Hardworking flexible buildings in downtown Akron, NY

Because Money. Specifically to understand how 30 year mortgages can work for a four-plex or four unit mixed use building.

Finding a mortgage for a small apartment building or a small mixed use building can be challenging. You take out a construction loan to build/rebuild the building and then you look for a longer term mortgage that is typically based upon the property’s income after expenses. You could get a Commercial Mortgage from a local bank which requires a commercial appraisal and typically have a 5 or 7 year term. These loans come with a specified amortization rate (often 25 years) and a balloon payment due at the end of the 5 or 7 year loan term.

There are some off-the shelf alternatives available from the FHA, VA, Fannie Mae and Freddie Mac for buildings with 1-4 dwelling units. Each Loan program has a different upper limit on how much Non-Residential Space is allowed within the building.

Loans that have very low down payments 0% for the VA, 3.5% for the FHA, and 3.5-5% for some Fannie Mae and Freddie Mac loans require that the one of the 4 units be occupied by the building owner for a minimum of one year. Loans with less than 20% borrower equity/downpayment require some form of Private Mortgage Insurance (PMI) With the FHA loans you will pay PMI for at least 11 years regardless of how much down payment you provide.

Loans from Fannie Mae and Freddie Mac with a minimum downpayment of 20% are considered Conforming Loans, some of these loan products allow for a Cash Out at closing as long as the 20% equity is provided.

How Much Non-Residential Space?

This percentage varies with the loan program. The top of the list is the FHA 203(b) standard 1-4 unit mortgage which allows for up to 49% of the building area to be Non-Residential Space as long as the uses and building configuration conforms with local zoning. This percentage was increased in the FHA’s bread and butter loan product from a 20% limit to 49% in September of 2015. If you didn’t read the 2015 edition of the HUD 4000.1 Single Family Housing Policy Manual you probably missed the new section added under the heading Mixed Use. https://www.hud.gov/program_offices/housing/sfh/handbook_4000-1 The manual contains all of the underwriting criteria for HUD and FHA loan products.

The HUD 4000.1 manual also contains the criteria for the FHA 203(k) Purchase/Rehab Loan. The 203(k) has the same underwriting and allows for 49% non-residential space. A two story main street building with four apartments on the second floor will have a stair or two taking up space on the ground floor. If the ground floor footprint is the same size as the second floor there’s your 49%. If the ground floor is slightly larger than the second floor, consider carving out some ground floor space for a bicycle garage or for storage cages for the residential tenants. Figure out how to hack your building to comply with the off-the shelf financing. If you have a 5 units above commercial, combine two units so that you have 4. The Fannie Mae guide lays out the particulars of Fannie Mae’s HomeStyle Purchase/Rehab loan. also a 1-4 unit product that allows 25% non-residential space.

These federally insured loan programs all publish and periodically update their underwriting guides, which they provide to banks and credit unions so that those folks can follow the rules required to sell you one of these loans. All of these guides refer to 1-4 unit buildings as “Single Family”, even if there are more than one dwelling unit and a some non-residential space in them. That comes from the original legislation that set up the federal guarantees. These underwriting manuals are distributed over the Internet, so you can read them too.

https://selling-guide.fanniemae.com/

https://guide.freddiemac.com/app/guide/

https://www.benefits.va.gov/warms/pam26_7.asp

Access to the underwriting guide is equivalent to finding a teacher’s edition to your 8th grad history textbook in the parking lot, with all the answers to the quizzes in the back. When you apply for one of these loans, the loan office (someone paid a base salary plus bonus, so pretty much a commissioned sales person) sends your application to the Underwriting Department of their bank where the salaried staff reviews the application with the criteria laid out in the lending guide. Underwriting is responsible for two things.

1.) Make sure that the commissioned sales people don’t put the bank at risk while pushing sales.

2.) Make sure the loan conforms to the underwriting guidance so that it will be insured and sold in a bundle of mortgages on Wall Street or purchased by Freddie Mac or Fannie Mae.

It is typical for the small developers we have coached to know more about the finer details of these loan products than the loan offices they are talking with. You will probably have to show them the citations from the underwriting guides.

Again, why would you go through the trouble of reading a technical manual like this? Isn’t that the banker’s job? Well, sort of. Just don’t expect that loan offices or loan brokers have read this stuff. They tend to sell the loan products they are familiar with and leave the details to the staff in the Underwriting Department.

So why read these manuals? Because Money. For small projects Form Follows Finance. Just like local zoning codes and building codes, you are going to want to understand the rules for off-the-shelf government insured 30 year mortgages. They are an excellent alternative to a 5 year Commercial Mortgage.

Over the last 10 years there has been a lot of very interesting work and research on how much parking is needed in different types of places. One of the leading authorities on parking is Professor Donald Shoup. Prof. Shoup wrote a well researched book called The High Price of Free Parking. 700 some pages on parking. A great resource if the PDF linked below gets you thinking about how parking is managed.

Below is a link to PDF paper publish before the book that digs into how shoddy the work that established parking minimums really was. Where those apparently precise off street parking requirement numbers come from?

This is more than some idle curiosity. When a municipality sets the minimum number of off-street parking spaces too high, the amount of land used by parking is increased and because the effective property tax rate on surface parking is so low, the local tax base is reduced. Essentially, if we spread civilization too thinly we have a hard time paying for it. One of the consequences of _false precision_ turns out to be reduced property tax revenue.

The median price to build a parking space in a parking garage is over $21,000. At that number you really don't want to build more spaces than you need , just because an engineer used some decimal places in the standards published by the Institute for Transportation Engineering (ITE).

Roughly right is always better than precisely wrong.

https://www.researchgate.net/publication/235360495_Roughly_Right_or_Precisely_Wrong

Building Codes, the International Residential Code (IRC ) and the International Building Code (IBC) are written to start out as model codes adopted by the International Codes Council (ICC). These model codes are adopted in to state law in total, or in part, with, or without the model appendixes, and with, or without additional modification by individual states, (It is always important to refer to your state’s version of the model building codes, otherwise you will miss the local modifications and amendments…..)

Some states provide a window of time for municipalities to further amend or modify the State adopted version of the model code. After that window closes, the local municipalities that have not modified the State adopted version of the model codes are typically required to adopt the state version. Some states allow municipalities to decide which year's code they will be using. One town may be operating under the 2012 IRC and IBC while the city next door is on the 2015 version. Municipalities publish information on which edition of the model codes they have adopted. by city council action. Check your town’s website or ask at the counter in the Building Department.

I recommend Francis Ching’s great book pictured above; Building Codes Illustrated if you want to have a good handle on how codes are written and interpreted.

Francis Ching’s indispensable book on Building Codes.

Because Building Codes start out as model codes with a formal revision process at the International Codes Council, the standard of care and precision with which they are written is pretty high. The revisions also need to be consistent with the intent of protecting public health and safety.

Zoning codes on the other hand, are written and adopted at the local municipal level and rarely follow the same standard of care or attention to intent and consistency found in Building Codes. It is painfully common to find a zoning code that contradicts and prohibits the policies and actions set forth in the municipalities adopted Comprehensive Plan or General Plan.

Because zoning codes have been used to reinforce segregation the chances are pretty high that they still have plenty of Exclusionary provisions. They commonly have expensive off-street parking requirements that have no basis in science or good practice. These are typically not rules that were thoughtfully crafted by wise grownups looking after the public interest. If you local zoning code was written in 1979 or earlier and then amended over the years, there is a very good chance that you have rules on the books that contradict the policies adopted in your Comprehensive Plan or General Plan.

Your downtown may be regulated by a heinous bullshit zoning code originally written to insure the predictable development of strip shopping centers in a town in Iowa and imported to your place.

Your zoning code probably treats anything from a duplex to a 30 units to the acre apartment complex as if rental apartments are some sort of noxious land use that should be regulated like a steel mill or a hog rendering plant. Don't be surprised if your zoning code treats sections of town that exclude everything but single family homes as the ideal, and everything else like a problem that must not effect of impact the Single Family House subdivisions build under Exclusionary Zoning.

Check out this conversation with the author of The Color of Law to learn more about Segregation and Exclusionary Zoning practices:
https://www.youtube.com/watch?v=9Pb6y9rNKmo