>> welcome back.this is lesson six in the partners for housing training.i'm gates dunaway. i'm going to do this session andthe next by myself. the fearless is not a part ofthis. margie maisonet has been a partof this. this is about a 30 minutelesson. so we are going to have thislesson and returning at 2:30 for a lesson on the tex creditpreservation strategies. so let's look at the firstslide, sustaining affordable
housing through refinancing.the objectives are identifying the steps required to apply forfha insured loan and identify the property owner requirementsin the incentives to obtain the insurance through the 223f or221d 4 program. topic 6.1, apply for fha insuredloan. we are going through the actualprocess of that. before we get into the steps, iwant to talk about what we have been doing and how it leads upto where we are today. the first five lessons teach youwhat it is you have with your
property.the point of the lessons is show you what you have and thehurdles you have or the barriers to prevent from getting therefinancing. what you have to do with 223,236 property or the section 8 contract and how to get andmaximize the renewal options. the idea of this path is get youto understand your property and know where you are andunderstand you understand that, we are entering the phase ofwhat kinds of financing you are achieve in order to pro pay the202.
achieve the capital needs.and move ahead with the pure preservation strategy.so looking bad, to refinance a hud section 8 property, the loanunder writing for the programs is performed by a hud approvedlender and the map lending program.and if you go to hud website you will find a list of map approvedlenders. you have to work with a mapapproved lender. the lender works with the ownerto under write the loan. it is a lender driven processand the lender is responsible
for putting the applicationtogether and sizing the loan and the owner is the most parent ofthe process, you have to know what it is you want to achieveand the path to achieving that. the lender submits theapplication to the hud field office.hud reviews and approves and endorses the loan.the loan is approve and pays the claim in terms of default.it is a hud insured mortgage. the lender makes the loan andthere's a mortgage independence premium, mip, that is paid inaddition to the interest rate on
the loan and that is theindependence premium. the last little step in theprocess is ownership contract the hud office to discuss theplans. the last bullet is saying thatthe lender drives the process. the owner is the critical piecebut the loaner is the entity keeping it going forward.you as an owner must set up the criteria for success.also not to draw too much on it, it is very, very important asyou go about this process that you are constantly talking tohud.
have your meeting as early aspossible, how you would like to achieve the intent and if thereis anything you want to know that the office tells you.we are looking at the 223 app property.topic 6.2. the next is next 221d 4 afterthat. the 223 app program is used topurchase or refinance multifamily projects.meant for the projects not needing a substantial rehab.the repairs cannot exceed the greater of 6500 a unitmultiplied by the hud high cost
factor for the area.you can find the factor, 2011-13, issued julyâ 22nd of2011. if you multiply, find the areaon the list, and 6500 times multiplied by the factor.that is how much you can spend per unit.you cannot exceed 15% of the estimated replacement cost afterthe completion of the repairs or improvements.calculate 15% of building the project from ground up.you are not supposed to be completing more than one majorbuilding replacement.
so a major building componentagain would be roofs, kitchen replacement, hvac replacement.there is a little flexibility in there.hud understands in some areas the high cost factor is closerto 300% and so upward of $20,000 per unit could be spend underthe program. it is impossible to do $20,000of repairs. so i want to tell you there isflexibility in that. the primary goal of all of thelimitations is because of other advantages of the f program, huddoesn't you going into an a
substantial rehab programbecause they cannot monitor and make sure you are do thingsaccording to code. if you slip into the types ofrepairs that require architect plans and drawings, you couldslip into exceeding the limits. if you are doing more than onebuilding replacement, talk to your local office about that.if you exceed the limits you may be a fitter under the d 4.it is for substantial rehabilitation.if any of the collection of the criteria is looking forsubstantial rehabilitation that
that is what you would go into.you can't have less tan five units on the property.the most recent renovation or the construction of the buildingmust be three years or older unless you get a waiver in hud.it allows for critical repairs determined by the pc & a and theproperty needs assessment, completed prior to closing andthe noncritical repairs and those must be completed within12 months of closing. the critical repairs and thenoncritical repairs are determined in a project, the pc& a is ordered by the lender.
we have had a lot of discussionsaround that where the client, which i call the client beingthe owner, the pv & a indicates that a long list of things beingdone that are not fitting into the budget or in conflict ofwhat the owner would do. there needs to be a lot ofinvolvement with the owner of the property.before you have a lender order the pc & a, you have to createcapital needs replacements list and you should also be doing anowner wish list. we also advise if possible forthe owners to estimate pricing
associated with the things theywant to do. the folks are national firms andsometimes they look to the owner for the local pricing and wehave conflicts between the pricing that shows up in aphysical needs assessment and what the owner can achieve inthe field and we have found a lot of success with the pc & afolks accepting the prices from the owners, assuming it is givenby a third party professional. so the pc & a is an importanttool in the process. it is not static and it issomething you should be involved
with.this says that there two elements of the pc & a.critical repairs, and those are immediate life safety issuesfound in the inspection. for instance, outlets are not inthe can i remembers or bathrooms, the smoke detectersare not up to code. then any trip hazards.these would need to be done prior to the closing from thefunds available from the owner's cash flow.we put them into the development budget and you are reimbursedfor the cost but have to do them
in advance of closing.one might stretch and say they would show on the react any way.the second piece or the noncritical repairs, this isyour scope of work. those things you are going to doduring the repair period after you close on the loan. this iswhat you do with a combination of the pc & a folks find youhave to do. the things that are going toexpire or need to be replaced in 12 months.it is generally not a long list. there is a flow and a pattern ofreplacing things and combined
with the owner wish list.again, there is a finite amount of money and you are figuringout large of a construction budget you can have and what thecost of the items you want to replace are and you are comingtogether to develop your noncritical repair list that ispart of the pc & a and part of your financing package.there is a pilot program that i think is getting a little pressright now. the 223 program limits theamount of money you can spend on a per unit basis.the pilot program recognizes
that the 223f program is theeasier lending vehicle that hud has access to and the idea isenable the f program to be combined with low income taxcredits. so we have a pilot program.it is discussed in housing notice 12-01 and the pilot usesto test the process of stream liming and expedite.there are three key property types.the first is the refinance of assisted housing projects,meaning they have 90% of the units covered by section 8.the second is the refinance of
older properties that have hadtax credits, now they are rescindicating, going to applyfor new tax credits to recapitalize their property.and the third is refinance of newly constructed properties.if the property is recently constructed and within the threeyear window that is excluded from the f program it isrefinanced under this program and combining the tax creditsand the 223f. under the pilot, repairs can goup to $40,000 per unit. and the pilot will start inboston, chicago, detroit and
l.a.so we are hearing is that they have just approved the maplenders that can work in this pilot program and for theoffices in the list of the four cities that still have taxcredit rounds we apply for low income tax credits every year,it is possible we could see some of the first pilot applicationscoming out this year and if it is successful and doing well, wehope to expand it to other offices.let's look at the under writing requirements for the f program.this is for a refinance.
if you are going to use 223ffunds for are refinance here are the under writing requirements.this is very high level. this is what the lender uses tosize your loan. this is how the criteria to sizethe loan. in the first row, you are goingto be sized at the lesser of the lee formulas.so you are either going to be loan to value constrained, theloan to value creates the lowest loan amount or debt servicecoverage ratio constrained. and rarely does cost come intoplay.
so in looking at the first twolines, you have three columns, one is market rate andaffordable and rental assistance.we get asked how do i know which column it is falling under?in the affordable category, there is a long definition ofwhat is considered affordable, it is generally in addition tohaving perhaps having rental assistance you have to a landuse restriction agreement that restricts affordable client basefor more than 15 years. if they don't apply to you, youare considered market rate.
so the folks less than 90%section 8 and don't have a restriction use agreement theyare falling into the market rate.it gets increasingly less conservative as you run acrossthe columns. in the market rate column theloan is not larger than 83.3% of loan to value rate.the value here is as determined by the appraisal that the lenderwill get. the appraisal has many, manycomponents and one is you are looking at a lot of variablesthat could be affected by you
and the project team.for instance, consider post rehab rent if you are goingafter a rent increase that might be marking up to budget ormarking up to market. your appraisal could considerthe rehab that you are going to do.if you are doing substantial amount of repairs that couldchange the comparable's for the appraisal that could beconsidered. so they come up with the value.the loan to value ratio goes up across the lines, so 85% max foraffordable project and 87% max
for 90% rental assistance.debt ratio is the next column. the debt service coverage, thatis where the net operating income which is that incomeafter vacancy and expenses and divided by the debt service.that is the max for that. we have another slide for the fprogram for acquisitions. it is the same numbers but athird criteria, called the eligibility transaction cost.that is across the bottom. more criteria for the f program.the occupancy 80% or higher. that is a healthy criteria soyou are not in trouble with the
market or in trouble to leasethe units. if you are considering atransaction and the big piece is combining units, you certainlycan bring forth that information to your local hud office andappeal for flexibility around this condition because you aregoing to necessarily exceeds 15% vacancy.after you get to the minimum physical occupancy, you have themaximums. the first, even if you areexperiencing a hundred percent occupancy, there's still goingto under write you, you get
credit up to 93% occupancy ifmarket rate deal or 95%. and so despite the fact that youare operating at a higher amount and achieving a higher income,this is going to cap the income to under write the size of yourloan. the third point is you mustdemonstrate a pattern of stable occupancy above the standardsfor six month period prior to submission of the application.since we are under writing you to 93% occupancy the goal isoperate at least 93.5 or a number above there and occurringfor six months or more.
if you are at 92 for six monthsor more you are brought down to that figure, it is important tobring up the occupancy above the amount that is being underwritten for you. a market study may be required.that is just something that we say to anything that has outlieroccupancy standards on rents in your market.additional information on the f program, when looking at 223floan, the max term is 35 years. it says the current rates are 3to 5 percent. we are seeing closings at 3% andunder 3%.
so i don't know how long that isgoing to last. but it is a good day for thisloan. fha, nonrecourse loans, meaningthat the only thing that the lender has to grab is thecollaterals and they are not coming back for personalguarantees or coming back to the corporation.the loans are similar to fha approval.repairs are being funded through escrow.in 223f program at closing you have sed a fund with hud for therepairs and must do the repairs
within 12 months of closing andif the project takes 12 months to do, you are talking aboutsomething that is more like substantial rehabilitation andtriggers you to be thrown out of this program.these are direct confirmed transactions.there are fewer steps in the 223f transaction than the 221d 4transactions. also this is last slide on 223f.right now this a very, very popular program.there are a lot of preservations strategies employing this andfor a number of reasons.
the size of the loan is theright size for the project. the typical expenses of many ofold 202 and 236 programs they are not resulting in loans thatwould even trip you. they are fitting nicely intothis. typically the loans are small asa million dollars, often $2â million and because hud capsthe fees on these it can be problematic for the lender outthere to imagine doing a deal that is less than $3â million.if you are an owner and looking to do a project and you don'tsee yourself borrowing more,
there are lenders that are hudand map approved and will work with the smaller transactions.you might have to look a little harder for them.you might expect to pay the full fees.there should be a way to get those done as well.then my last little note on this, applying to the d 4program as well, map approved lenders are hud approved andunderstand the processes to go through this and we get thequestion on how to find the lender that will work for you.outside of that, a factor to
look for are those working withthe local hud offices. what we are talking in thewebinars is general information that is factual informationbased on notices and hud processes, however, things varyon a case to case basis with the property and the local hudoffice. find a lender that isexperienced with your local hud office.that means the relationships are good and tuned and people knoweach other and getting through what can be a little complicatedprocess might go a little
smoother.so let's talk about the next program.221d 4. we call this substantialrehabilitation loan program because mainly set up to dolarge scale renovations. as with the 223f.these are nonrecourse assumable construction and permanentfinancing for new apartments or for the substantialrehabilitation of existing apartments.you can build a new property using these funds.similar to the f program,
requirements for repairs.the cost of the repairs must be more than 15% of the estimatedreplacement cost. and it must be more than the$6,500 per unit factor. if the high cost factor led youto $18,000 per unit and you need $25,000 per unit for repairsperhaps you need a different program.you are not usually spending the type of money as in the d 4program. we see a lot of wholesalerenovations through the d 4 program, full kitchens andbathrooms and that trigger more
than two buildings beingreplaced. we have a chart that is similarto the f program in the under writing requirements.so the same categories. and these are actually lessconservative in the f program. the debt service coverage ratiocomes down 1.11 under the property with 90% of theproperty with rental assistance and the loan to cost goes up to90% of the assisted projects. again, loans are assumable.max term of a d 4 is 40 years. plus the construction periodadded to that.
or 75% of the remaining usefullife. these are nonrecourse loans withstandard carve outs that is referred to as a bad boy carveouts. if you do something that isfalling into the lying, cheating or stealing, they'll go afteryou. they are assumable.you must have five or more units in the project.different from the f program, this is a good reason toconstrains the two, wage rates apply.davis rates are the hud approved
wage rates you have to use to dopay for the renovation of the program.in many cases, they can add a lot of cost to renovation.in certain parts of country when they apply it adds a premium tothe cost and increasing the complexity to the project andcan shrink the pool of the contractors available to youbecause they have to understand the program and agree to usethem and apply. there are no income limits onrenters on either of those programs.statutory restrictions.
they are in the same place asthe high cost factor. in some certain high cost areasyou have to watch out for that. under the d 4 program, you doneed to have stamped architect drawings.under the f program you do not. that means the predevelopmentprocess under the f program is shorter, less complex and lesscostly than the d 4. that requires architect drawingsbecause of the extensive rehab. additional information for the d4 program. it is a two stage process.if you have section 8, you can
go directly to the firmcommitment and streamlining the process.it is a construction to permanent financing loan all inone. after the rehab is done, thereis a final closing and loan transitions.mortgage insurance requirements. this is on both of the programs.you must be a single asset entity.i sail that in certain scenarios that are prevalent throughoutthe country, which is the single asset nonprofit, owns 202project, and this is all they
own, they typically own it underthe corp. rate name, we advise to set up a new llc and thatnonprofit entity moves the asset to the llc and they are theowner and allows the nonprofit to go about and set up multiplellc's to own future projects otherwise it is complicated.you would be required to set up an llc if you have multipleproperties. it is something to be aware of.it is not triggering the payment of property taxes if you are taxexempt at the moment and not triggering the payment of incometax moving into it the llc if
the parent is a nonprofitcompany. these are nonrecourse loans.these are fixed interest rate loans.for the construction and the permanent loan periods.there will be amortization plan that shows how the principal andinterest is paid down over the year.going on to the next slide this gets into the fees.the hud application fee of 30 basis points that is a feeexpected to pay prior to closing from money on hand.to go over the fees that are
paid out of pocket beforeclosing we have inspection fee, the application fee, the lendergets a fee that is a processing fee, five to $7,000 and duediligence fees. these are expenses that you areexpected to pay out of pocket before closing but reimbursed atclosing. at closing a hud inspection feeof five basis points. you also will be expected to paymortgage insurance premium. the 40 basis points is afterclosing. at closing you pay one to twoyears of that at closing.
up to 1% of mip at the closing.the lender fees and charges. hud maxes out the amount of feescharged by the lender to 3 and a half percent of the mortgageamount. fair housing equalityopportunity. you must comply in that area.no issues with the 2530 form. you are ready to set up anoperating deficit escrow and replacement reserverequirements. the pc & a looks at the term ofyour loan, the life of the property, and one of the thingsit is doing in addition to
determining the critical repairsand noncritical repairs requiring the up front reservethat needs to be in the bank to get you through the next year ortwo and determining the on going reserves.this is something that looks at the expected replacements overthe coming 30 or 40 years. lastly on the slideenvironmental review that is required.again, out of pocket costs the hud application and duediligence fee and pay the lender their application fee, fee toengage them.
developer fees are something notto forget to talk about. bars may receive a developer feeas part of the transaction. for the 221 d 4, 96-36.and for 223 f transaction with 202 project look at notice04-21. we don't have any guidance on223f transaction of 236 program, so there's some talk about that,but no specific guidance on that.here is a quick comparison of the programs.so the f program does a rehab level that is less than $6,500 aunit.
it is a quicker and expeditedprocess. for the tax credit programprojects that you want to use you can use it only under thepilot program. it is only used within the pilotprogram. looking at the d 4 program, therehab level is greater than the $6,500 we are unit times thehigh cost factor. you may combine the tax creditswith the d 4, in fact, it is a common way of providing thefinancing. that is the end of the fhamodule.
we have a review question thatmay show up. the one question is when applyfor fha insured loan, who drives the loan process?that is an interesting question. the owners is a big part ofthis. the answer is hud approvedlender drives the process. they really do, but the owner isright there and beside the lender.two objectives the lesson, i have the requirements andincentives required in obtaining the loans and second is identifythe steps required to apply for
the loan to refinance or rehabthe property. with that, we are closing thislesson and coming back at 2:30 for a lesson on tex â -- taxcredits and that is the last lesson of the webinar.