Trended rents are rental rates that are based on market growth projections for inflation and other factors. Usually, historical market data is used to predict future rental growth of annual rents. While using trended rents may present a slightly more accurate version of a property’s future financial position than using untrended rents, it’s usually not a good idea to rely on future rent increases in order to make a property profitable.
Untrended rents are projected rents that are not based on market-driven rent increases. In contrast to trended rents, untrended rents assume no growth in annual rents. While it's true that rents are growing in most areas in the United States, using untrended rents in projections is a safer and more conservative way to calculate the future financial position of a multifamily property investment.
Underwriting is lender’s process of determining if a borrower meets their criteria for a loan. Underwriters usually consider three C’s - credit, capacity and collateral. When it comes to HUD 223(f) loans, lenders will also examine a borrower’s experience with owning and managing similar multifamily properties as part of their underwriting process.
Tax credits are incentives that allow taxpayers to deduct certain amounts from the taxes they owe the government. When it comes to the HUD 223(f) loan program, the most common tax incentive program is the Low-Income Housing Tax Credit, or LIHTC. The LIHTC allows property owners to take a 10-year tax credit on their federal income taxes, as long as they keep their property’s rents under a certain limit.
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 can also occur when rehabilitation costs pass certain cost thresholds defined by HUD.
Subsidized Affordable Housing and the HUD 223(f) Loan Program
Using HUD’s subsidized affordable housing programs, tenants receive rent assistance for housing, but must pay at least 30% of their income towards housing costs (rent and utilities). Some examples include Section 8 Public Housing, HOPWA Facility-Based Housing, and Homeless Project-Based Units. Properties financed with HUD 223(f) loans are eligible for the Section 8 program, and, if they are already part of a HUD legacy program, such as the rent supplement, rental assistance payment, or Section 8 moderate rehabilitation programs, they can also qualify for the HUD Rental Assistance Demonstration (RAD) program. This can assist property owners in the process of making long-term improvements to their properties.
Property stabilization or stabilized occupancy is a projected range of occupancy for rental property. In other words, this is the expected occupancy that the project will have after being on the open market for a certain time period. Stabilized occupancy can also refer to the level of occupancy a property needs in order to “break even,” meaning that the project’s monthly expenses are less than or equal to the monthly income it generates.
A single-asset entity is typically a limited liability company (LLC) that owns real estate but has no other assets. Single-asset entities, or SAEs, are designed to limit liability for both borrowers and lenders. They are especially helpful to lenders, because, if a borrower personally declares bankruptcy, but they own property via a single-asset entity, the property will not be involved in the bankruptcy.
Rental Assistance Demonstration and the HUD 223(f) Loan Program
Rental assistance demonstration is a program which offers PHAs (public housing authorities) the power to “preserve and improve public housing properties” by addressing nationwide deferred maintenance backlogs. Certain HUD ‘legacy’ programs can enter into long-term contracts for financing improvements, including Rent Supplement, Rental Assistance Payment, and Section 8 Moderate Rehabilitation.
Rental Assistance Properties and the HUD 223(f) Loan Program
Rental assistance properties are properties where low-income or very low-income tenants qualify for monthly rental assistance. HUD is involved with several rental assistance property programs, including low rent apartments, in which HUD “gives funds directly to apartment owners, who lower the rents they charge low-income tenants.”
HUD also offers the Section 8 program, in which low-income tenants receive vouchers that will pay for part or all of their rent. In return, Section 8 landlords receive a subsidy from HUD that will pay for the remaining portion of the rent. Properties financed with several types of HUD multifamily loans, including HUD 223(f) loans and HUD 221(d)(4) loans, are eligible to become Section 8 rental assistance properties.
Recourse Loans and the HUD 223(f) Loan Program
If a loan is recourse and the borrower defaults (fails to repay the loan), the lender can seize both the collateral used to secure the loan and the borrower’s assets which are not used as collateral. Depending on how a loan is structured, this sometimes means that a lender can seize a borrower’s personal assets. Fortunately for borrowers, HUD 223(f) loans are non-recourse. This means that the lender can only seize a borrower’s collateral in the case of default, and cannot attempt to go after their other assets.
However, most HUD 223(f) loan agreements do contain “bad boy carve-outs,” which means that a borrower can go after a borrower’s non-collateral assets, but only if the borrower has committed certain bad acts, such as financial fraud or embezzlement.
Prepayment occurs when a borrower pays off a loan balance before maturity (the end of the loan term). If a borrower does this, they will often be prepayment penalty of a certain percentage of the loan amount. In the case of HUD 223(f) loans, there is usually a 0-2 year lockout period, in which borrowers cannot repay the loan at all. After that, borrowers will typically face a 8-10% to 1% declining prepayment penalty.
An MIP, or Mortgage Insurance Premium, is an annual payment on a HUD mortgage, paid at closing, for each year of construction, and annually.
Multiple yet separate housing units in a single building or several buildings. An apartment building is one example, while other common examples include duplexes, triplexes, quadplexes, and mixed-use properties. In general, HUD 223(f) loans are only available for multifamily properties with 5+ units.
The MAP, or Multifamily Accelerated Processing program is a streamlined method and set of national standards for approved lenders to prepare, process, and submit loan applications for HUD multifamily financing. To be approved for MAP, all underwriters employed lender must attend a specialized HUD training session.
Low-to-moderate income housing is subsidized housing intended for people whose incomes are low to moderate when compared to prevailing incomes. In general, all Section 8 housing must be intended for people with this income level. To determine what the rent limits are based on the low-to-moderate income level in your area, visit the HUD User Portal’s Income Limits Dataset and look up the county in which your property is located.
Low-Income Housing Tax Credits, or LIHTCs are federal tax incentive intended to increase the availability of low-income housing. LIHTC credits can be claimed for up to ten years after the construction is completed and the property is leased up. LIHTCs are available as long as the property follows LIHTC requirements, and can be used with HUD multifamily loans including 223(f) loans and HUD 221(d)(4) loans.