Who says you can’t get financing for a small mixed use building???!!

3story mixed use 203K diagram

Small Mixed Use Building in Geneva, NY.  Photo by Mike Puma
Small Mixed Use Building in Geneva, NY. Photo by Mike Puma

The typical 2 and 3 story main street mixed use building is perfect for a rookie developer to use the FHA 203K purchase rehab loan program to finance their first project.  Understand the Loan program and fill out the forms carefully, design your rehab to fit the rules. Now from the start, understand that this loan program is for owner occupants.  You would have to live in the building for a minimum of one year.

HUD GUIDELINES FOR FHA 203(K)

The program is for 4 units plus some amount of  allowed non-residential space which varies with the number of stories in the building.  Here is the breakdown from the FHA Guidelines:

“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.”  So you can stabilize the shell of the entire building including the non-residential portion, but you will need other funds to renovate the non-residential space.

If the building was built after 1991 the Federal Fair Housing Act applies.  In those newer buildings above the  4 units or  threshold for buildings covered by the Fair Housing Act requirement that all ground floor units must be accessible/adaptable, here’s what you do to rehab a small mixed use building using an FHA 203)k) loan:

  • ALTERNATIVE 1: KEEP THE NUMBER OF RESIDENTIAL UNITS TO 3 OR LESS AND THE SF OF NON-RESIDENTIAL FLOOR AREA WITHIN THE PERCENTAGES LISTED ABOVE.
  • ALTERNATIVE 2: CARVE OUT AN ACCESSIBLE UNIT AT THE REAR OF THE GROUND FLOOR WITH THREE UNITS ON THE UPPER STORIES.

This is not some exotic loan program.  It is a fixer-upper loan on a 1 to 4 unit dwelling that is conveted to a 30 year mortgage once the renovation is completed.  If you pay attention to the particulars of the loan program, you can use it to fix a main street mixed use building and be in a position to live in one of the units rent free.  Four or five local folks doing this within a couple blocks of each other could change the main street.  Seriously worth pursuing for a lot of towns.

A number of colleagues whom I respect have made a point to telling me that the process of getting a 203(k) loan to actually CLOSE can be really tough.  There are enough specific underwriting requirements that are different enough from more typical loans which lenders process that closings get delayed, or the lender withdraws their commitment.  So finding a bank that actually has their act together on this program is important.  Wells Fargo has invested in training their people on this, so start with them.

The extra brain damage involved in the loan is why I think the 203k program is an excellent vehicle for the rookie developer looking to step up their game. It requires that the project scope be well thought out and well documented. It requires the rookie developer to understand the lender’s underwriting way more than the average mortgage borrower would. (-and possibly the more than the loan officer does..) It requires a long due diligence period from the seller. In short, the process is hard wired to require the rookie developer to have an excellent plan and seek help from their colleagues to launch their first significant solo project. It puts the rookie developer squarely in the position of adding value by creating order out of relative chaos. That ‘s the job.

4 thoughts on “Who says you can’t get financing for a small mixed use building???!!

  1. Mike McBride December 2, 2015 / 12:01 pm

    I believe that the 203k loan is available only for owner occupied properties, not investors. It is a good program with high loan to value based on as completed appraisal and relatively low rates, if you can manage the red tape.

    • rjohnanderson December 2, 2015 / 12:36 pm

      Yes, the requirement is for the subject property to be owner occupied for a minimum of one year.

  2. Michael Sherrill (@boxeswithknobs) January 31, 2018 / 3:35 pm

    Brilliant post. To clarify, is this a commercial zoned multi-unit, or just one unit? Sounds like there’s an extra step if so. Looking to do something similar on a larger structure.

    • rjohnanderson January 31, 2018 / 5:12 pm

      It is a four unit building that can use a standard 30 year mortgage to finance a small mixed use building, same as you would a house. FHA, VA, Fannie Mae, and Freddie Mac 30 year loans allow 1 to 4 units. Most of these loans allow for 20-25% non-residential SF. The FHA 203(b) mortgage allows for as much as 49% non-residential space. Financing is different from zoning. Feed the various folks what they eat.

      The Zoning people get a site plan in which you explain that you are meeting the zoning. The building department gets a building permit application in which you explain how you meet the building code. The bank gets a loan application with a schematic floor plan and elevation drawing or photo with your description of how you meet the underwriting standards of the particular loan they are selling you.

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