Share

Investment Fundamentals

Investment Fundamentals

Back

Back

The Importance of HUD Loans for Commercial Real Estate Projects

Some investors may not know what a HUD loan is, but it is important to understand its impact on a select commercial real estate (CRE) investment. Having a HUD-insured loan can mitigate risk, provide attractive loan terms and overall help ensure the longevity of the project. In this article, we'll dig into what a HUD loan is and its importance to a CRE investment.

Similar to other federal agencies like Freddie Mac and Fannie Mae, the U.S. Department of Housing and Urban Development (HUD) is a federal agency that primarily focuses on multifamily unit loans. However, HUD does not finance loans'“they insure 100% of the loan in case there is a default, providing greater security for the lender. Since HUD is a government agency, project sponsors get to lock in the lowest interest rate available, similar to AAA bonds.

HUD doesn't just insure loans for affordable housing developments; they also insure for market-rate multifamily development projects. These construction loans are officially referred to as 221(d)(4) loans and they provide some of the most competitive terms a developer can find, including:

  1. Competitive fixed rates

  2. 40-year term amortization

  3. Loan amounts up to 85% of the project cost

  4. Non-recourse financing

However, HUD typically only provides these ultra-competitive loans to a small pool of sponsors. According to MultiFamily.loans Capital Markets Advisors, in 2018, there were $226.4 billion in total multifamily loans issued. Of that $226.4 billion, only $6.2 billion (2.74%) were HUD 221(d)(4) multifamily construction loans.

HUD is extremely risk-averse and has an extensive vetting process that can deter many sponsors from applying. This can be attributed to:

  1. Tedious Screening Process: HUD 221(d)(4) loans are not readily available to most projects or sponsor teams, and proposed projects must go through an extensive pre-review process and the project must be well-positioned with an established team in place to execute. The process is advertised as taking seven to 10 months to be approved, but it can take much longer to actually close a loan; in some cases up to two years.

  2. Interest Rate Uncertainty: Sponsors do not know the interest rate they are locking in for 40 years until 30 days before closing. A 50 bps swing in rates can be a meaningful difference in how much equity they need. However, sponsors are often willing to take this risk due to the low benchmark interest rates of HUD loans and that, once they do lock a rate, they are now fixed for 40 years.

  3. Selectivity: HUD only loans to approved sponsors/developers. Further, HUD will not loan to sponsors with troubled HUD track records'“one strike and you're out. If a developer is showing their 4th HUD deal, that means they are performing on all three previous deals. Similarly, HUD requires a bonded contractor and HUD-experienced management team to supervise daily operations of the project. Therefore, the sponsor will be required to partner with HUD-approved and reputable construction, development, and management teams to facilitate the development and lease-up of their properties.

  4. Mortgage Insurance Premiums ('MIP'): Just as is the case with an FHA home mortgage, a borrower on a HUD 221(d)(4) construction loan must pay a mortgage insurance premium. The premium is 0.65% per annum for market-rate properties but can go as low as 0.25% if the borrower is able to obtain a green MIP reduction by incorporating energy efficiency improvements to the project.

  5. Prevailing Wage Requirements: Prevailing wage is the rate that contractors must offer their employees when doing business with a government agency. This wage rate is almost always higher than standard wage rates, even as much as 5 '“ 20% higher depending on location. Since over half of total construction costs are born from labor costs, this means total construction costs could increase by 2.5% '“ 10%.

  6. Bi-annual Cash Flow Distributions: Unlike a conventional loan that gives borrowers more flexibility in how they distribute cash flow, HUD limits distributions to twice per year and assesses the health of the property prior to approving each distribution. Investors should understand that the developer has less flexibility in issuing distributions to limited partners.

While these may seem like drawbacks to sponsors, they are also risk-mitigating factors for investors. Outside of providing attractive loan terms, HUD also requires a greater amount of reserves in comparison to a conventional loan (both interest and operating reserves during lease-up) to decrease the likelihood of default. HUD underwrites and evaluates projects using stringent criteria, and due to this outlook, HUD requires sponsors to carry additional cash in the deal. For example, HUD requires 12 months of debt service payments to be held escrow versus six months for most conventional lenders. And HUD will not release the reserves until sponsors have at least six months of at least a 1.0 debt coverage service ratio.

HUD loans, unlike most bank loans, are primarily asset-based, meaning that HUD scrutinizes the property location, the pro forma rents, expenses, and the development team to ensure its communities are successful and achievable. There are many hoops that experienced sponsors will jump through in order to obtain a highly sought after HUD loan. Ultimately, having a HUD insured project means you are working with a sophisticated sponsor with a proven track record that has taken additional precautions to improve the probability of the success of their project. As one local developer who has closed multiple HUD 221(d)(4) puts it, 'If you can do a 221(d)(4) loan, you can do anything.'

Don’t miss these

Don’t miss these

Don’t miss these

Don’t miss these

Investment Fundamentals

Exploring 401(k) and Private Markets: New Possibilities Ahead

Jul 28, 2025

Private markets may soon appear in 401(k) plans. Explore what these possibilities could mean for investors and how Crowd Street empowers informed choices.

Read now

Investment Fundamentals

Exploring 401(k) and Private Markets: New Possibilities Ahead

Jul 28, 2025

Private markets may soon appear in 401(k) plans. Explore what these possibilities could mean for investors and how Crowd Street empowers informed choices.

Read now

Investment Fundamentals

Making Sense of CRE Valuations in Real Estate Deals

Jul 28, 2025

Not all CRE valuations are equal. Learn the difference between broker opinions and appraisals, plus key questions to ask when evaluating property value.

Read now

Investment Fundamentals

Making Sense of CRE Valuations in Real Estate Deals

Jul 28, 2025

Not all CRE valuations are equal. Learn the difference between broker opinions and appraisals, plus key questions to ask when evaluating property value.

Read now

Investment Fundamentals

Crowd Street's Private Equity Guide: Understanding the Basics

Jun 25, 2025

Discover how private equity works, some key risk factors, and ways individual investors can explore this space with Crowd Street's private equity guide.

Read now

Investment Fundamentals

Crowd Street's Private Equity Guide: Understanding the Basics

Jun 25, 2025

Discover how private equity works, some key risk factors, and ways individual investors can explore this space with Crowd Street's private equity guide.

Read now

Take your portfolio beyond the index.

Request Access

Take your portfolio beyond the index.

Request Access

Take your portfolio beyond the index.

Request Access

Take your portfolio beyond the index.

Request Access

CrowdStreet, Inc. (“Crowd Street”) offers investment opportunities and financial services on this website.

Broker dealer services provided in connection with an investment are offered through CrowdStreet Capital LLC (“Crowd Street Capital”), a registered broker dealer, Member of FINRA/SIPC. Information on all FINRA registered representatives can be found on FINRA’s BrokerCheck. Additional information is available in Crowd Street Capital's Client Relationship Summary (Form CRS).

Advisory services are offered through CrowdStreet Advisors, LLC (“Crowd Street Advisors”), a wholly-owned subsidiary of Crowd Street and a federally registered investment adviser. Crowd Street Advisors provides investment advisory services exclusively to private funds and does not otherwise provide investment advisory services to the Crowd Street Marketplace or its users. Additional information is available in Crowd Street Advisors’ Form ADV.

Crowd Street and its affiliates do not endorse any of the opportunities that appear on this website. Investment opportunities available through Crowd Street are speculative and involve substantial risk. You should not invest unless you can sustain the risk of loss of capital, including the risk of total loss of capital. Diversification does not guarantee investment returns and does not eliminate the risk of loss. All investors should consider their individual factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. Private placements are illiquid investments, in that they cannot be easily sold or exchanged for cash, and are intended for investors who do not need a liquid investment.

Performance information presented on this website has not been audited or verified by a third party. By accessing the Crowd Street Marketplace, you agree to be bound by its Terms of UsePrivacy Policy, and any other policies posted on this website. The Crowd Street Marketplace is only intended for accredited investors.
For more information, see Legal Documents and Important Disclosures.

Ⓒ 2025 Crowd Street Ltd. All Rights Reserved

CrowdStreet, Inc. (“Crowd Street”) offers investment opportunities and financial services on this website.

Broker dealer services provided in connection with an investment are offered through CrowdStreet Capital LLC (“Crowd Street Capital”), a registered broker dealer, Member of FINRA/SIPC. Information on all FINRA registered representatives can be found on FINRA’s BrokerCheck. Additional information is available in Crowd Street Capital's Client Relationship Summary (Form CRS).

Advisory services are offered through CrowdStreet Advisors, LLC (“Crowd Street Advisors”), a wholly-owned subsidiary of Crowd Street and a federally registered investment adviser. Crowd Street Advisors provides investment advisory services exclusively to private funds and does not otherwise provide investment advisory services to the Crowd Street Marketplace or its users. Additional information is available in Crowd Street Advisors’ Form ADV.

Crowd Street and its affiliates do not endorse any of the opportunities that appear on this website. Investment opportunities available through Crowd Street are speculative and involve substantial risk. You should not invest unless you can sustain the risk of loss of capital, including the risk of total loss of capital. Diversification does not guarantee investment returns and does not eliminate the risk of loss. All investors should consider their individual factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. Private placements are illiquid investments, in that they cannot be easily sold or exchanged for cash, and are intended for investors who do not need a liquid investment.

Performance information presented on this website has not been audited or verified by a third party. By accessing the Crowd Street Marketplace, you agree to be bound by its Terms of UsePrivacy Policy, and any other policies posted on this website. The Crowd Street Marketplace is only intended for accredited investors.
For more information, see Legal Documents and Important Disclosures.

Ⓒ 2025 Crowd Street Ltd. All Rights Reserved

CrowdStreet, Inc. (“Crowd Street”) offers investment opportunities and financial services on this website.

Broker dealer services provided in connection with an investment are offered through CrowdStreet Capital LLC (“Crowd Street Capital”), a registered broker dealer, Member of FINRA/SIPC. Information on all FINRA registered representatives can be found on FINRA’s BrokerCheck. Additional information is available in Crowd Street Capital's Client Relationship Summary (Form CRS).

Advisory services are offered through CrowdStreet Advisors, LLC (“Crowd Street Advisors”), a wholly-owned subsidiary of Crowd Street and a federally registered investment adviser. Crowd Street Advisors provides investment advisory services exclusively to private funds and does not otherwise provide investment advisory services to the Crowd Street Marketplace or its users. Additional information is available in Crowd Street Advisors’ Form ADV.

Crowd Street and its affiliates do not endorse any of the opportunities that appear on this website. Investment opportunities available through Crowd Street are speculative and involve substantial risk. You should not invest unless you can sustain the risk of loss of capital, including the risk of total loss of capital. Diversification does not guarantee investment returns and does not eliminate the risk of loss. All investors should consider their individual factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. Private placements are illiquid investments, in that they cannot be easily sold or exchanged for cash, and are intended for investors who do not need a liquid investment.

Performance information presented on this website has not been audited or verified by a third party. By accessing the Crowd Street Marketplace, you agree to be bound by its Terms of UsePrivacy Policy, and any other policies posted on this website. The Crowd Street Marketplace is only intended for accredited investors.
For more information, see Legal Documents and Important Disclosures.

Ⓒ 2025 Crowd Street Ltd. All Rights Reserved

CrowdStreet, Inc. (“Crowd Street”) offers investment opportunities and financial services on this website.

Broker dealer services provided in connection with an investment are offered through CrowdStreet Capital LLC (“Crowd Street Capital”), a registered broker dealer, Member of FINRA/SIPC. Information on all FINRA registered representatives can be found on FINRA’s BrokerCheck. Additional information is available in Crowd Street Capital's Client Relationship Summary (Form CRS).

Advisory services are offered through CrowdStreet Advisors, LLC (“Crowd Street Advisors”), a wholly-owned subsidiary of Crowd Street and a federally registered investment adviser. Crowd Street Advisors provides investment advisory services exclusively to private funds and does not otherwise provide investment advisory services to the Crowd Street Marketplace or its users. Additional information is available in Crowd Street Advisors’ Form ADV.

Crowd Street and its affiliates do not endorse any of the opportunities that appear on this website. Investment opportunities available through Crowd Street are speculative and involve substantial risk. You should not invest unless you can sustain the risk of loss of capital, including the risk of total loss of capital. Diversification does not guarantee investment returns and does not eliminate the risk of loss. All investors should consider their individual factors in consultation with a professional advisor of their choosing when deciding if an investment is appropriate. Private placements are illiquid investments, in that they cannot be easily sold or exchanged for cash, and are intended for investors who do not need a liquid investment.

Performance information presented on this website has not been audited or verified by a third party. By accessing the Crowd Street Marketplace, you agree to be bound by its Terms of UsePrivacy Policy, and any other policies posted on this website. The Crowd Street Marketplace is only intended for accredited investors.
For more information, see Legal Documents and Important Disclosures.

Ⓒ 2025 Crowd Street Ltd. All Rights Reserved