The Gold Standard: HUD 221(d)(4) Construction Financing
For developers willing to navigate the bureaucracy, the HUD 221(d)(4) loan is arguably the best construction financing product available. It offers non-recourse debt, high leverage, and a 40-year fixed rate that eliminates refinancing risk.
What is HUD 221(d)(4)?
It is a mortgage insurance program administered by the Federal Housing Administration (FHA) for the new construction or substantial rehabilitation of multifamily rental housing. HUD doesn't lend the money; they insure the loan, which allows private lenders to offer incredibly favorable terms.
The "Gold Standard" Terms
- Non-Recourse: No personal guarantees (except for standard "bad boy" carve-outs).
- High Leverage: Up to 85% Loan-to-Cost (LTC) for market-rate projects (87% for affordable).
- Fixed Rate: Interest rate is locked before construction begins.
- Long Term: Construction period (interest only) + 40-year fully amortizing permanent loan.
- One Closing: Construction and permanent financing are combined, saving on closing costs.
The Catch: Why Isn't Everyone Using It?
If the terms are so good, why do many developers stick with bank loans? Two main reasons: Time and Wages.
1. Davis-Bacon Wages
HUD 221(d)(4) projects are subject to Davis-Bacon prevailing wage requirements. In New Jersey, this can increase hard costs by 15-25% depending on the trade and location. You must weigh the financing savings against the increased construction cost.
2. Processing Time
This is not a quick close. The process typically takes 7 to 10 months (or longer). It involves a two-stage application (Pre-Application and Firm Application) and rigorous HUD review. If you need to close on land quickly, this is not the vehicle (unless you use a bridge loan first).
Who is it Best For?
The 221(d)(4) program is ideal for:
- Long-Term Holders: Developers who plan to build and hold for cash flow. The 40-year amortization maximizes cash-on-cash returns.
- Large Projects: The high fixed costs (legal, third-party reports) make it less efficient for deals under $10-15 million.
- Developers with Time: If you already own the land or have a patient seller, the timeline is manageable.
Strategic Considerations
In a high-interest-rate environment, the 221(d)(4) shines even brighter. Locking in a rate today for the next 43 years provides incredible certainty. Furthermore, the loan is assumable, which can be a massive selling point if you decide to exit in a future high-rate environment.
Navigating the HUD Process
The application process is complex, but the payoff is worth it. I help developers assess feasibility and manage the HUD application team.
About the Author
Ryan Goldfarb is a real estate development advisor. He specializes in structuring capital stacks for large-scale multifamily projects, helping developers choose between agency, bank, and alternative financing.