The federal policy for real estate finance can impact neighborhoods and communities.
For example, agency lenders (FHA, Fannie Mae, or Freddie Mac) can fund non-recourse 30 year mortgages for buildings up to four residential units.
However, if the project is five units or more, many developers do not use a federal loan program, rather rely on a local bank for a commercial construction loan which may require a 30% down payment and a personal guaranty.
Many small and rural developers who want to develop mid-sized mixed use projects are not able to access the favorable financing that large developers rely on.
For example, HUD;s 221(d)(4) Loan Program’s underwriting requirements are pretty competitive:
- Equity requirement is only 16.5%.
- Loan term is fixed for 40 years.
- The loan converts from construction loan to permanent loan.
- The loan is assumable
- There is no personal guaranty required.
However, the underwriting standards have specific restrictions upon how much commercial space is allowed in the building and how much commercial income can be considered in the rents the project will collect.
HUD recently released the 2016 Multifamily Accelerated Processing guide. There have been some changes made to support transit friendly, mixed use neighborhoods.
- The 10% Cap on Gross Commercial Income has been raised to 15%.
- The 15% Cap on Gross Commercial Area has been raised to 25%.
So if you are a developer who wants to build a four story mixed use building and devote the ground floor to commercial use, you may want to take another look at HUD’s 221(d)(4) loan program.