Market Rate Multifamily Housing

PDF Version New Construction or Substantial Rehabilitation
HUD Section 221(d)(4)

Loan Program Highlights

Fixed Interest Rate
Fully Amortizing
Non-Recourse during Construction and Permanent Loans
Assumable Construction and Permanent Financing

Eligible Properties

New construction or substantial rehabilitation of apartment properties.

For a property to qualify for substantial rehabilitation it must be at least three years old and the scope of work (not including costs of an addition) must:

  • Exceed in aggregate cost a sum equal to the base per dwelling unit limit times the applicable High Cost Factor or
  • Replace two or more major building systems. There are 5 building systems (Structural Frame, Building Envelope, Mechanical, Electrical and Plumbing) and a system is considered “replaced” when the costs of replacement work equal or exceeds 50% of the cost of replacing the entire system.

Maximum Term

40 year term, fully amortizing, plus construction period

Debt Service Coverage

1.176 DCR on an underwritten vacancy of at least 7%

Loan to Cost:

85% of Replacement Cost

Personal Liability

FHA loan is non-recourse, with standard carve-outs.


Yes, subject to FHA approval

Fees and Expenses

0.30% application fee. Financing and permanent placement fees of up to 3.5% are based on final loan amount and payable at closing. HUD inspection fee for new construction is 0.5% of mortgage amount. Third party reports include an Appraisal, Market Study and Phase 1 Environmental Site Assessment as well as an A&E and Cost Review.

Mortgage Insurance Premium

0.65% of the outstanding principal balance calculated annually. Reductions in MIP are available for qualified Green/Energy Efficient Housing.

Other FHA Requirements

  • Construction Contingency is allowed for Substantial Rehabilitation only and ranges from 10% to 15% of the sum of structures, land improvements, and general requirements based on the condition of the structure.
  • Commercial space is limited to 25% of total net rentable area and commercial income to 15% of effective gross income (waivers allowable).
  • Secondary Financing from federal, state or local agencies is permitted, but must be fully subordinated to the HUD insured loan and repaid from cash flow.
  • Working Capital Escrow equals 4% of loan amount with 2% allocated to construction contingency and 2% to working capital expenses. Initial Operating Deficit escrow will also be required. Both escrows can be posted in cash or letter of credit
  • Escrows for property taxes, insurance, MIP and replacement reserves are required and will be held by the Lender.
  • The absorption period used in estimated market demand is restricted to 18 months.
  • Any “offsite” construction costs or demolition costs require separate funding by the borrower.
  • Borrowers, management agents, contractors and subcontractors must comply with HUD Fair Housing and Equal Opportunity requirements.
  • HUD requires that all parties (Principals, General Contractor, Architect and Management Agents) have multifamily development experience.

General Contractor Requirements

  • The general contractor must pay Davis-Bacon prevailing wage rates as required by the Department of Labor.
  • A cost certification for the general contractor and owner will be required after construction completion.
  • The general contractor must provide a 100% performance and payment bond (or 15-20% cash escrow or letter of credit acceptable to FHA), and have liquid net worth equal to at least 5% of the project construction contract plus all other uncompleted construction work.