There are many moving parts during the HUD/FHA 221(d)(4) application process. Read on for more information about what to expect during the stages of development, including general guidelines for builders and developers that gives insight into the process of obtaining HUD/FHA insured 221(d)(4) financing for a multifamily apartment project.
Site Analysis Details
Once the developer identifies the site, or the land that is going to be chosen for the project, they should prepare an analysis to provide to potential investing partners and to lenders. This analysis should include a construction budget, detailed pro-forma that details the construction costs as well as a stabilized operating budget, and an organizational chart that lists principals for the transaction. The site analysis should also contain details of the project such as the number of units, bedroom count, number of stories, zoning, parking, commercial and ancillary income. The developer should be familiar with the (PMA) Primary Market Area of recent new construction projects that have been completed, and existing comparable projects. The lender will want to review an estimate of the average occupancy of properties in the market that are comparable, and rents and expenses of those properties. The developer should have a good understanding of the demand and supply of the project type to ensure that they can lease up the project based on their estimations. The developer should also have a good understanding of the rents that they will be able to charge as well as the demand in the market, and they need to estimate the expenses and costs that it will take to operate the project, factoring in the normal management fee estimate of approximately 5%. While preparing the site analysis, the developer should have a general contractor and architect in mind that has prior experience completing similar projects. Finally, the developer needs to make sure that they will have access or site control in order for an Environmental Report to be completed.
Review from FHA & HUD Approved Lenders
Once the site analysis is submitted to a lending advisor such as LSG Lending Advisors, they will submit these items to an approved FHA HUD lender that will provide a term sheet. The term sheet will cover the terms, costs, and eligible transaction amount for the project. The term sheet will also have an estimated interest rate based on the current rate environment. If you choose to proceed, an Engagement Letter will be drawn up providing these details for you to review prior to execution. Once the lender receives details on the development team, identifies the principals, general contractor, and management agent, they will perform due diligence. The lender will usually complete their own review of the market that includes the current and historical average occupancy of existing projects that are comparable. This review also includes other new construction multifamily apartments and units that are going to be completed in the area in the near term. For recently completed new construction projects, a review of the absorption rate per lease up will be analyzed. The lender may also want to order a market study prior to a concept meeting with HUD, in markets that are outside of what is considered in obvious needs of supply.
Primary Market Area Review
HUD looks at several factors when considering an invitation to submit an application. They want to make sure that the projected rents are in line with the comparable existing projects. HUD will also review the new construction pipeline in the PMA (Primary Market Area) because they want to make sure the supply does not exceed the current demand. Primary Market Areas in which demand exceeds the current supply, are less of a risk as new units will likely be absorbed quickly. Also, HUD will review the physical occupancy of the comparables in the PMA since they want to see that the occupancy percentage is high, and that the occupancy percentages are trending upward. A decrease in occupancy percentage could point to a declining market with increased risk. Next, HUD will review other insured projects in the area and how they are currently performing. If the concept meeting receives a favorable response from HUD, the lender will order a limited appraisal, environmental assessment, and market study, if one has not been ordered prior to the concept meeting.
Finalizing the Construction Contract & More
The next stage of development prior to breaking ground on a 221(d)(4) new construction project for a multifamily apartment includes many moving parts. Upon receipt and review of the 3rd party reports, the construction contract is finalized. Next up is the construction budget, and when it is completed, the operation plan can be finished. Once the limited appraisal and market study are completed and reviewed, the proposed rents and expenses are adjusted, and the lease up and absorption schedule are finished. At this time, the architectural plans are completed and building permit approvals are requested from the city. After approvals from the city and the Lender, the groundbreaking can begin for your new multifamily apartment project.
LSG Lending Advisors is here to assist you throughout the process of working with a HUD approved Multifamily Accelerated Processing (MAP) lender to submit and complete your application.