9 Types of Condo Projects that Must be Reviewed by HUD/HRAP

HUDWhile HUD allows lenders with Direct Endorsement authority to review and approve condominium projects on HUD’s behalf (DELRAP), there are 9 different circumstances where the condominium must be reviewed by HUD (HRAP).

  • Condominiums in Florida.  Due to the issues in the condominium real estate market in Florida, all condominium project approvals must be reviewed by the Atlanta Homeownership Center.
  • In Bankruptcy or Receivership.  The fact that the condominium project or the developer is in bankruptcy or receivership is not an automatic disqualification for project approval but it must be reviewed by HUD.
  • Manufactured Housing Condominium Projects (MHCPs).  MHCPs are not considered Site Condo Projects and must be reviewed by HUD.
  • Converted Non-Gut Rehabilitation Condominiums.  This includes project submissions that have been converted to a condominium regime within the past two years.  Consult ML12-18 for the definition of “non-gut”.
  • Mixed-use condominiums with commercial space exceeding 25% of the total floor area.  The standard guideline for commercial space in a condominium project is 25%.  However, HUD will allow up to 50% commercial floor area on an exception basis but it must be reviewed by HUD.
  • Live-work condominium projects.  Condominiums containing live-work units must be reviewed by HUD.
  • Condominiums with Rent-stabilized and Below-Market-Rent (BMR) units.  These must be reviewed by HUD.
  • Condominiums containing Affordable Housing Units.  Condominiums with Affordable Housing Units may be eligible for project approval if they meet the requirements of 24CFR203.41 but must be reviewed by HUD.
  • Condominiums that have been Rejected or Withdrawn in the previous 12 months.  If a condominium has been Rejected or Withdrawn either through HRAP or DELRAP, the project must be submitted to HUD for approval/reconsideration.

Mixed Use Condominium Exception Requests for FHA Condo Approval

7_25_14Mixed-use condominium projects may be eligible for an FHA condo approval if they meet these two additional basic requirements:

  • The total floor area of the non-residential space is 25% or less (calculations must be provided) and
  • The non-residential aspect of the condominium is homogenous with the residential component.

Exceptions do exist for condominium projects that have more than 25% of their floor area dedicated to non-residential purposes.  Obviously, they would have to meet additional requirements and they may only be processed for approval at the Philadelphia Home Ownership Center.  DELRAP is not an option.

I fielded an inquiry recently regarding a 3-floor condominium where top two floors are residential units and the first floor is commercial space and roughly 33% of the total floor area.  This raised several questions about the exception process.  Here are the answers to those questions:

1. In addition to the standard criteria, what other criteria are examined in order to approve such a project?  I.E., must the project have excessive reserves?

No, but it would be a positive factor if it did, and you would want to point it out.

2. Does the commercial vacancy rate come into play?  If so, is there an allowable percentage of vacancy of the commercial units at the time of approval?

Yes, the vacancy rate is significant, but no minimum acceptable rate has been established.

3. If the elevator only services the residential units, is it acceptable for the legal documents to require that only the residential units be responsible for its maintenance?

Yes.  However, the legal documents must not give preferential treatment to the non-residential units over those that are residential.  This would not be an example of preferential treatment.

4. Is the single-entity ownership percentage allowed to exceed 10% of the units/floor area (up to 50%) or is the project held to the former 10% rule because this approval would be on an exception basis?

One entity may not own more than 50% of the units, including the commercial floor space.

In addition to the above, exception requests must include a statement of ‘good cause’ and must accompany the project-approval package.  For the most part, the request should include the documentation listed on the bottom of page 5 and the top of page 6 of ML 2012-18.

Note that only projects completed for more than one year for which control has been transferred to the unit owners are eligible, and they can only be reviewed under the HRAP process.

Exception requests for FHA condo approval of mixed-use condominium projects are highly subjective.  Homogeneity and the financial picture play a large role in the final determination.

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