Pre- Application architectural requirement for Insured Loans
Pre-Application Architectural Requirements The architectural requirements for a Pre-Application package may vary depending on the office and current changes. We offer the following as a general guide for developers to understand the process. Architects should consult the proper HUD handbooks.
The architectural handbook and other requirements are found at HUD.gov. The MAP guide will give the requirements and more specific URL’s for any required handbooks.
In general a pre-application will require:
1. Sketch plan of the site showing overall dimensions of main building(s), major site elements, e.g. water, sewer, electric, gas in the streets adjacent to the site. Contour lines and elevations are not required in the sketch site plan.
2. Sketch plans of main building(s) must show overall dimensions of:
a. Typical floor plan showing apartment types and placement;
b. ground floor plans showing common areas;
c. Sketch floor plans of typical dwelling units(s);
d. Typical wall section(s) showing footing, foundation, wall and floor structure. Notes must indicate basic materials in
structure, floor and exterior.
Sketch plan dimensions must be sufficient to allow the HUD architectural analyst to calculate the Gross Floor Area for the entire project and the Net Rentable Areas for all the apartment units in the project.
This information should be obtained at the following link: http://www.hud.gov/offices/hsg/mfh/map/mapguide/mapguide.cfm
Form AIA 305A is the required form for both the architect and contractor.
How Insured Refi/Acquisition loans work
Explanation Refinance/Acquisition – Insured Loans
The Insured refinance/acquisition program is designed for apartments of more than 5 units. It is A conventional financing. FHA insures our mortgages and this results in favorable terms and low rates. Subsidy requirements, affordable housing percentages,and low/middle income requirements for tenants do not apply. The program allows for upscale projects with pools, tennis courts, etc. as long as the costs are supported by market rents and market expenses.
The basics are a fixed rate (no balloon) thirty-five-year permanent mortgage based on the lesser of 80% LTV (cash out for a refinance) or 83.3% LTV or cost (for acquisition or rate and term refinance). Loans are underwritten to a minimum 1:20 Debt Service Coverage Ratio. A seller second promissory note of up to 7.5% of cost/value is also allowed on acquisitions.
How Insured New Construction/Substiantial Rehab Loans Work
How Insured New Construction/Substantial Rehab Loans Work
Explanation: New Construction – Insured Loans The Insured new construction/substantial rehabilitation program is designed for apartments and health care facilities and is a conventional loan. FHA insures the mortgage and this results in favorable terms and low rates. Subsidy requirements, affordable housing percentages, and low/middle income requirements for tenants do not apply. The program allows for upscale projects with pools, tennis courts, etc. as long as market rents and market expenses support the costs.
The terms are a fixed rate (no balloon) construction loan based on 83.3% of costs, and a 1:20 Debt Service Coverage Ratio (Utilizing 83.3% of NOI). When final construction numbers are accepted, the loan rolls into a 40 year fixed rate permanent at the same rate. Many transactions allow a credit for appreciated land value. This calculation uses value estimates from an appraiser for the intended use of the land as of the closing date. In turn, this may allow loan sizes to climb to more than 100% of total project “costs”. The construction mortgage and the permanent are both non-recourse and always assumable (not just “one time” assumptions). The forty-year amortization period starts when construction is completed and it becomes a permanent mortgage. The program also allows for a 10% Builder’s Sponsor’s Profit Risk Allowance (BSPRA) for apartments. This is similar to a developer fee that is based on all the hard and soft costs except the land and comes through the builder. See: http://www.trustlender.com/wp-content/uploads/2013/12/ExplanationofBSPRA1.pdf
Explanation Of BSPRA- the Developer's Fee
BSPRA (Builder Sponsor Profit Risk Allowance)Add your content here.
BSPRA is paper equity. A BSPRA allowance of up to 10% of all hard and soft costs combined is added to those costs and then the value of the land (or as-is value of the property in sub rehab cases) is included to arrive at the total estimated replacement cost of the property. (The BSPRA allowance could be any amount up to 10% but is always the full 10% in practice.) The maximum mortgage by the cost test is then 90% of the replacement cost. In a simplistic example, let’s say that for every $60 in hard costs, there were $30 in soft costs. So the total of the two would be $90 and the allowable BSPRA $9. Then say the land value is $1. The total replacement cost is $100 ($60 + $30 + $9 + $1) and the maximum mortgage $90. If the general contractor and developer agreed not to take any part of the BSPRA in cash, but to leave it in the deal, then they can fully mortgage out their hard and soft costs. If the land owner is also in the deal, which sometimes happens, the project can be built with no upfront cash equity requirement.
Here is HUD’s definition of BSPRA: “A. Builder’s and Sponsor’s Profit and Risk Allowance (BSPRA). An amount included in replacement cost for profit motivated and limited distribution mortgagors where an identity of interest (See paragraph 4-9) exists between the mortgagor and general contractor. BSPRA is no more than 10 percent of the total estimated cost of: on-site land improvements; structures; general requirements; general overhead expenses; architect’s fees; carrying and financing charges; and legal, organizational and audit expenses.” In order for the BSPRA allowance to be used, there must be a recognizable identity of interest between the general contractor and the owner/developer. And here is HUD’s description of what constitutes an identity of interest:
4-9. IDENTITY OF INTEREST. An identity of interest exists if:
A. The mortgagor (or any general or limited partner, shareholder, director, officer, employee or authorized representative of the mortgagor) has a financial interest in or contractual arrangement with the contractor regarding the project, including site procurement, other than the construction contract or vice versa.
B. Any general or limited partner, shareholder, director, officer, employee or authorized representative of the mortgagor is also a general or limited partner, shareholder, director, officer, employee or authorized representative of the contractor or vice versa.
C. The contractor advances funds for any obligation of the mortgagor, including site procurement, or pays on behalf of the mortgagor (or provides without cost) architectural or engineering services, except those permitted by the construction contract or owner-architect agreement.
D. The mortgagor (or any general. or limited partner, shareholder, director, officer, employee or authorized representative of the mortgagor) can directly or through one or more intermediaries control or influence the decisions or policies of the contractor, including apparent control or influence over the decisions or policies, or vice versa. “Apparent control or influence” means any relationship that exists between the mortgagor and contractor (or any general or limited partner, shareholder, director, officer, employee or authorized representative of the mortgagor and contractor) by blood or marriage.
E. The mortgagor and contractor at any time enter into any agreement, contract or undertaking that changes or cancels any obligation of the other party that is required by the documents executed at initial endorsement.” In cases where a identity of interest does not already exist, the most common way of establishing the identity of interest is “B” above. The general practice is to give the contractor (or one of its principals) a non-controlling minority interest in the ownership entity (5%-25%), which is then bought out at the end of construction and final endorsement by the payment of a fixed price (the builder’s profit). If BSPRA is used, then no Builder’s Profit is included in the construction contract and the contract cannot be of the “fixed price” type but must be of the “cost plus a fixed fee” type. Builder’s Overhead (2%) is permitted to be included in the contract in BSPRA cases. If no identity of interest exists or is created as described above, then the builder’s profit is included in the contract and must be met with upfront equity. The contract may then be of the fixed price type.
The developer may only receive a SPRA allowance as paper equity. SPRA is equal to 10% of the soft costs only. Here is HUD’s definition of SPRA.:
Sponsor’s Profit and Risk Allowance (SPRA). An amount included in replacement cost where no identity of interest (see paragraph 4-9) exists between the general contractor and mortgagor. SPRA is no more than 10 percent of the total estimated cost of: architect’s fee; carrying and financing charges; and legal, organizational and audit expenses.” In our simplistic example above, this is what happens. Hard costs equal $60 and a builder’s profit of say 10% is added to those costs. Soft costs equal $30 and a SPRA of $3 is permitted. Land is still $1. So, total replacement cost is the same ($60 + $6 + $30 + $3 + $1 = $100) and maximum mortgage is still the same at $90. But the builder’s profit is not now paper equity; it’s real cash equity. The developer has got to put up the $6 before first mortgage proceeds are released. Furthermore, it is unusual for HUD to allow a 10% builder’s profit in non-identity of interest cases. Most I’ve ever seen is about 8%. So what would really happen to our simplistic example is this: $60 + $4.80 + $30 + $3 + $1 = $98.80 and the maximum mortgage is $88.92.
So, even if the land owner still chucks in his buck, the mortgagor has to come up with $5.88 in real hard cash at the initial closing. This way both developer and general contractor lose.
Hospital Finance: Insured Loans for New Construction Or Rehabilitation
Minimum Criteria for Consideration for Insured Hospital Mortgage Insurance
These are guidelines to help potential applicants reach their own preliminary assessments on whether or not they meet the minimum criteria for Mortgage Insurance. Passing this preliminary test DOES NOT assure that an application will be approved.
1) Is your facility a licensed hospital? (Requisite Response: YES)
2) a) For the most recently completed Fiscal Year, were the total patient days for the following services more than 50% of the hospital’s total patient days? (Requisite Response: NO)
Chronic convalescent and rest
Drug and alcoholic
Nervous and mental
Note: If the patient days for the above services are slightly over 50%, calculating adjusted patient days may yield a result under 50%. Contact us for an adjusted patient days worksheet.
b) Through the end of the project construction and for two complete Fiscal Years thereafter, do you anticipate that during any Fiscal Year the total of patient days for the above services will be more than 50% of the hospital’s total patient days? (Requisite Response: NO)
3) Does your State have a Certificate of Need (CON) process?a) If yes, has a CON been issued? (Requisite Response: YES or PENDING)
4) After the project construction is completed, will the mortgage exceed 90% of the estimated book value of all property (existing before project, new additions and/or renovations after project) that secures the mortgage? (Requisite Response: NO)
5) Will you grant to the lender and the insurer a first mortgage on the entire hospital property, plant, and equipment, including receivables? (Note: exceptions may include leased equipment, off site property, capital associated with affiliations, etc.) (Requisite Response: YES)
6) Are you willing to make monthly payments into a Mortgage Reserve Fund that will build to: (a) a balance equal to one year of debt service after five years, and (b) a balance equal to two years of debt service after 10 years?
(Requisite Response: YES)
7) Over the last three full Fiscal Years, has the average operating margin been equal to or greater than 0.00? (Requisite Response: YES)
8) Over the last three full Fiscal Years, has the average debt service coverage ratio been equal to or greater than 1.25? (Requisite Response: YES)
Note: Include leases in calculations for both Operating Margin and Debt Service Coverage Ratio below.
Operating Margin =
+Operating Net Income from Two Full FYs Ago
+Operating Net Income from Three Full FYs Ago
+Total Operating Revenues from Two Full FYs Ago
+Total Operating Revenues from Three Full FYs Ago Debt Service Coverage Ratio (DSC) = Net Income + Depreciation Expense + Interest Expense Current Portion of Long Term Debt (Prior Year) + Interest Expense
Compute the DSC for each of the last three full fiscal years, then compute the three year average for this calculation.
Health Care Property loan terms for Insured Loans
1.HUD Exam Fee:This is an application fee to HUD when everything is completely processed and the final package goes in for the application for mortgage insurance. It is 3/10 of 1% of the mortgage amount.
2. Allowable FHA finance fee (the points):It is the 2.00% finance fee HUD allows us. We can’t charge more than this.
3. Estimated 3rd party reports:These are an appraisal, engineering review, feasibility study and a phase I. Except for the Phase I, the others are by HUD approved companies that act as if they are a HUD employees. They are awarded that status and have received some HUD training. We are doing the processing and HUD becomes a review agency.
4. GNMA security fee of 1.5%:This is like a bond fee we are allowed that covers the costs of placing the loan, also called a placement fee. We issue GNMA securities loan by loan which is what makes it all work. It turns the mortgage transaction into a triple a rated bond transaction or security.
5. Est. Borrower organizational:This is an estimate of your costs to set up the organization you are using as the borrower, i.e. LLC, trust, Corporation etc.
6. Cost Cert./Constr. Audit:At the end of construction you would hire a CPA to certify that all the costs went into the property. Once this is accepted is when it becomes a permanent mortage andwhen the 40 years starts.
7. What is BSPRA?:This is like a “developers fee”. It is approximately 10% of all the costs except the land or property value.
8. The basic qualifiers for the underwriting process:We look at mostly the feasibility study and then at the builder and borrower to make sure they are qualified. There is no minimum credit score or equity required