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Glossary
1 min read

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.

In this article:
  1. Substantial Renovation Definition
  2. To learn more about the HUD 223a7 refinance program, fill out the form below to speak to a HUD/FHA loan expert.
  3. Related Questions
  4. Get Financing
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Substantial Renovation Definition

As defined by HUD, substantial renovation is one of the following situations:

  1. Required replacements, repairs, and improvements that involve the replacement of two or more major building components

  2. Rehabilitation costs exceed the greater of:

    1. 15% (exclusive of soft costs) of the property's replacement cost/ fair market value after required repairs, replacements, and improvements

    2. $6,500 per dwelling unit (adjusted by HUD's authorized high-cost percentage)

    3. 20% of mortgage proceeds for rehabilitation expenses

To learn more about the HUD 223a7 refinance program, fill out the form below to speak to a HUD/FHA loan expert.

Related Questions

What is considered a substantial renovation for commercial real estate?

When it comes to commercial real estate, a substantial renovation is one of the following situations:

  • Required replacements, repairs, and improvements that involve the replacement of two or more major building components
  • Rehabilitation costs exceed the greater of:
    • 15% (exclusive of soft costs) of the property's replacement cost/ fair market value after required repairs, replacements, and improvements
    • $6,500 per dwelling unit (adjusted by HUD's authorized high-cost percentage)
    • 20% of mortgage proceeds for rehabilitation expenses

For more information, please refer to the HUD Glossary of Multifamily Affordable Housing Preservation Terms.

What are the benefits of a substantial renovation for commercial real estate?

Substantial renovations for commercial real estate can have a variety of benefits, including excellent locations, superior building materials, zoning and permitting flexibility, and historic tax credits.

Excellent locations: Though not always the case, many older commercial buildings are located in highly desirable urban areas, such as city centers. Even if is not located in a city’s urban core, an older building in a neighborhood with rapidly increasing commercial rents may be an excellent candidate for repurposing and rehabilitation. (Source)

Superior building materials: While older buildings can have a variety of issues, many older structures are built with materials such as stone, which is incredibly sturdy and can lead to significant energy when compared with recently constructed buildings. (Source)

Zoning and permitting flexibility: Certain cities, such as Los Angeles, have special adaptive reuse incentive programs, which relax density, parking, and accessibility requirements, as well as other zoning ordinances, while also making it easier and faster for developers to obtain permits for adaptive reuse projects. (Source)

Historic tax credits: The federal Historic Tax Credit (HTC) allows investors who support the rehabilitation of eligible historic structures to deduct 20% of the project’s qualified costs from their federal income tax liability. In addition, many states have similar historic tax credit programs that can be paired with the federal HTC in order to maximize investment returns. (Source)

What are the costs associated with a substantial renovation for commercial real estate?

The cost of a substantial renovation for commercial real estate can vary greatly depending on the scope of the project. Construction costs have risen dramatically over the past few years, so it is important to do your research and plan ahead with a strong budget before beginning apartment renovations to avoid any nasty surprises. According to Janover Data Reveals Steady Stream of CRE Loan Inquiries, the cost of renovation projects can range from $50,000 to $2 million.

If you need help wading through the financing options available for your renovation project, Multifamily.loans can match you with the best loan for your needs. Fill in your details and they will be in touch with a free quote.

What are the risks associated with a substantial renovation for commercial real estate?

There are a few risks to consider before renovating your multifamily property. As you’ve no doubt heard, construction costs have risen dramatically over the past few years. While most people think of ground-up development projects being impacted, renovation work, too, has skyrocketed in cost. Make sure you do your research and plan ahead with a strong budget before beginning apartment renovations to avoid any nasty surprises.

Tied to construction costs, construction delays are also an unfortunate fact of life. Due to supply chain issues, some cannot be avoided — so it may be best to take a very conservative approach in terms of your project timeline. Don’t assume you will have rents in place the month after your capital improvements are scheduled to wrap up.

Finally, your renovation work may simply not be enough to get the investment outcome you’re looking for. You may invest a lot of capital to add the highest-end luxury amenities to a property built in the 1980s — but if potential renters are looking for a newer building, you may not see much of an uptick in occupancy or rental revenue.

If you choose to renovate, there are many financing options available — regardless of the size of your project. Need help wading through the choices? We can match you with the best loan for your needs, whether you’re gut rehabbing a seven-unit Class C building or adding amenities to a 60-unit luxury property. Fill in your details below and we’ll be in touch with a free quote.

What are the best practices for a substantial renovation for commercial real estate?

The best practices for a substantial renovation for commercial real estate depend on a number of factors, including your budget, the condition of your property, and the rental market in your area. It's usually best to renovate when the rental market is strong, so you can realize gains in the short term through higher rents and improved attraction or retention. If your community has a substandard vacancy, even during a rough time for the market, this could be a great opportunity to get work done — from minor improvements to a gut rehab — in those unoccupied units or across the entire property. Do that when you’re full, and you could take a more significant hit in terms of lost rental revenues.

When it comes to financing, there are many options available — regardless of the size of your project. You can explore apartment financing options such as Fannie Mae, Freddie Mac, HUD, and bridge loans. You can also consider construction financing options such as construction-to-permanent loans, hard money loans, and mezzanine loans. If you need help wading through the choices, you can contact us and we’ll be in touch with a free quote.

What are the financing options for a substantial renovation for commercial real estate?

For substantial renovations of commercial real estate, there are a wide range of financing options available. These include bank, credit union, life company, and CMBS loans. Additionally, bridge loans and hard money loans are also available. For more information, you can get a free quote from CommercialRealEstate.Loans by filling in the form on their website.

In this article:
  1. Substantial Renovation Definition
  2. To learn more about the HUD 223a7 refinance program, fill out the form below to speak to a HUD/FHA loan expert.
  3. Related Questions
  4. Get Financing
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