HUD Project Concept Meetings

In recent years, HUD has mandated that prior to submitting a loan application package for a HUD 221(d)4 or 220 loan, the lender must attend a project concept meeting with HUD. While not required, we recommend that project concept meetings be held for 223(f) loans, particularly when the borrower is seeking a cash-out refinance. We also recommend that the developer/borrower attend the project concept meetings and, if helpful, the lender’s appraiser and market study firm.

HUD construction and substantial rehabilitation loans require an appraisal to be submitted with the final loan application package. However, unlike acquisition financing or refinances, the appraiser does not imply a capitalization rate to the property net operating income to establish an income-approach appraised value. Rather, HUD 221(d)4 and 220 loans are constrained either by statutory limits set forth by HUD, loan to cost, or debt service coverage. At project concept meetings for construction and rehabilitation loans, it is important for the developer/borrower to obtain feedback from the HUD staff with respect to how HUD’s EMAD (Economic and Marketing Analysis Division) will view the market feasibility of the property, as well as how HUD will set the construction wages to comply with Davis-Bacon wage requirements. Both of these topics can be confusing in the manner in which they are set forth by HUD. The developer needs to leave the meeting understanding if EMAD will likely approve or reject the project and how the wage determination will impact project costs. That is why we recommend that the project concept meeting package prepared by the lender include a market study and list of project costs.

For 223(f) loans, HUD may dispute the appraiser’s capitalization rates, computation of rents, and remaining economic life of the property. One way to potentially mitigate this concern is to submit with the project concept meeting package a “desk” appraisal, whereby the appraiser reviews the property rent roll and operating statements and researches comps and capitalization rates. The cost of a desk appraisal is less than a full appraisal since the appraiser does not inspect the property. By submitting this document at the project concept meeting, it enables everyone at the meeting to voice consensus or concerns about any of the appraiser’s assumptions. The borrower should also be prepared for large replacement reserves with a HUD loan. If the sources and uses of funds are overly stressed by a large initial reserve deposit, this issue should be raised at the project concept meeting.

Regardless of the topic or issue, it is important that a lender and borrower submit sound and well-researched documentation for the project concept meeting, rather than leaving some of these items open for first-time feedback by HUD after the borrower has paid the application and processing costs of the transaction. If the lender or borrower is not satisfied with HUD’s feedback at the project concept meeting, it may be advisable to seek financing from another source.

By |2019-04-22T14:31:40+00:00January 3rd, 2019|HUD|

Contact Information

Kathryn Cassidy
2000 Auburn Drive, Suite 200
Beachwood, OH 44122

Phone: 216.765.9000

Fax: 440.919.0270

Web: JSMultiCapital.com