As we sort out the FHA underwriting for 1 to 4 unit loans, I have been getting a lot of questions about what rules HUD or FHA has revised/ is revising to allow for loans on mixed use buildings.  This can be confusing, so I will do my best to lay out what is going on now, There are multiple HUD, FHA, VA, Fannie Mae and Freddie loan guaranty/loan insurance programs for residential buildings that have restrictions on how much non-residential space can be in a building when financing or refinancing mixed use.  I will work with our new appraiser guy Ryan in Boston on assembling a reliable matrix so we don't keep conflating the requirements that are specific to each of these programs.  For people who are not actively engaged in trying to finance projects, this stuff probably blurs together under a broad HU or FHA banner, but the specifics really do matter.  Here is a brief summary:

Already Done: The Change in FHA Condo Finance

https://www.cnu.org/cnu-news/2012/09/fha-raises-cap-financing-limits-commercial-space

 John Norquist and others from the Congress for New Urbanism met with folks in the Treasury Department and explained how FHA and HUD underwriting rules were working against the policies on the books at HUD, EPA, and US DOT which actually promote mixed use buildings as part of walkable urbanism.  This turned into a shift in the FHA Condo Loan rules rather quickly. The Mortgagee Letter from FHA raised the baseline amount of allowed non-residential and provides a process of further increasing non-residential to up to 50% of building area in a condominium building.

This applies to the FHA insured loans that a developers takes out to build new buildings with condominium ownership or to convert existing buildings to condominium ownership.

This also has bearing on the FHA insured mortgages that individual condo owners get to buy or refinance their individual condo units in condo buildings with mixed use.  The building has to be on the FHA Approved Condo List for the individual condo buyer to get an FHA Insured mortgage on their unit.  FHA Condo list search page

Loan Programs that are already in place and can be used in Lean Context; Small Buildings/Incremental Projects.

• VA 1 to 4 unit mortgage, 0% down 30 year with PMI.
• Fannie Mae and Freddie Mac 1 to 4 unit mortgage term, PMI requirements, and down payment varies with credit score.
• FHA 203(b)  1 to 4 unit mortgage, 3.5% down 30 year with PMI, if owner occupied for min. 12 months. ( 25% down if not owner occupied for 12 months).  FHA 203(b) 
• FHA 203(k) 1 to 4 unit purchase + rehab mortgage, 3.5% down 30 year with PMI if owner occupied for min. 12 months. ( 25% down if not owner occupied for 12 months). FHA 203(k) Program  Some key information from the FHA Guidelines on how much non-residential floor area is allowed in a mixed use building under the 203(k) loan program:“A 203(k) mortgage may be originated on a “mixed use” residential property provided that the percentage floor area used for commercial purposes follows these standards:

  – One story building 25%

  – Two story building 49%

  – Three story building 33%

  The commercial use will not affect the health and safety of the occupants of the residential property.

  The rehabilitation funds will only be used for the residential functions of the dwelling and areas used to access the residential part of the property.”

Loan Programs with new Underwriting Rules out for Public Comment - workable for apartment buildings and mixed use at the larger end of the spectrum of the Lean Building Types.

• HUD 210  HUD 221(d)(4) and other HUD originated/FHA Insured Loan programs for 5 units or more

From the jump I have to tell you that it is critical that you stop reading this right now and put CNU 24 in Detroit on your calendar --June 8-11 2016.  Do it now. http://www.cnu.org/cnu24  Reinforce your intention to be there with a great collection of folks working on building/rebuilding good places.

CNU is an inspiring and energizing event for me, this time more than ever.  My agenda for the year is set and I am thrilled to have all kinds of help.  We started out on Wednesday morning with a 3 hour session Understanding the Numbers and Asking for Money with Andrew Frey of Townhouse Center in Miami and Monte Anderson of Options Realty in Dallas.  We hung in the room for an extra hour with lots of great questions from the folks attending.  Monte and Andrew and I agree that we need a free session on the basics next time, with opportunity for some hands on learning beyond sharing pro forma files.  Email me if you would like a PDF of my section of the presentation.  janderson@andersonkim.com  Jim Kumon from Strong Towns captured the audio.  I will post a link when it is available.

Thursday morning Monte Anderson and I presented Building and Financing Incremental Development.  David Kim and Bruce Tolar and I are working with Monte on several projects in the Dallas area because we think his approach spanning pop-up tent markets to small buildings, to mixed use infill buildings is really needed.  The lower end of this progression is a chance for people to get started in development with low risk and high impact.

In the afternoon there was a two hour session Learning From Lean Urbanism with Andres Duany, Hank Ditmar, Sandy Sorlien, Lysistrata Cloud-Hall, and me.  We updated folks on what the Project for LEan Urbanism has been up to since CNU22 in Buffalo and what the gameplan is between now and CNU24 in Detroit.  I recommend spending some time on the website if you have not done so yet.   http://leanurbanism.org/about/

Friday morning started with the Second Annual Rookie Developers Breakfast.  Breakfast is an exaggeration.  Because 80 people showed up, "breakfast" meant get coffee and go to the park next door to talk.  A sub-group of women rookie developers was formed.  There is now a general Small Developer/Builder FaceBook Group and a FaceBook Group for "CNU Lady Developers"  ---and no, I did not pick the name.  This is a formidable group by the way.  I am impressed with the questions asked and the skills they are bringing to bear.  If you would like to be added to either group, just email me.

We had a number of seasoned developers participate; Michael Lander, Ward Davis, and others from the NTBA.  After an intense couple of hours with the Rookie Developers, Monte and I scrambled over to the Hotel Mezzanine do a podcast with Chuck Marohn of Strong Towns.

http://www.strongtowns.org/journal/2015/5/1/show-234-john-anderson-and-monte-anderson-at-cnu-23

For Part II of this blog post, I will line out the work that needs to be done between now and CNU 24 in Detroit next June.  I will be asking for help on this stuff.

I got an email from an Architect Colleague working on a infill project for a private developer across the street from the light rail station in a suburban city in the Northeast.  The City does not want to reduce the off-street parking requirement and does not think anyone would ever use ZipCar if the developer set up a couple spaces for ZipCars on the site.  My advice below comes from frustration with similar circumstances over the years.

Create two choices that are clear and straightforward.  Propose that by following the city's current 20th Century parking requirements and building Design "A" you can build 20 units next to transit.  You could call this "pretending that massive transit investment does not exist."  Design "A" produces $80,000 in annual property taxes for the city.

Design "B" delivers the amount of parking we think the market demands considering that the massive transit investment actual does exist and is a significant amenity for  the site.  You have further expanded the transportation choices by providing 2 zip car spaces based upon the projected usage by the folks at ZipCar.  Design "B" consists of two buildings and produces 40 units in a wider range of size and configuration and $160,000 in annual property taxes for the city.

The developer recognizes that the city may seek to delay its participation in the 21st Century for a few more years and if required to,  will limit construction to the over-parked 20th Century Design "A" and preserve a portion of the over-parked site for an additional building.  Eventually we expect that the city will want us to build the second building on the site and complete Design "B".

Don't fool around at the edges.  Present a clear choice.  If the  City picks the 20th Century Design you were never going to get much more than that, and I don't think you should not waste your time trying to make inconsequential marginal improvements on the over-parked design, (apart from preserving a portion of the site for more building, keeping the utilities out of the future building pad.)

If the City is going to value parking over more market rate dwellings next to transit and greater tax revenues, there is little chance you will convince them to do otherwise.  Build half of the buildings and go down the road to do something else.  Give them the numbers and the clear choice.   If they pick more parking and less tax revenue on purpose, the best you can do is save a place for another building for when more thoughtful people are in charge.

If the developer is smart they have not closed on the  land yet.  They can offer the seller less money now that they have discovered that the site is contaminated with a bullshit parking requirement and is inconveniently stuck in a 20th century time warp.

Those things just make the land less valuable.  Sorry.