HUD’s version of a Property Condition Assessment, called a Project Capital Needs Assessment (PCNA), is a much different beast than the engineering assessments required for other multifamily lenders including Fannie Mae and Freddie Mac.
Low and Slow. HUD/FHA loans will have a lower interest rate but the financing process will take longer, due to a greater level of oversight and coordination. The same goes for HUD Project Capital Needs Assessments. Because many of the integral parts of the PCNA are reliant on various sources of information, it is vital that all parties involved (including the Lender, Appraiser and Engineering Consultant) coordinate the flow of information, which takes time. For example, the Property Insurance Schedule form HUD-92329 accounts for the appraised/land value based on the engineering consultant’s valuation of the gross square feet per building. Therefore, the appraiser would need this information from the consultant before they could provide the appraised value, which the consultant in turn would use to execute the form (whew!).
Additionally, borrowers may request changes to the anticipated PCNA reserves based on their historical expenditures. Finally, HUD’s review may also generate questions or revisions to the PCNA. So, all things considered, HUD projects may often take 3-6 months or longer.
Terms of Endurance. A substantial difference of HUD’s Project Capital Needs Assessment is due to the loan term – HUD’s loan term is typically 37 years versus the standard 10+2 year terms typical for Fannie Mae or Freddie Mac. This requires a rather different approach to the replacement reserve analysis. Many items that would not require replacement within a 12 year time frame typically will require replacement at some point within the 37 year term, such as asphalt overlay, concrete surfaces, slider doors, and unit cabinetry. As these items must be budgeted for as part of the loan, additional capital reserves are needed to provide a realistic outlook of the property’s overall needs.
Other HUD PCNA “Uniquities”
Another key difference of a HUD PCNA includes a clear distinction between various types of short term or “immediate repairs”, which are separated into life safety, non-life safety/deferred maintenance issues, and owner elected repairs (referred to as Critical and Non-Critical Repairs, respectively).
The PCNA may also involve an Americans with Disabilities Act (ADA), Federal Fair Housing Act (FFHA), or Uniform Federal Accessibility Standard (UFAS) conformance review, depending on the project type and construction parameters. If accessibility issues are identified, they must be included in the Critical Repairs.
In addition to the PCNA report and reserve analysis, and supporting documents, there are several HUD-specific forms that must also be completed by the Needs Assessor (such as the previously mentioned Form HUD-92329 and the Form HUD-92264 Summary Appraisal Report which requires detailed analysis of the property).
Given HUD’s particular requirements and detailed review of the Project Capital Needs Assessment, it is critical to work with a lender and third party provider that have a solid history and track record with HUD projects to minimize the risk of further delays.