Is a HUD 223(f) Loan a Good Fit for an Apartment Syndication?
A HUD 223(f) loan can be a good fit for a syndication that buys a stabilized apartment building and plans to hold it for many years, because HUD's MAP Guide allows a loan term of up to 35 years and leverage of up to 85% of value for market-rate properties. It is a poor fit for a short value-add plan: the National Housing Act generally bars prepayment for 5 years after the loan is insured, substantial rehabilitation is not allowed, and the approval process has several HUD review steps. Match the loan to the business plan, not the other way around.
What is a HUD 223(f) loan?
Section 207 pursuant to Section 223(f) of the National Housing Act lets the Federal Housing Administration, part of HUD, insure mortgages for the purchase or refinancing of existing rental housing. A HUD-approved lender (a MAP lender) underwrites and makes the loan under HUD's Multifamily Accelerated Processing Guide, and HUD insures it (HUD MAP Guide). The figures in this article come from the March 2021 revision of that guide; HUD updates its guide and notices, so confirm current terms with a MAP lender.
The property must have at least 5 residential units. Properties needing substantial rehabilitation are not eligible, and critical life-safety repairs must be finished before the loan is insured. Buildings with certificates of occupancy issued 3 or more years before the application must show stable occupancy of at least 85% and stable operating results; newer buildings have their own underwriting conditions.
What are the main loan terms?
| Term | Market-rate property | Source in the MAP Guide |
|---|---|---|
| Maximum term | Lesser of 35 years or 75% of remaining economic life | Section 3.1.6 |
| Maximum loan to value (purchase) | 85% (87% for qualifying affordable, 90% with 90% or more rental assistance) | Section 3.7.11 |
| Debt service coverage | 85% of NOI, about 1.176x (1.15x affordable, 1.11x with 90% or more rental assistance) | Section 3.7.11 |
| Cash-out refinance limit | Greater of 80% of value or the cost to refinance | Section 3.7.11 |
| Upfront MIP | 1% for 223(f) loans | Section 3.1.8 |
| Annual MIP | Set by HUD notice; reduced to 0.25% for broadly affordable or green and 0.35% for affordable | Section 3.1.8 |
| Lender financing and placement fees | Up to 3.5% of the mortgage in total | Section 3.1.11 |
| Davis-Bacon prevailing wages | Do not apply to 207/223(f) | Section 3.7.9 |
| Secondary financing | Secured secondary financing allowed up to 92.5% total loan to value | Section 3.7.17 |
| Prepayment | Generally prohibited for 5 years from endorsement | Section 3.7.10 |
Loan sizing uses several tests, and the lowest one controls.
A made-up example. A stabilized market-rate building is valued at $10,000,000 and has $600,000 of NOI. Assume, for illustration, an all-in rate of 6.0% including the annual MIP, on a 35-year amortization.
- Value test: 85% of $10,000,000 is $8,500,000.
- Coverage test: annual debt service can be up to $600,000 / 1.176, about $510,204. At a 6.0% rate on 35-year amortization, that supports a loan of about $7,456,000.
- The coverage test is lower, so it controls: a loan of about $7,456,000, roughly 74.6% of value. The upfront MIP of 1% would be about $74,560.
Real sizing includes more criteria and actual rates. Use the example to see why the coverage test often matters more than the headline 85%.
Why does the 5-year prepayment rule matter?
The MAP Guide says the National Housing Act "prohibits prepayment of loans insured under Section 223(f) for 5 years from the date of endorsement for insurance," except in narrow cases, such as when the borrower agrees with HUD to keep the property as rental housing for the rest of the 5 years. The rule is not meant to block a refinance into another HUD loan under Section 223(a)(7), though the security that funds the loan may have its own prepayment terms.
For a syndication, that means a 3-year value-add plan with a sale is a poor match. A long-hold plan that pays quarterly distributions from stable cash flow fits better. Compare it with the prepayment terms on agency loans in yield maintenance vs defeasance vs step-down.
Can a first-time sponsor get a 223(f) loan?
It is hard on your own. The MAP Guide says borrowers "with no experience operating multifamily rental housing will not be considered for acquisition financing under Section 223(f) unless there are significant mitigants," such as clean credit, strong finances, a conservative valuation and an experienced HUD management agent. A first-time sponsor can bring in an experienced co-sponsor or key principal and a qualified property manager.
HUD also reviews the principals' previous participation in HUD programs, and the process has several review steps. Ask a MAP lender for a current timeline and build it into your purchase contract.
When is it a good fit, and when not?
| Good fit | Poor fit |
|---|---|
| Stabilized building, at least 85% occupied | Building needing substantial rehabilitation |
| Long hold with steady distributions | Plan to sell or refinance within 5 years |
| Sponsor team with multifamily experience | First-time sponsor without an experienced partner |
| Affordable or green features that lower MIP | Tight closing date that cannot absorb a longer approval |
Investors should see the loan's terms in the offering documents, including the prepayment rule and the MIP. See bridge loan vs agency loan for the other common choices.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5 or more units from their friends and followers under Rule 506(b) or 506(c). It forms the deal's LLC, prepares the standard offering documents, files Form D and state notices, and holds investor funds in escrow at Enterprise Bank & Trust, an FDIC-insured bank. Fees are $1,500 at setup (non-refundable), $5,000 at closing (only if the deal closes) and $3,500 a year, with no percentage of the raise. DoorRaise does not make or arrange HUD loans.
Raise your apartment deal from the people who already follow you.
DoorRaise is built for apartment buildings with 5 or more units: one link for the deal, escrow until closing and a standard fee card.
See how it works for the steps.
FAQ
Is a HUD 223(f) loan non-recourse?
The MAP Guide says the HUD mortgage note contains a non-recourse provision as to the borrower entity, while certain parties can be personally liable for losses from certain "bad acts" set out in the Regulatory Agreement. Read the loan documents with your attorney.
Can I do renovations with a 223(f) loan?
Yes, within limits. Repairs and some alterations are allowed, but substantial rehabilitation is not; that needs a different HUD program.
Is a 223(f) loan assumable?
A transfer needs HUD's consent through its review process. See can a syndication assume the seller's loan.
Do Davis-Bacon wage rules apply?
The MAP Guide says Davis-Bacon prevailing wage requirements do not apply to Section 207/223(f).
Next step: read sources and uses to size the equity raise around the loan.
Sources
- HUD, Multifamily Accelerated Processing (MAP) Guide, March 2021 revision
- HUD, Mortgage Insurance for Purchase or Refinancing of Existing Multifamily Rental Housing: Sections 207/223(f)
This article is general information, not legal, tax or investment advice. Talk to a securities attorney and a HUD-approved lender about your deal. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.