In early 2020, HUD announced a major change to their 223(f) refinance program which was further
expanded upon with the publication of HUD’s multifamily underwriting guide in December 2020.
Previously, if you did not use HUD to construct an apartment building, you could not refinance with HUD
for three years post-certificate of occupancy. That arbitrary waiting period is now removed. HUD will
now accept refinance requests when they hit the following metrics:
● A loan application can be submitted to HUD after the property has achieved the programmatic
HUD debt coverage ratio (1.11x-1.176x) for no less than one full month. 1.11x coverage is
required for affordable apartment buildings. 1.176x is required for market rate apartment
buildings. This is different from a minimum occupancy threshold. Theoretically if a property was
only 70% occupied, but had strong enough cash flow that it could meet HUD’s debt coverage
requirements (based upon the size of the HUD 223(f) refinance/takeout loan), the package could
be submitted to HUD. Again, HUD is looking for this debt coverage based on the new loan. If you
presently have 1.20 DCR on a $7mm loan, and are looking for a $10mm cash-out loan with HUD,
you’d need to support the minimum debt coverage on the $10mm loan sizing.
● The project must maintain this debt coverage for three consecutive months prior to closing. To
reiterate, you need one month of debt coverage to submit to HUD and then three consecutive
months must be held prior to closing. The three consecutive months can be secured while HUD
is reviewing the underwriting package. If you dip below the required DCR levels at some point in
this three month period, it is likely HUD will decline the request and you will have to start over.
● HUD will need to see an income and expense statement from time of initial occupancy to
submission, along with rent rolls and a leasing-history. Concessions, short term leases and other
discounts to incentivize tenants to enter into a lease will need to be delineated.
● The DCR HUD is looking for will be based on actual in-place rents and expenses, not hypothetical
appraised values.
● Cash-out is allowed, however 50% of the available cash-out will be held until the project
maintains the above referenced debt coverage for six consecutive months.