What is Substantial Renovation?
When it comes to HUD multifamily loans , such as the HUD 223(f) loan , substantial renovation of a property occurs when the required repairs and improvements of a HUD-assisted multifamily rental housing involve replacing two or more major building components. Alternatively, substantial renovation
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When it comes to HUD multifamily loans, such as the HUD 223(f) loan, substantial renovation of a property occurs when either:
The required repairs and improvements of a HUD-assisted multifamily rental housing involve replacing two or more major building components, OR
Rehabilitation costs exceed the greater of:
15% of the property's replacement cost (fair market value - exclusive of soft costs) after completion of all required repairs, replacements, and improvements OR
$6,500 per dwelling unit (adjusted by HUD's authorized high cost percentage) OR
20% of the mortgage proceeds applied to rehabilitation expenses
What is the definition of substantial renovation?
Substantial renovation is one of the following situations, as defined by HUD:
- 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
What are the requirements for a substantial renovation?
As defined by HUD, substantial renovation of a property occurs when either:
- The required repairs and improvements of a HUD-assisted multifamily rental housing involve replacing two or more major building components, OR
- Rehabilitation costs exceed the greater of:
- 15% of the property's replacement cost (fair market value - exclusive of soft costs) after completion of all required repairs, replacements, and improvements OR
- $6,500 per dwelling unit (adjusted by HUD's authorized high cost percentage) OR
- 20% of the mortgage proceeds applied to rehabilitation expenses
What are the benefits of a substantial renovation?
The benefits of a substantial renovation are numerous. A substantial renovation can help to improve the value of a property, increase rental income, and attract new tenants. Additionally, it can help to reduce operating costs, improve energy efficiency, and increase the safety and security of the property. Finally, it can help to improve the overall aesthetics of the property, making it more attractive to potential tenants.
For more information on substantial renovation, please refer to the HUD Glossary of Multifamily Affordable Housing Preservation Terms.
What are the risks associated with a substantial renovation?
The risks associated with a substantial renovation include construction costs that have risen dramatically over the past few years, construction delays due to supply chain issues, and the possibility that the renovation work may not be enough to get the desired investment outcome. According to HUD, substantial renovation is defined as 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
What are the costs associated with a substantial renovation?
When it comes to substantial renovation of a property, the costs associated with it depend on the situation. As defined by HUD, 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 on the risks associated with renovating a multifamily property, please refer to this article.