What is a Single Asset Entity (SAE)?
A single asset entity, or SAE, is usually a limited liability company (LLC) that owns real estate but no other assets. In real estate, an SAE is typically set up for the ownership of a property. HUD multifamily loans typically require that borrowers hold their property in a single asset entity, which is also often referred to as a single-purpose entity (SPE).
What is a Seismic Report?
A seismic report, also referred to as a seismic assessment, gauges the seismic risk (probability of an earthquake) of a particular property. It may include calculations of the SML (Scenario Expected Loss) and PML (Probable Maximum Loss) consistent with current building codes.
What is Substantial Renovation?
As defined by HUD, substantial renovation can occur in several situations. First, it can occur if a renovation involves making required replacements, repairs, and improvements that involve the replacement of two or more major building components. It can also happen when rehab costs exceed certain thresholds, including $6,500 per dwelling unit (adjusted by HUD's authorized high-cost percentage), 15% (exclusive of soft costs) of the property's replacement cost/ fair market value after required repairs, replacements, and improvements, or 20% of mortgage proceeds for rehabilitation expenses.
What is Subsidized Affordable Housing?
With subsidized affordable housing properties, residents receive rent assistance but are required to pay at least 30% of their income for rent and utilities. Examples include HOPWA Facility-Based Housing, Section 8 Public Housing, and Homeless Project-Based Units.
What are Replacement Reserves?
Replacement reserves consist of money set aside to fund the replacement of a building’s equipment and components as they wear out. All HUD multifamily loans require a minimum amount of replacement reserves, but this varies based on loan type. For example, HUD 221(d)(4) loans require a minimum replacement reserve of $250/per unit, per year. Exact replacement reserve requirements are typically determined by a PCNA (project capital needs assessment), which must be completed every ten years.
What is a Single Room Occupancy (SRO) Housing?
Single Room Occupancy (SRO) housing is housing with single room dwelling units which are the occupants’ primary residences. HUD requires new construction, reconstruction of SRO units, and the conversion of non-residential space to contain either food preparation areas or bathrooms (or both).
What is Underwriting?
In the underwriting process, lenders determine if borrowers meet certain criteria by examining their credit, capacity, and collateral (the 3 Cs).
What is SPRA (Sponsor's Profit and Risk Allowance)?
SPRA (Sponsor's Profit and Risk Allowance) is no more than 10% of the total estimated cost of: architect's fees, legal, organizational, carrying and financing charges, and audit expenses. It is included in the Replacement Costs and used if there is no identity of interest between the mortgagor and general contractor.
What are Rental Assistance Properties?
Rental assistance properties are defined as properties in which low-income or very low-income tenants qualify for monthly rental assistance. The most common rental assistance program is the HUD Section 8 program. Many properties funded with HUD 221(d)(4) and HUD 223(f) loans participate in Section 8, and Section 8 properties financed with these loans can also be refinanced through the 223(a)(7) program.
What is Rehabilitation?
Rehabilitation is defined as any costs (including materials, tools, and labor) associated with improving buildings. This usually excludes routine and/or minor repairs. While HUD 221(d)(4) loans are equipped to handle the substantial rehabilitation of multifamily properties, HUD 223(a)(7) loans can typically only finance moderate repairs.
What is a Recourse Loan?
If a loan is recourse and the borrower defaults (fails to repay the loan), the lender can go after both the collateral and the borrower’s assets which are not used as collateral. Fortunately for borrowers, all HUD multifamily loans are non-recourse, which means the lender cannot go after any non-collateral assets in the case of a loan default. However, most HUD multifamily loans do include “bad boy” carve-outs, which state that if a borrower commits certain bad acts, like fraud or embezzlement, the loan will become recourse.
What is Renovation?
In terms of HUD multifamily loans, renovation can be defined as repairs or reconstruction activities involving 75% or less of a facility or building’s value before rehabilitation. While HUD 221(d)(4) loans can finance the renovation of multifamily properties, HUD 223(a)(7) loans typically cannot.
What is Prepayment?
Prepayment occurs when a borrower pays off a mortgage balance before maturity (the end of the loan term). The FHA requires prior approval for the prepayment of HUD multifamily loans. In most cases, HUD multifamily loans require a prepayment penalty, which reimburses the lender if the borrower attempts to pay off the loan early. Most HUD multifamily loans have a two-year lockout (a period in which the borrower cannot repay the loan at all), followed by an 8-1% declining prepayment penalty.
What is a Pro Forma Financial Statement?
Pro forma calculations are financial results which highlight current or projected figures. For example, in order to showcase the potential profitability of a multifamily property which has not yet been constructed, investors and developers may send a pro forma income statement to lenders.
What is the LIHTC (Low-Income Housing Tax Credit)?
The LIHTC (Low-Income Housing Tax Credit) is a federal tax incentive designed to increase availability of low-income housing. As long as the property follows LIHTC requirements, LIHTC is available. However, LIHTC credits can only be claimed for ten years after construction is completed and a property is leased up. In general, the LIHTC program only available to HUD 221(d)(4) and HUD 223(f) properties. In general, if those properties are refinanced with a HUD 223(a)(7) loan, the HUD 223(a)(7) loan will not adversely affect the LIHTC.
What is the Fair Housing Act?
The Fair Housing Act, which was enacted as Title VIII of the Civil Rights Act of 1968, prevents discrimination during the home buying process on the basis of race, national origin, color of skin, ethnicity, religion, gender, familial status, or disability. In 2017, a federal judge ruled that sexual orientation and gender identity were also protected classes under the Fair Housing Act.
What is the Federal Housing Administration?
The FHA (Federal Housing Administration) was created in 1934 by the National Housing Act to promote home construction and reduce unemployment. The FHA does this partially by operating several loan insurance programs, including insurance for 1-4 unit properties under the 203(b) and 203(k) loan programs, and insurance for multifamily and healthcare properties under the HUD 221(d)(4), HUD 223(f), HUD 232, and HUD 223(a)(7) programs. Even though the FHA operates loan insurance programs, it builds no properties and makes no loans.
What is FHA Mortgage Insurance?
FHA mortgage insurance protects lenders against loan default and decreases risk for lenders. In the event of default, the FHA pays claims based FHA criteria.
What is MAP (Multifamily Accelerated Processing)?
MAP (Multifamily Accelerated Processing) establishes national standards for approved lenders to prepare, process, and submit applications for FHA/HUD multifamily financing. Lenders that are MAP-approved will typically see their borrower’s applications processed much more quickly than those that use TAP (Traditional Application Processing.)
What is a Multifamily Rental?
Multifamily rentals, which are also known as multi-dwelling units/MDUs, comprise multiple but separate living units within a structure or structures. A common example is an apartment building, but multifamily rentals can also come in the form of duplexes, triplexes, quadplexes, mixed-used properties, and independent living facilities. Smaller HUD loans, like the FHA 203(b) loan can finance 1-4 unit properties. HUD multifamily loans, such as HUD 221(d)4) and HUD 223(f) loans, can finance apartment buildings, mixed-used properties (with limits on the amount of commercial space), and independent living units.
What is an Architectural Report?
An architectural report describes a property’s condition and code compliance including the building’s condition along with the site and the property’s systems. Reports often contain written descriptions and photographs explaining the building inspection, relevant building codes, and zoning ordinances.
What is Loan-to-Cost Ratio (LTC)?
Loan-to-cost ratio (LTC) is a metric that compares the amount of financing a real estate construction project has to the cost it will take to build the project. In terms of HUD multifamily loans, LTC typically only affects HUD 221(d)(4) loans and HUD 232 loans, as these types of financing involve the new construction or substantial rehabilitation of multifamily and healthcare properties.
What is an Engineering Report?
An engineering report is an assessment of a property’s physical conditions and risks by an engineer and other specialists that could affect the property’s value. This report might contain issues or flaws found in the property. Like architectural reports, engineering reports are typically only required for HUD multifamily loans that finance new construction or substantial rehabilitation, such as the HUD 221(d)(4) loan, or the HUD 232 loan for senior healthcare properties.
What is BSPRA (Builder and Sponsor’s Profit and Risk Allowance)?
Basis points measure changes in interest rates and other financial percentages. 1% change = 100 basis points, and 0.01% = 1 basis point. Convert basis points into a percentage by multiplying the basis points by 0.0001. For example, 275 basis equals 0.0275 (275 x 0.0001) or 2.75% (0.0275 x 100).
What is Escrow?
Escrow refers to assets (money, funds, and securities) held by a third party on behalf of two other parties before a transaction is complete. In the case of HUD multifamily loans, such as the HUD 223(a)(7) loan, property taxes, MIP, and required replacement reserves are typically held in escrow by a lender.
What is Loan Assumability?
Assumability is the ability to transfer an existing mortgage and all terms from the current borrower to a buyer. In many cases, this keeps the new buyer from needing to obtaining a new mortgage, though they are free to do so if they desire. While all HUD multifamily loans, including HUD 221(d)(4) loans, HUD 223(f) loans, HUD 232 loans, and HUD 223(a)(7) loans are fully assumable, the FHA requires prior approval along with a 0.05% fee of the original loan amount.
What is Leverage?
Leverage refers to the amount of debt used to finance an asset. Basically, it is the act of financing assets with borrowed money. When using leverage, the asset is collateral for the purchase. In general, lenders limit the amount of leverage borrowers can use.
What is Low-to-Moderate Income Housing?
Low-to-moderate income housing is housing designed for people whose incomes are low to moderate when compared to prevailing incomes in their area. HUD attempts to promote the supply of low-to-moderate income housing via the Section 8 and LIHTC programs, both of which are available to properties financed with HUD 221(d)(4) and HUD 223(f) loans. HUD 223(a)(7) loans are fully equipped to refinance HUD 221(d)(4) and HUD 223(f) properties with low-to-moderate income housing-based income restrictions.
What is Default?
Default is defined as the failure to meet mortgage terms including not making payments and not performing other stated obligations specific to the mortgage. Unfortunately, due to the fact that most HUD multifamily loans are issued to real estate projects held by special purpose entities (SPEs)/single asset entities (SAEs), it is often impossible for a developer or investor to inject cash directly into a property to save it from a loan default.
What is an Interest-Only Fixed-Rate Loan?
Interest-only fixed-rate loans are mortgages in which a borrower pays only interest and nothing towards the mortgage principal. Interest-only fixed-rate loans are only offered by two HUD multifamily loan programs, the HUD 221(d)(4) program, and the HUD 232 program. In both cases, these loans are offered for up to 3-year periods during the construction phase of a project.
What is HUD?
HUD, or the U.S. Department of Housing and Urban Development, was set up by President Lyndon Johnson in 1965 as part of his "Great Society" program. It is part of the Executive Cabinet. HUD’s purpose is to develop and execute housing policies, specifically concerning affordability and sustainability. To do this, HUD offers a variety of mortgage insurance products for both singe-family homes, multifamily properties, and healthcare facilities.
What is MIP (Mortgage Insurance Premium)?
MIP (Mortgage Insurance Premium) consists of annual payments on HUD mortgages. MIP is first paid at closing, and typically costs 1% of the loan amount, though this varies. MIP for HUD multifamily loan programs must then be paid annually. Specific costs also vary by program.
What is a HUD-Approved Lender?
A HUD-approved lender is a lender which can offer HUD-insured financing. In order to issue HUD loans, particularly HUD multifamily loans, a lender must meet several requirements. These include having a specific net worth and a specific amount of liquidity, having a clean legal and financial record, and having a sufficient amount of errors and omissions (E&O) insurance. HUD-approved lenders must also send all of their underwriters to an in-person training session with HUD.
What are Basis Points?
Basis points measure changes in interest rates and other financial percentages. 1% change = 100 basis points, and 0.01% = 1 basis point. Convert basis points into a percentage by multiplying the basis points by 0.0001. For example, 275 basis equals 0.0275 (275 x 0.0001) or 2.75% (0.0275 x 100).
What are Davis-Bacon Wages?
The Davis-Bacon Act of 1931 established requirement for public works projects in which workers must be paid the locally prevailing wages, typically referred to as Davis-Bacon wages. Compliance with the Davis-Bacon Act is required by many HUD programs and overseen by HUD’s Office of Labor Relations. Specifically, Davis-Bacon wages are required for HUD 221(d)(4) loans and HUD 232 construction and substantial rehabilitation loans. Davis-Bacon wages are not typically required for HUD 223(a)(7) refinances, as they do not usually involve any construction or substantial rehabilitation work (only minor repairs).
What is a HUD-Held Loan?
A HUD-held loan is an FHA-insured loan that is now owned by HUD. Typically, this occurs when a borrower has defaulted on their loan and HUD decides to purchase the loan from the lender. In some cases, HUD will provide debt service relief to the property for a certain period of time, while creating a work-out plan to stabilize the property financially.
What is a Firm Commitment?
A firm commitment is a lender’s promise to enter a loan agreement with a borrower. Also known as ‘firm commitment underwriting’. Firm commitments are a regular part of the HUD multifamily loan process, though timelines vary depending on the type of loan a borrower is applying for.For sample firm commitment paperwork from HUD, click here.
What are Fair Market Rents?
Fair Market Rents, or FMRs, are rents in a local market’s average price range. These are used by HUD to set maximum rents for certain HUD-insured loan programs. In general, fair market rents are only applicable to projects involved in the housing choice voucher program, projects with certain expiring Section 8 contracts, and projects with certain kinds of SRO (single-room occupancy) housing.
What is Loan-to-Value Ratio (LTV)?
Loan-to-value ratio (LTV) is a metric that compares the size of loan to the value of an asset. While most HUD multifamily loans are constrained by LTV, HUD 223(a)(7) loans are not. Instead, HUD 223(a)(7) loans simply must not exceed 100% of eligible refinancing costs. These include the outstanding balance of the loan, eligible repair costs, third-party reports, and other eligible expenses.
What are Government National Mortgage Association (GNMA) Mortgage-Backed Securities?
GNMA mortgage backed securities (MBS) are issued by Ginnie Mae (Government National Mortgage Association). Typically, these are created by pooling a variety of loans, including HUD multifamily loans, and offering them to borrowers in a process known as securitization. Ginnie Mae mortgage backed securities are backed by the full faith and credit of the U.S. government. While Ginnie Mae does not usually directly affect borrowers, it does help keep rates low for HUD multifamily loans. However, it’s important to note Ginnie Mae does not directly sell or buy securities and does not purchase mortgage loans.
What is a Bankruptcy-Remote Entity?
A bankruptcy-remote entity is an entity within a larger company or corporation whose bankruptcy would have little impact on the rest of the corporation. In the case of real estate investments, a bankruptcy-remote entity is often also a special-purpose entity (SPE). This means that it only has one, specific purpose (typically to own a piece of multifamily or commercial real estate.) SPEs are also often referred to as single-asset entities (SAEs). In most cases, properties purchased or refinanced with HUD multifamily loans (including the HUD 223(a)(7) refinance) need to be owned by a bankruptcy-remote entity such as an SPE/SAE.
What is Cooperative Housing?
Cooperative Housing (also Housing Cooperative, Co-op, or Housing Company) consists of membership-based cooperatives or corporations that own real estate. They typically comprise one or more residential buildings and are a type of housing tenure. Cooperative housing provides the right for members to live in a certain residence. Both HUD 221(d)(4) and HUD 223(f) loans are equipped to fund cooperative housing properties, however, they are subject to certain additional requirements. Cooperative housing properties financed with HUD 221(d)(4) and HUD 223(f) are also fully eligible for HUD 223(a)(7) refinancing.
What is OAMPO?
OAMPO (The Office of Asset Management and Portfolio Oversight) is an office that helps direct various parts of HUD’s multifamily housing programs. In particular, this office develops and interprets policies, controls a number of field operations, manages partner relationships, and is responsible for multifamily assets after the development phase.
What are FHA-Insured Loans?
FHA-insured loans are mortgages backed with FHA mortgage insurance. The FHA insures a variety of loans under its various programs, including the 203(b) and 203(k) loan programs for single-family homes, duplexes, triplexes, and quadplexes. The FHA also insures loans for multifamily and healthcare properties under the HUD 221(d)(4), HUD 223(f), HUD 232, and HUD 223(a)(7) programs.
What are Non-Recourse Loans?
Non-recourse loans are typically secured by collateral such as real estate. Unlike recourse loans, if a borrower defaults, the lender can’t hold the individual personally liable for the unpaid debts. Because of this, lenders can’t seize personal property or garnish wages. With a non-recourse loan, the lender accepts a certain amount of loss. All HUD multifamily loans, including HUD 221(d)(4) loans, HUD 223(f) loans, HUD 223(a)(7) refinance loans, and HUD 232 healthcare loans are fully non-recourse.
What are Fixed-Rate Mortgages?
Fixed-rate mortgages are mortgage loans with monthly payments set at fixed interest rates. Just like the other HUD multifamily loans they are designed to refinance, all HUD 223(a)(7) loans are fixed-rate mortgages.
What is DSCR (Debt-Service Coverage Ratio)?
DSCR, or debt-service coverage ratio, is defined as the cash flow necessary to pay debts - interest, principal, lease payments, etc. It is used by lenders to determine loans on income properties. DSCR requirements are different for different types of HUD multifamily loans, however, HUD 223(a)(7) loans are subject to a maximum DSCR of 1.11x (for-profit entities) or 1.05x (nonprofit entities).
What are Affordable Properties?
When it comes to HUD multifamily loans, affordable properties are those which using tax subsidies to provide below-market rents for low-income residents. Common examples include properties using HUD Section 8 housing subsidies, or properties taking advantage of the LIHTC program. HUD 223(a)(7) loans are fully equipped to refinance affordable properties currently financed with HUD 221(d)(4) or HUD 223(f) loans.
What is an Amortizing Loan?
An amortizing loan refers to a debt repayment that is repaid over a period of time on a fixed schedule. Amortizing loans are paid in regular installments, and most of the early monthly payments are weighted towards paying interest. All HUD multifamily loans including HUD 221(d)(4) loans, HUD 223(f) loans, HUD 232 loans, and HUD 223(a)(7) loans are fully amortizing.
What is an Appraisal?
The appraisal process involves the valuation of a property by trained, authorized appraisers according to property features, comparisons to similar properties, and other factors. Most HUD multifamily loans, including HUD 221(d)(4) loans, HUD 223(f) loans, and HUD 232 loans, require full appraisals as a part of the loan application process. However, HUD 223(a)(7) loans do not.