HUD 223(f) Loans and Commercial Space Limitations
If you're a multifamily investor interested in purchasing or refinancing a property with a HUD 223(f) loan, can you rent some of your space to commercial tenants? The answer is yes. HUD 223(f) loans allow for commercial development, albeit with somewhat strict limits: commercial tenants are restricted to using 25% of net rentable area and must not generate more than 20% of the project's effective gross income.
Are There Any Ways Around HUD's Commercial Space Limits?
Sometimes, but not often, there are ways to circumvent HUD's commercial space limitations. For example, if an investor was interested in acquiring a mixed-use development with more than 25% of the net rentable area devoted to commercial space, they could attempt to broker a deal with the buyer that involves splitting the property into two parts: a residential area, which would be funded with the HUD 223(f) loan, and a commercial area, In this situation, the investor would have to get separate funding (and use a separate borrowing entity) for the commercial portion of the building. However, the borrower would need to get HUD approval for the loan, which may or may not work in practice.