New Construction/Sub Rehab
Explanation New Construction-Map Loans
The FHA/HUD new construction/substantial rehabilitation program is designed for apartments and health care facilities and is a conventional loan. FHA insures the mortgage and this results in favorable terms and low rates. Subsidy requirements, affordable housing percentages, and low/middle income requirements for tenants do not apply. The program allows for upscale projects with pools, tennis courts, etc. as long as market rents and market expenses support the costs.
The terms are a fixed rate (no balloon) construction loan based on 83.3% of costs, and a 1:20 Debt Service Coverage Ratio (Utilizing 83.3% of NOI). When final construction numbers are accepted, the loan rolls into a 40 year fixed rate permanent at the same rate. Many transactions allow a credit for appreciated land value. This calculation uses value estimates from an appraiser for the intended use of the land as of the closing date. In turn, this may allow loan sizes to climb to more than 100% of total project “costs”. The construction mortgage and the permanent are both non-recourse and always assumable (not just “one time”). The forty-year amortization period starts when construction is completed and it becomes a permanent mortgage. The program also allows for a 10% Builder’s Sponsor’s Profit Risk Allowance (BSPRA) for apartments. This is similar to a developer fee that is based on all the hard and soft costs except the land.
The FHA Insurance Process:
Upon receipt of the signed agreement, we will send you a list of additional information needed for the pre-application review by credit committee. Depending on the HUD office, there may or may not be a pre-application meeting. We will package the additional information and send it for final credit committee approval. When the pre-application package is complete, it will be sent to the HUD office for review. Third party Feasibility and a Phase I Environmental Report are required at this stage. The project essentially gets a pass/fail during the pre-application review by FHA/HUD. The pre-application results in an invitation letter that will include rents and operating expenses that FHA will COMMIT to underwrite to. This is a commitment for the 1.20 DSC mortgage calculation of the underwriting. Transactions that receive an invitation letter generally close. We have always received a commitment after receiving the MAP invitation letter.
After the invitation letter is received, the lender and the borrower will put together a Firm Submission Package. Assuming that no new problems or concerns arise (see above), the loan should be committed within 30 to 60 days of FHA/HUD’s receipt of the firm submission package and the exam fee (payable to HUD). The commitment to insure the mortgage is good for thirty days (with one extension) and we can close within a few weeks provided the local HUD offices’ schedule could accommodate us. Reasons for which a firm commitment might not be issued include an unqualified builder, or borrower who supplied erroneous information.
The firm submission is extensive and includes complete plans and specifications and qualifications and statements for the borrowing entity, general contractor, management agent, architect and others involved with the project.
New Construction FHA-Insured MAP Processing Costs
STAGE I: Pre-application
1) Packaging Fee $12,500 (refunded at closing) We visit the site, borrower, architect and other parties such as management agent, contractor etc.
2) Final credit committee approval after receipt of all required documents.
3) Phase I Environmental estimated $2,000
4) Feasibility Study & limited appraisal estimated $8,500
5) The pre-application fee of 15 basis points or 0.0015% of the mortgage amount.
6) Submitted to HUD for an invitation letter after all the pre-application documents are submitted.
For Health care properties, this step is combined with the Firm Submission so it is “One Step” instead of two. We do the equivalent of an in house pre-application in order to establish marketability.
In cases for both apartments and health care projects, where we have market concerns, we will have a market analysis performed by the contractor who will do the feasibility study to determine marketability of the development before funds are expended for detailed plans and specs.
Stage I can take 1-2 months to complete the feasibility study and HUD may require 1-2 months to issue the invitation letter. HUD has 45 days to issue the invitation letter per the handbook
STAGE II: Firm Submission (This stage can be submitted at the same time as STAGE I)
1) Processing Fee (paid)
2) Appraisal estimated $ 5,000
3) Engineering Review estimated $ 5,000
4) Cost Review $ 5,000
5) Balance of the Exam Fee to HUD of 15 basis points or 0.0015% of the mortgage amount.
Additional costs that you may incur include architects, legal expenses, other fees that may be charged by municipalities, sellers etc. After all construction documents, borrower and management agent documents are received it is packaged and the required number of copies are sent to HUD with the appropriate exam fee.
STAGE II can take HUD 1-2 months to issue the commitment. They are required to issue the commitment within 60 days by handbook. Borrower typically takes two to four months just to complete plans, specs and get final costs
STAGE III: Closing (a few weeks from receipt of the commitment)
1) Good Faith Deposit, locks the rate and is paid two to four weeks before the closing at ½% to 1% of the mortgage amount. It is always refunded at closing
All costs are financible if they are determined to be reasonable. ( eg: Attorney’s fees of $15,000 to handle the closing may be reasonable. Attorney’s fees of $200,000 on $2M loan would not).
The closing is the first draw of the construction loan and construction starts immediately. All documents including signed construction contract, completed commercial grade plans and specs etc. are submitted with the firm submission.
STAGE IV. Permanent Closing
After construction is completed a CPA completes a “Cost Certification” or audit of the General Contractors books and records for the loan. When this audit is accepted by all the parties, the mortgage becomes a permanent mortgage and the 40 year term starts. At this time the working capital (2% of the mortgage amount) is released back to the borrowing entity. These closings usually occur by mail.
The total time line can take from 6 to 9 months depending. The shorter time frame is if we are allowed to submit both the pre-application and the firm submission together in one step. This is not allowed in the current market by most HUD offices as they want to establish feasibility first. For more detailed information, please review the 221(d)4 program for apartments and the 232 program for health care on the WEB at www.HUD.gov. Choose multifamily housing.
Email us at info@trustlender.com to find out if your project is eligible for FHA insurance or call 800-536-3371.