What sets the loan amount
Three tests run and the lowest one governs. A loan to cost test against total replacement cost, a debt service coverage test against net operating income, and a statutory per unit limit adjusted for the market. On an affordable deal with a recorded use agreement, both the cost ratio and the coverage requirement are more generous than on a market rate deal, which is why the program and LIHTC pair as often as they do.
In practice coverage is usually the binding test on a tax credit deal, because restricted rents cap the income side while construction costs do not care about your rent restrictions. Run coverage first. If coverage governs by a wide margin, you are gap financing a larger number than you probably assumed.
How the equity pay in collides with the draw schedule
HUD advances during construction against completed work. The equity investor pays in on milestones that it negotiates, and the investor wants as much of its money in as late as possible. Those two schedules have to be reconciled before closing, not after.
The usual resolution is that equity goes in first to a negotiated point, HUD advances behind it, and a bridge covers the timing difference on the back end until the final installment arrives at stabilization or at 8609. If nobody models that bridge, it shows up as a funding hole in month fourteen. Model it at application.
The schedule is the real cost
Count on a pre application meeting, a firm commitment application, third party reports with their own lead times, a HUD review period and then initial endorsement. Sponsors who have not done one tend to budget half the calendar they need.
The pieces that most often add months are the appraisal and market study when the submarket has thin comparable data, environmental review when there is any history on the site, and the Davis Bacon wage determination and contractor documentation. None of those are discretionary and none of them move faster because the credit allocation has a placed in service deadline. Build the deadline backward from initial endorsement and then add a quarter.
When it is the wrong tool
If the deal needs to close in ninety days, this is not the program. If the rehabilitation scope is moderate and the property has existing debt worth preserving, look at 223(f) or 223(a)(7) instead. If the sponsor has no HUD experience and no HUD experienced general contractor, the learning curve will cost more than the rate saves on a small deal.
Where it is right, it is very hard to beat. A forty year fixed rate locked at endorsement, with no refinancing event for the life of the compliance period and beyond, removes the single largest risk in an affordable deal's back end.
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