What Housing Developers Need to Know About HUD

Written by: Scott Hoppa, Senior Vice President

What Housing Developers Need to Know About HUD Financing for Their Next Deal

As construction lenders continue to be more selective on multi-family deals, more developers are pursuing HUD 221(d)(4) financing for their next apartment property. These non-recourse loans are provided by third-party lenders and are backed by the U.S. Department of Housing and Urban Development (HUD). Since HUD guarantees these loans, they are closely involved in every step of the planning, construction and closeout process.

It’s important to note that projects involving HUD financing are not necessarily affordable housing. At McShane, we’ve worked with multiple developers on a variety of product types utilizing HUD 221(d)(4) financing, including market rate, workforce housing and affordable deals.

The approach for HUD-financed projects differs from traditionally funded developments, so we’re going to outline the entire process, from concept to turnover.

When a developer has a project where they want to pursue HUD financing, they begin by selecting their lender. This firm is also going to help them underwrite the project and guide them through the HUD process. There are a handful of companies across the country that specialize in this.

The developer then provides their initial submittal to HUD, which involves a concept meeting followed by a submittal. If HUD likes the concept, they’ll issue a formal Letter of Invitation. This is where the heavy lifting starts. Drawings need to be created and firm pricing from a general contractor is required. A third-party cost analyst gets involved and there are several underwriting standards that the general contractor must go through. HUD prefers to work with contractors that have a successful track record delivering HUD-financed properties.

The design and underwriting process can take 8 to 12 months to complete the necessary due diligence. It’s important that the developer works closely with the general contractor throughout this process and sticks to the drawings as the HUD procedures are not very flexible once construction is underway. Upon completion, the developer submits their firm application. Once approved, they are on a 60-day clock to close.

As construction commences, HUD hires a third-party inspector who visits the jobsite once a month to check compliance with both the drawings and Davis Bacon prevailing wages. Specific HUD forms are required for all payment applications during construction.

The HUD turnover procedure is also unique. Once inspections have been completed, a Permission to Occupy (PTO) form must be executed by HUD in order for tenants to occupy the residence. It’s important for developers to time this requirement properly, as the HUD representative is only onsite once a month to sign off on the PTO form.

As a seasoned HUD contractor, McShane is well-versed in the details and execution of HUD 221(d)(4) projects and will leverage this experience on your next housing deal.