5.1.2 Substantial Rehabilitation

A. Substantial rehabilitation is work on existing building(s) including any additions for which the Aggregate Cost of construction (the Aggregate Cost) exceeds the Aggregate Cost Limit amount defined as follows:

1. Aggregate Cost means the total costs of all the proposed construction work at the property, including General Contractor fees and Project Architect fees. The Aggregate Cost will also include the amounts spent from the contingency reserve and assurance of completion escrows[1] at the end of construction, as well as any cost increases through change orders.

   • For LIHTC transactions, 100% of the contingency and assurance of completion amounts should be assumed to be expended and included in the upfront estimate of the Aggregate Cost.[2]

• The final Aggregate Cost at the completion of all construction, which must include all actual amounts spent from the contingency reserve and assurance of completion escrows as well as any

1 Construction contingency reserve escrow and assurance of completion escrow as required per Chapter 8. 2 See Chapter 5.6.2.6 and its related Footnote for further explanation.

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Chapter 5 Architectural and Construction Analysis 5.1 Eligible Construction Activities

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cost increases incurred from change orders, must not exceed the Aggregate Cost Limit[3] for any applications for refinance or acquisition programs (i.e. Section 223(a)(7) and Section 223(f)).

2. Aggregate Cost Limit is calculated in dollars as follows:

   • Aggregate Cost Limit Calculation. Aggregate Cost Limit = [Base per Dwelling Unit Limit] X [High Cost Percentage multiplier] X [Number of Dwelling Units]

• Base per Dwelling Unit Limit. HUD set the Base per Dwelling Unit Limit (Base Limit) at $15,000 per unit in 2016 and has annually adjusted it for inflation based on the percentage change published by the Bureau of Labor Statistics of the Department of Labor or other inflation cost index.

• High Cost Percentage. HUD annually calculates and publishes the High Cost Percentage (HCP) multipliers for designated cities based on the industry-standard construction cost index. These published HCP multipliers are used to calculate the threshold for substantial rehabilitation specific to the project’s location.

• Number of Dwelling Units. The total number of dwelling units should be the count of units at the property upon completion of all proposed construction work, given that the work may include addition and/or deletion of units at the property. The number should include non-rental units and commercial spaces in live/work type units.

• High Cost Areas Multiplier. The higher limit HCP multiplier for the identified High Cost Areas (315%) is used only to determine the maximum mortgage amount as an exception granted by HUD. This higher limit multiplier for High Cost Areas may not be used in the calculation to define the substantial rehabilitation threshold as described above.

• Annual Revision of Base Limits. The revised Base Limits and HCPs are both published in Housing Notices titled “Annual Revisions to Base City High Cost Percentage, High Cost Area and Per Unit Substantial Rehabilitation Threshold” for the year and can be located on HUD Website: https://www.hud.gov/program_offices/administration/hudclips/notices/hsg