The 221(d)(4) program is a strong option for providing financing for either new construction or substantial rehabilitation for developers, particularly for affordable housing.

In April, M&T Bank and M&T Realty Capital Corporation (MTRCC) convened a panel of experts to discuss best practices in financing real estate projects under the auspices of the U.S. Department of Housing and Urban Development (HUD) Federal Housing Authority (FHA) 221(d)(4) New Construction/SubRehab program.

The panel featured:

  • Monty Childs, Managing Director, Affordable Housing, MTRCC
  • Drew Robison, Vice President, MTRCC
  • Allison R. King, Esq., Partner, Tiber Hudson LLC
  • Jacob Heitler, Principal, D4equity
  • Jesse A. Pasco, Senior Program Director, EBI Consulting
  • Phillip Winterland, Energy & Sustainability Group Manager, EBI Consulting

Drew Robison, who is responsible for MTRCC’s screening of affordable and market rate multifamily transactions for FHA mortgage insurance, kicked off the program by offering attendees a high-level overview of the 221(d)(4) program.

“M&T Realty Capital Corporation has closed many of these transactions, some of the greatest advantages are: non-recourse, high leverage and low interest rates,” Robison said, noting a 221(d)(4) transaction is essentially two loans in one: a construction loan that converts to a permanent loan. “These are very favorable terms to provide construction to permanent financing, not only for market-rate housing, but also for affordable housing.”

The program is a “strong” option for providing financing for either new construction or substantial rehabilitation for developers, Robison added, particularly for affordable housing. Even better, HUD has made “tremendous advances” to the program over the past decade, streamlining processes with a focus on continuous improvement to make it more favorable for projects coupled with either 4% or 9% tax credits and layers of subordinate financing.

“More developers and housing authorities that are doing rental assistance demonstration projects are using this program over and over again, and are becoming more and more proficient,” Robison concluded.

Issuing bonds to finance projects

Allison King with the law firm of Tiber Hudson is an industry leader in tax-exempt bonds to finance 221(d)(4) deals, particularly those also involving low-income housing tax credits (LIHTC). King said FHA loans presently offer “incredible” terms and encouraged developers to take advantage of the program. “Interest rates have dropped 96 basis points from last year on the tax-exempt side,” King said.

The process of issuing bonds to finance these deals can be complex and should be carefully managed, she added, because at closing, the borrower is closing on two loans simultaneously. “You have the bonds and the FHA loan, and those bonds are going to be sold by an underwriter to the market,” she explained. “Then, those bond trust proceeds are going to be deposited with the trustee in closing in exchange for the bonds.”

At closing, the initial draw will go from the lender to a trustee because the bonds are backed by cash and not collateralized by the project. As such, the trustee must maintain cash collateral at all times to secure the bonds. After the initial draw is deposited, the trustee releases a corresponding amount of bond proceeds to the issuer for the project–a process that continues with succeeding draws. “Once the project is complete and placed in service, the borrower is going to let the trustee know it can use the cash collateral to pay off the bond holders and that piece goes away,” King explained.

Interest rates are starting to “tick up a bit,” she noted, which is leading to more developers refinancing to resyndication. “This allows developers to lock in really low rates today for a future LIHTC deal.”

Investor considerations for 221(d)(4) deals

Jacob Heitler is a partner with D4equity, which provides opportunities by coinvesting in multifamily projects and managing the process with HUD. He offered tips for developers on key factors investors consider.

“There are opportunities for specialized investors,” Heitler said, because many traditional real estate private equity investors either cannot or do not want to be involved with the HUD/FHA program.

When sourcing these deals, Heitler recommended that investors considering this space work with a partner experienced as a developer and an investor in 221(d)(4) projects. His company prefers sourcing cost-constrained loans (85% loan-to-cost for market rate deals) because in the event of an unexpected cost overrun, the loan may be increased by up to 5% after stabilization, with HUD approval. Additionally, cost constrained loans will generally have higher returns, he added.

Going Green with 221(d)(4) projects

Jesse Pasco and Philip Winterland of EBI Consulting, an engineering and environmental consulting firm, said HUD has a list of 10 eligible green certification programs; the one most relevant to 221(d)(4) is Enterprise Green Communities. Winterland said following steps to obtaining green certification is vital to getting the project qualified for FHA’s green Mortgage Insurance Premium, or MIP. “Getting the green MIP is a really big benefit to the entire project,” he advised.

Winterland recommended engaging with a green consultant early in design to will allow any design-level changes to be caught early. He also suggested hiring architects and designers with green experience. “Make sure they’ve worked on projects that have completed a green MIP deal before or have gone through a green certification program,” he explained. “This minimizes conflicts with the green consultant, and it means your design is going to be correct from the get-go. You’re not going to have as many changes during the design process.”

Developers must submit a Statement of Energy Design Intent (SEDI) that covers the mechanical schedules, especially the HVAC and lighting systems. Winterland said he advised builders to use energy modeling software because the SEDI must take into account complex issues such as hourly weather effects on energy use.

When such a project advances to a firm commitment, developers must have a data collection plan in place. Winterland recommended whole-property energy meters be installed to obtain the most complete data picture.

Finally, Winterland said developers should take detailed photos at various points in the construction process. “This is important because it’s entirely possible the green certification program standard holder may have questions about a particular stage of construction. Not doing so can put your green certification at risk,” he explained.

For more information on our affordable housing initiative, contact the panel moderator and MTRCC Affordable Housing Platform Managing Director, Monty Childs at (312) 203-5410. Additionally, visit our website at




The opinions expressed within this webinar and subsequent article are those of the panelists and not those of M&T Bank, nor does M&T Bank necessarily endorse those opinions or suggestions for your own organization.

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