Mortgage Insurance for Single Room Occupancy Projects (SRO): Section 221(d)(3) and 221(d)(4)

Summary:
Section 221(d)(3) and 221(d)(4) program insures mortgage loans for multifamily properties consisting of single-room occupancy (SRO) apartments. There are no Federal rental subsidies involved with this SRO program. It is aimed at those tenants who have a source of income but are priced out of the rental apartment market. SRO projects generally require assistance from local governing bodies or charitable organizations in order to reduce the rents to affordable levels. Although SRO housing is intended for very low-income persons, the program does not impose income limits for admission.

Purpose:
Section 221(d)(3)(nonprofit borrowers) and Section 221(d)(4)(profit motivated borrowers) insure lenders against loss on mortgages. The program encourages construction or substantial rehabilitation of single-room apartment buildings with financing insured by HUD, thus enabling people with very limited incomes to find clean and safe housing.

Type of Assistance:
FHA provides mortgage insurance to HUD-approved lenders.

Eligible Activities:
Insured mortgages may be used finance construction or substantial rehabilitation of projects consisting of five or more one room SRO units, with no more than 10 percent of the total gross floor space dedicated to commercial use (20 percent for substantial rehabilitation projects). Each SRO apartment can have its own kitchen or bathroom facilities, or these facilities may be shared by several apartments. Apartments can be designed to allow for more than one occupant, but the number of people living in a unit cannot exceed the number permitted by occupancy requirements in State and local codes and the Fair Housing Act.

The maximum amount of a Section 221(d)(3) nonprofit loan is 100 percent of the estimated replacement cost. The maximum amount of a Section 221(d)(4) profit motivated loan is 90 percent of the estimated replacement cost. The maximum mortgage term is 40 years or up to three-fourths of the building's remaining economic life, whichever is less. Contractors for new construction and substantial rehabilitation projects must comply with prevailing wage standards under the Davis-Bacon Act.

Eligible Borrowers:
The program is used by nonprofit organizations, builders or sellers teamed with a nonprofit purchaser, limited-distribution entities, profit-motivated firms, or public agencies. Cooperative lenders or investors are not eligible.

Eligible Customers:
Residents are subject to normal tenant selection procedures. There are no income limits for admission. This program cannot be used with project-based subsidies.

Application:
Applicants must document (1) a clear need for the proposed SRO, (2) its experience operating SROs, (3) local government support of the project; and a relocation plan, if needed.

The sponsor has a preapplication conference with the local HUD Multifamily Hub or Program Center to determine preliminary feasibility of the project. The sponsor then must submit a site appraisal and market analysis application (SAMA) (for new construction projects), or feasibility application (for substantial rehabilitation projects). Following HUD's issuance of a SAMA or feasibility letter, the sponsor submits a firm commitment application through a HUD-approved lender for processing. Considerations include market need, zoning, architectural merits, capabilities of the borrower, availability of community resources, etc. If the proposed project meets program requirements, the local Multifamily Hub or Program Center issues a commitment to the lender for mortgage insurance.

Technical Guidance:
This program is authorized by Section 221(d) (12 U.S.C. 1751(d)) and pursuant to Section 223(g) (12 U.S.C.1715l (d)) of the National Housing Act, pursuant to Section 223(g) of the National Housing Act (12 U.S.C. 1715n(g)). Program regulations are found in 24 CFR 221.565. The basic program instructions are in HUD Handbook "Mortgage Insurance for Single Room Occupancy (SRO) Projects, Section" 4560.3 available on HUDclips. The program is administered by the Office of Multifamily Housing Development.

Program Accomplishments:
No loans were insured under this program for Fiscal Year 2011.