 120 calendar days. The application for firm commitment must be submitted within 120 days of the date of the invitation letter. 



LEAN Loan Processing

Lean loan processing can only be used for the HUD 232 for new construction or substantial rehabilitation of Senior housing that has a healthcare component, such as senior independent living, assisted living, memory care and licensed nursing homes. The purpose of the lean loan processing system is to save time with the lender using templates and checklists to speed up the process. 


Low Income Housing Tax Credit Program (LIHTC)

The LIHTC tax credit programs purpose is to create more affordable housing in the United States. It is better than a tax deduction that reduces taxable income. LIHTC tax credits provide a dollar reduction for each dollar of the developer’s tax liability. Most developers sell their tax credits to high-net-worth individuals to raise capital to build the project. 


Tax credits can be used for 10 years, but the property must continue as affordable housing for a minimum of 15 years. Tax credits come in two varieties. A 4% LIHTC which covers 30% of project cost, and a 9% LIHTC which covers 70% of project costs. Each state receives an allotment of tax credit funds based on population each year by the federal government. Unfortunately, the demand is much greater than the amount.  Therefore, developers have stiff competition to get approved for the LIHTC tax program.



Market Rate Apartment Buildings

Market rate multifamily properties are far more prevalent than any other type. This is because the owner can charge whatever the market will bear, and they are not required to have annual leases. Renting units month to month is acceptable. This differentiates them from affordable rent apartment buildings, where rents are set based on the Area Medium Income (AMI). Market rate properties are still subject to maximum rental increases in rent control cities. Click on this link to review How Does HUD Define Multifamily.


Market Study

For all new construction or substantial rehabilitation projects, HUD will require a market study completed to HUD specification. This is a feasibility study to determine the need for the project. Included in the report will be a thorough analysis of the submarket including market rental rates, vacancy rates, market conditions, employment opportunities, geographic boundaries and the time estimated for absorption. Most importantly the study will estimate when the property is ready to occupy, how many apartment units will be vacant and what the need for more units will be at that time.  Ideally the study will show that there will be a need for a large number of units in the submarket. HUD requires that the market study not be more than 120 days old when the lender submits the pre-application. 


Mortgageable Costs

Mortgageable costs pertain to the HUD 221(d)(4) Loan program for new construction or substantial rehabilitation on sites where no prior construction work on the project has been done prior to the loan closing. If site work or minor improvements to the property have been completed by the previous property owner, the lender can apply for a waiver from HUD on this issue.  

Mortgageable costs can include:

  • Land Value
  • Demolition Expenses
  • Structure – All physical aspects 
  • Architectural Fees
  • Landscaping
  • Borrower legal expenses
  • Contractors Bond
  • Third Party Reports
  • Builders Overhead
  • Furniture, Fixtures and Equipment (FF&E)
  • Site Work
  • Insurance and taxes during construction
  • Title Fees
  • Loan Financing Fees
  • HUD Fees
  • Mortgage Insurance Premium Fees


Mortgage Insurance Premium (MIP)

All HUD multifamily loans are required to have mortgage insurance for the life of the loan. This allows HUD to guarantee the mortgage with the full faith and credit of the United States Government. The funding for these loans would not exist without this guarantee which allows them to be bundled and sold on Wall Street as high credit Ginnie Mae bonds. 


There is a 1% fee at closing to start the MIP, and then a monthly charge of .25% for green buildings and .60% for standard buildings. This fee is added to the mortgage rate. Click on this link to view today’s HUD Multifamily Loan Rates which have the MIP added in. 


Multifamily Accelerated Processing (MAP)

The HUD Multifamily Accelerated Processing system is a guide designed to lower the amount of time it takes to get a loan approved by HUD and have uniform standards for every phase of the loan process. HUD approved lenders and underwriters must have HUD training on MAP. There are streamlined guidelines for HUD staff, HUD lenders, and every professional contributing to the loan process. This includes all third party consultants that prepare appraisals, market studies, environmental reports and more. Here is a link for the full MAP Guide:


Multiple Single-Family Units Eligibility 

Buying multiple houses with a HUD loan for the purpose of renting them is not allowed.  A FHA residential loan can be used to purchase a duplex, triplex or fourplex and renting units out is allowed as long as the applicant occupies one of the units. HUD multifamily frowns on financing 1 – 3-unit properties in any configuration. However, HUD will finance 2 or more contiguous fourplexes on one or individual tax lots. For more on this click on this link: Buying Multiple House with a HUD/FHA loan and click on this link to review How Does HUD Define Multifamily.



Non-Recourse Financing

All HUD Multifamily loans are Non-Recourse Financing. This means that the key principals that are responsible for the loan do not have to personally guarantee it and risk losing some or all of their personal assets. There is actually no foreclosure process with non-recourse financing. The borrower simply gives the property back to the lender.   With recourse financing should there be a default, the lender after receiving a court judgment can sell the property for whatever amount they can get quickly and then if there is a deficiency, they can obtain that a deficiency judgement and use it to lien your bank accounts, property or any other personal asset. Click on this link for more on Non-Recourse-Financing, and on this link to check out just about everything about HUD Multifamily Loans.



Opportunity Zone

Opportunity Zones are an economic development incentive that allows developers to invest in distressed areas of the United States and defer a portion or all of their capital gains taxes on properties that they have previously sold. If you are planning on new construction or major rehabilitation of a multifamily property and you have cash in the bank subject to capital gains taxes, then investing in an opportunity zone property will allow you to invest those funds into the new project located in an opportunity zone tax deferred. If you hold the newly built property for 10 years, any capital gains taxes are permanently eliminated. There are hundreds of thousands of land parcels and buildings in the U.S. that qualify as opportunity zones nationwide. HUD usually expedites loans where the properties are located in an opportunity zone. 


Owner Draws – Allowable by HUD

HUD allows borrowers to take two draws – every 6 months from the property’s income annually after a CPA financial audit is completed annually. HUD’s purpose in mandating this is to ensure that the owners are not drawing cash from the properties cash flow, but from actual verified profits. HUD multifamily loans have one of the lowest default rates of any commercial loan because of this practice. Click on this link to the Disadvantages of HUD Multifamily Loans, and on this link to view the Advantages of HUD Multifamily Loans.




The pre-application stage for new construction or substantial rehabilitation is designed to permit HUD to review the feasibility of a proposed project in detail prior to the lender, borrower, and HUD spending the time and expense involved in a Firm Commitment application and processing. Pre-application submissions are reviewed for completeness, processed, and underwritten by HUD. HUD will then either reject the transaction, or recommend the loan to be approved, approved with conditions, or returned to the lender for modifications. If pre-approved, HUD will issue an invitation letter to move forward with the next phase – the firm commitment application. Click on this link to view HUD Multifamily Loan Requirements.


Prepayment Penalty for HUD Multifamily Loans

All HUD Multifamily Loans have a declining prepayment penalty for the first 10 years, after which there is no prepayment penalty. The prepayment penalty is typically: 10, 9, 8, 7, 6, 5, 4, 3, 2, 1.  Some HUD lenders put in a prepayment lockout for the first 2 – 3 years.


Project Capital Needs Assessment (PCNA)

HUD requires that HUD 223(f) Loan and HUD 232/223(f) Loan applications for the acquisition or refinance of existing multifamily properties have a PCNA report completed. This is foremost a very thorough property condition report examining all major systems including: structure, roof, electrical, plumbing, HVAC, and much more. Repairs are stated as critical or non-critical repairs. This is also a Capital Needs Assessment (CNA) report that estimates the cost of maintaining the properties major systems over time. Each system will be give an estimate of years remaining before needing replacement. This report determines the initial reserve amount for replacement reserves collected at closing and on-going monthly replacement reserves amount that will be made with the loan payment. 


HUD requires that a new PCNA report be completed every 10 years.



Reserve Fund for Replacements - Replacement Reserve Account

Based on what is suggested in the PCNA report, HUD requires that the lender maintain a reserve fund for replacements. These funds are to be deposited monthly based on so many dollars per unit per year to cover the cost of replacing any item of all the systems of the property. The borrower usually covers the cost for the repairs or replacements and then turns the receipts into the lender to get reimbursed. After 4 or 5 years, should it be determined that this fund has accumulated excess funds, the lender can request a waiver from HUD to suspend the collection. This will then be reviewed annually.


Residual Receipts

Borrowers are allowed 2 distributions of the property’s income annually. Residual receipts refer to the surplus cash remaining in the borrower’s operating account after distributions are paid. 



Secondary Financing

HUD will allow secondary financing from another party if it’s from grants, affordable housing programs, and green programs up to 100% of fair market value, but rarely approves seller financing in second position. For major remodeling, repair or adding on to the properties that have an existing HUD multifamily loan, HUD has supplemental financing available up to 90% cumulative LTV (combines first and second). See HUD 241(a) Loan above. 


Section 8 Voucher Program

The Section 8 Voucher Program is HUDs main subsidy program for helping low income, disabled and elderly renters be able to afford quality housing located not only in subsidized housing projects where the entire building is subsidized, but also in individual rentals that accept the vouchers. In the latter, participants are allowed to freely choose the neighborhood and style of residential unit including single family homes, 2 – 4 multiplex buildings, and apartment buildings. 


Section 8 vouchers are administered in each state by Public Housing Agencies (PHAs), which receive federal funding from HUD. The subsidies are paid directly by the PHAs to the landlord which have to have their properties approved by the PHA. It can take up to several years for a tenant to be approved by the PHA for a section 8 voucher there  are limited funds and always a long waiting list. 


There are two types of section 8 voucher programs. The Housing Choice Voucher Program which where the vouchers are issued directly to tenants that can use them anywhere, and the Project Based Voucher Program, where the vouchers are issued to specific buildings.  


Scattered Sites

HUD will consider a scattered site transaction consisting of two or more nonadjacent parcels when the parcels are owned and managed by one real estate entity. Each parcel must have at least 5 units. Scattered site transactions have to be approved by HUD.  


Single Asset Entity

HUD requires that the property be directly owned by a single asset entity (owns no other assets accept the subject property). This is most often an LLC, but can also be a general partnership (GP) with two or more partners, a Limited Partnership (LP) with one or more general partners, an S Corporation or a C Corporation.


Single Room Occupancy

Single room occupancy refers to an apartment building consisting of single room dwelling units that are the primary residence of their occupants. In the case of new construction, HUD does not prefer buildings that exclusively have SRO’s, unless the market study supports this use. For new construction HUD requires that all SRO’s have their own food preparation areas and bathrooms.  In the of acquisition or refinance of existing multifamily buildings, shared kitchens and bathroom facilities are allowed. HUD Multifamily does not allow student housing. 


Single Room Occupancy (SRO): Single Room Occupancy (SRO) housing means housing consisting of single room dwelling units that are the primary residences of their occupants. HUD’s definition of SRO has been revised to require the unit to contain either food preparation areas or bathrooms (they may contain both) only if the property consists of new construction, conversion of non-residential space, or reconstruction. For acquisition or rehabilitation of an existing residential structure, neither food preparation nor sanitary facilities are now required to be in the unit. If the units do not contain sanitary facilities, the building must contain sanitary facilities that are shared by tenants. Substantial Rehabilitation (HUD Definition): HUD


Stabilization of Property

The stabilization of a commercial property refers to when a newly built or renovated property reaches market occupancy. Commercial construction appraisals have a separate - as completed valuation and as stabilized valuation.


Substantial Rehabilitation

When renovating an existing multifamily property HUD considers the project to be substantial rehabilitation when major repairs or replacements are done on two or more major building systems such as electrical, plumbing, HVAC, Structure, etc. Also when the cost of the renovations are over $15,000 per unit, over 15% of the property’s replacement value, and over 20% of the loan proceeds. In the case of substantial rehabilitation, a HUD 221(d)(4) Loan has to be used. If the renovations do not exceed these the thresholds above, HUD will consider the project minor rehabilitation and a HUD 223(f) Loan can be used which has fewer components and takes less time.   


Syndication – Real Estate

When the sponsor raises the down payment from one or more passive investors who have no other role than contributing their funds, the Securities and Exchange Commission (SEC) will require the sponsor to form a Real Estate Syndication. The SEC views this transaction as a security because the investors have to trust the sponsor/ syndicator with their cash just as investors have to trust a funds manager when investing in publicly traded stock. SEC Regulation D allows the syndicator to raise unlimited cash from accredited investors who are strong financially. HUD has a favorable view towards syndicated transactions. 



Tax and Insurance Reserve Escrow Account

All HUD Multifamily Loans require monthly tax and insurance escrows to be collected monthly with the loan payment. 


Third Party Reports

The borrower is required to pay for all third party reports including but not limited to the Appraisal, Market Study, Phase I or Phase II Environmental, PCNA (property condition report), Sound Study, Green Study, and Wetlands Study. Pre 1978 properties will be required to have asbestos and lead based paint testing. All reports may be financed with the loan.


Trended Rents

Trended rents are rents based on inflation and historical rent growth projected forward.   HUD tends to be conservative and gives more weight to current rents or untrended rents which assumes no future rental growth. However, HUD will consider some future rent growth in the rent roll pro forma. 



Utility Allowance

Utility Allowance: Utility allowances are estimates of utility costs (except cable television and telephone) for an average family occupying a unit of a particular size in a specified MSA. Utility allowances apply to HUD-assisted multifamily rental housing that receives rental subsidy assistance, where all or some of the utilities are paid directly by the resident. In HUD-assisted multifamily rentals with Section 8 contracts, the residents in units assisted with Section 8 may pay no more than 30 percent of their adjusted gross monthly income toward rent and utilities. The balance is covered by the Section 8 payment. 



Working Capital Escrow (WC)

For HUD 221(d)(4) Loans, for new construction or substantial rehabilitation, HUD requires the borrower to put 4% of the loan amount into a working capital escrow account to cover the cost of Furniture, fixtures and equipment (FF&E) outside of the construction budget, construction cost overruns above the contingency, marketing the property for lease up, operating expenses, taxes and insurance, or any other unforeseeable expense prior to the property being stabilized. The WC escrow cannot be funded from the loan proceeds. A letter of credit can be utilized in lieu of cash. Any unused WC funds remaining in the escrow will be released at the borrowers request and returned to the borrower when the property reaches the required Debt Service Coverage Ratio (DSCR) or within 12 months after the final endorsement when HUD has approved the completion of the construction. 







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HUD Loans are one of the best options with the current level of interest rates. For a complete guide to HUD Multifamily Loans please go here:

HUD Multifamily Loans - The Complete Guide