HUD’s Three-Year Waiver – One Year Later

It has been just over one year since HUD waived its “three-year requirement” for multifamily projects to be eligible for mortgage insurance under the Section 223(f) refinancing and acquisition program.  Prior to that, a multifamily property could not benefit from obtaining a 223(f) loan until it was in service for three years, an eternity, especially when current rates for HUD-insured loans have been at historically low levels.  Developers unwilling to wait three years have historically used HUD’s Section 221(d)(4) program to finance new projects. 

However, the three-year waiver has given multifamily developers an opportunity to finance new projects with the best of both worlds – short-term bank financing for construction followed by a HUD take-out once the project has reached a modest level of stabilization.  How modest?  HUD will accept an application for 223(f) mortgage insurance after the property has reached one month of 1.176 debt service coverage and will close on the loan after three consecutive months at that same coverage has been achieved.   

However, developers considering bank financing for multifamily construction instead of a 221(d)(4) loan, then using a 223(f) loan to take out the bank debt should consider the advantages and disadvantages of that approach.

The advantages:

• The time to complete the bank financing will be shorter, enabling construction to start sooner.  
• Davis-Bacon “prevailing” wages for construction will not be required with a bank loan.
• The construction contract and architect agreement can be structured with more flexibility.
• The bank’s application will be less complicated and esoteric.

The disadvantages:

• Bank loan-to-cost ratios are lower, which means more equity will be needed to complete a bank deal.  Some of this additional equity can be recovered with the 223(f) loan, as cash-outs at 80% loan-to-value underwriting are permitted.
• Banks require recourse and personal guarantees.
• There is interest rate risk on the 223(f) loan since it will not close until after construction is completed and there has been at least three months of stabilized debt service coverage.
• Construction lending by banks has been somewhat curtailed during the COVID-19 pandemic. 

We recently assisted a prospective client evaluate these options for a market-rate multifamily development in Florida and would be pleased to do the same for you.