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Multifamily Property Insurance Requirements for HUD 221(d)(4) Loans
The multifamily insurance you need depends on the stage you're in. Find out what you'll need during and after construction with our guide.
- Overview of HUD 221(d)(4) Loans
- Insurance Requirements During Construction
- Builder's Risk Insurance
- Commercial General Liability (CGL) Insurance
- Worker's Compensation Insurance
- Professional Liability Insurance
- Umbrella or Excess Liability Insurance
- Insurance Requirements Post-Construction
- Property Insurance
- Fidelity Bond (Crime Insurance)
- Flood Insurance
- Earthquake Insurance
- Documentation and Compliance
- Work With an Experienced Insurance Broker
- Get Financing
If you're considering a HUD 221(d)(4) loan for the construction or substantial rehabilitation of a multifamily property, you've got to understand the insurance requirements associated with these loans.
Finding the appropriate insurance coverage not only protects your investment but also ensures compliance with HUD guidelines. In this article, I'll give you an overview of the HUD 221(d)(4) loan program and detail the specific insurance requirements.
Overview of HUD 221(d)(4) Loans
HUD 221(d)(4) loans are designed to facilitate the construction or substantial rehabilitation of multifamily properties, including apartments, cooperatives, and assisted living facilities. These loans offer long-term, non-recourse, fixed-rate financing with terms up to 40 years, as well as the potential for high loan-to-cost ratios. By utilizing a HUD 221(d)(4) loan, developers can get the funding needed to bring their multifamily projects to life while benefiting from incredible terms.
Because HUD 221(d)(4) loans cover both the construction phase and what comes after, insurance requirements are also different depending on where in the process your project is.
Insurance Requirements During Construction
During the construction phase of a HUD 221(d)(4) project, several types of insurance are required to protect the property and comply with HUD guidelines:
Builder's Risk Insurance
Builder's risk insurance protects against damage to the property under construction due to fire, wind, theft, vandalism, and other risks. The policy must cover 100% of the insurable value of the project on a replacement cost basis and remain in effect through the construction period until project completion.
Commercial General Liability (CGL) Insurance
CGL insurance provides protection against claims of bodily injury or property damage arising from your construction operations. HUD requires a minimum coverage of $1 million per occurrence and $2 million aggregate, with HUD and the lender named as additional insureds.
Worker's Compensation Insurance
Worker's compensation insurance covers medical expenses and lost wages for workers injured on the job. Coverage must comply with state laws where the project is located.
Professional Liability Insurance
If you have architects, engineers, or other professionals working on the project, professional liability insurance is required. Typical coverage amounts are $1 million per claim and $2 million aggregate, with the policy extending at least through the construction period.
Umbrella or Excess Liability Insurance
Umbrella or excess liability insurance provides additional liability limits over your primary policies. This isn't always explicitly required, but the amount recommended typically ranges from $5 million to $10 million, depending on the project size and risk assessment.
Insurance Requirements Post-Construction
Once construction is complete, you'll need to maintain the following insurance coverages:
Property Insurance
You must convert the builder's risk insurance to a permanent property insurance policy covering 100% of the replacement cost of the building. An all-risk or special form policy is required.
Fidelity Bond (Crime Insurance)
A fidelity bond (crime insurance) protects against dishonest acts of employees, including theft and fraud. It's typically required for the property management team, with a minimum coverage equal to at least two months of gross potential income from the project.
Flood Insurance
If the property is located in a Special Flood Hazard Area (SFHA), flood insurance is required. Coverage must equal the lesser of 100% replacement cost or the maximum coverage available under the National Flood Insurance Program (NFIP).
Earthquake Insurance
Depending on the seismic risk of the project location, earthquake insurance may also be required. The coverage amount is determined by an analysis of the project's seismic risk. This is most relevent for projects in parts of California, Alaska, Oregon, Washington, and Nevada.
Documentation and Compliance
To ensure compliance with HUD 221(d)(4) loan insurance requirements, you must provide certificates of insurance to HUD and the lender. All policies should name the lender and HUD as additional insureds where applicable. Your insurance policies and coverage amounts must be reviewed and approved by HUD and the lender.
Work With an Experienced Insurance Broker
Navigating the complex insurance requirements for HUD 221(d)(4) loans isn't exactly easy, especially when the actual requirements change depending on the project phase.
This is why it's essential to partner with an insurance broker who has experience working with these loans. A knowledgeable broker can help you secure the appropriate coverage, ensure compliance with HUD guidelines, and streamline the insurance process.
At Janover Insurance Group, we have deep experience finding insurance solutions for HUD 221(d)(4) loans. Our team understands the unique requirements of these loans and can help you obtain the necessary coverage using our comprehensive network of insurers to protect your investment and meet HUD's standards — all at a reasonable cost.