HUD’s newly issued Mortgagee Letter 2016-12 extends FHA-insured financing to Build-to-Rent (BTR) communities, creating an exciting new opportunity to develop, acquire, and refinance rental properties containing detached homes, duplexes, and triplexes. Age-restricted BTR communities (62 and over) also are eligible.
Historically, HUD’s multifamily insurance programs focused on buildings with four or more units, leaving many single-family-style rental communities outside the platform. Under the new policy, qualifying BTR developments can be financed as multifamily rental properties through:
- Section 221(d)(4) for new construction; and
- Section 223(f) for acquisition or refinancing of recently developed properties with certificates of occupancy issued within the prior three years.
Eligible projects must contain at least five units, occupy one cohesive contiguous site, and operate as a single rental property. The site can be made up of individual plots provided they are all connected. Projects may include detached houses, duplexes, triplexes, or a mix of BTR and traditional multifamily buildings.
The new financing path is promising, as FHA-insured loans are high-leverage, non-recourse and fixed rate instruments. However, BTR lease-up may be slower than traditional multifamily because construction and occupancy often occur on a rolling basis. For new construction, HUD may allow up to 24 months for absorption, and the initial operating deficit escrow, funded outside the insured loan, must be the greater of 3% of the loan amount or four months of debt service.
Operating and reserve assumptions should also reflect the nature of BTRs. For example, roads, landscaping, roofs, exteriors, windows, and other components are spread across more buildings, which can increase operating costs and replacement-reserve needs. Market-rate projects must generally underwrite vacancy at the greater of 7% or the comparable market rate; affordable properties require at least 5% vacancy.
HUD’s policy change recognizes a major market shift: growing demand from households seeking the space, privacy, yards, garages, and neighborhood feel of a home without the cost or commitment of ownership. It gives developers and owners access to a financing framework designed for long-term rental housing while serving a segment that sits between conventional apartments and homeownership.
Contact us if you’re interested in how HUD’s outstanding financing programs can be used to finance your BTR development.
