FHA 232 Appraisal Cap Rates

The Department believes that, in most but not all economic environments, the following debt service constant formula (Debt Service Constant + FHA MIP) multiplied by 1.25 would reflect reasonable guidance for the “minimum” capitalization rate for a proposed project. HUD would expect that the market realities of each project would dictate the capitalization rate to be used, which may be higher than the minimum formula. HUD does not wish to impose requirements for determining the capitalization rate and will defer to the USPAP appraisal standards to provide the definitive guidance on this issue. The Department’s guidance on capitalization rates is not mandatory and the Department understands that this guidance may not be as helpful as a guide when market and economic conditions are either highly optimistic or overly conservative and/or when the interest rate environment reflects unusually low or high project interest rates.

Example for calculating Cap Rate: 7% fixed interest rate plus the MIP of 50 basis points. {.0746+.50bp MIP=.0796*1.25=.0995 or 9.95%}. In this example, the minimum capitalization rate “guidance” is 9.95.

The revised guidance relative to the debt service coverage ratio, loan to value, and capitalization rates for assisted living projects shall apply to any future application for mortgage insurance where an FHA Project Number is issued after February 6, 2009. Alternatively, if the FHA number has not been issued but a project appraisal is underway, FHA will accept the lower DSCR of 1.3 for refinancing and 1.35 for new construction if an appraisal engagement letter was executed prior to February 6, 2009, and if appraisals using the lower DSCRs are finalized and provided to HUD prior to April 6, 2009. On projects that do not meet this revised guidance (where the FHA Project Number was issued on or prior to February 6, 2009) the Lender should provide a notification in the Check Transmittal Letter and Lender Narrative of the mortgage insurance application that provides for the discussion of the appraisal lender modifications.

Please note that the previous guidance on loan to value and debt service coverage on Section 232/223(f)’s for Skilled Nursing and Independent Living Facilities have not been revised.

Scott Kendall
Kendall Realty Advisors
Evanston, IL
(847) 903-7578
Charles Kendall
Kendall Realty Advisors
Chicago, IL
(773) 259-7074