223(f) or 221(d)(4) for a renovation? Where the line is

A renovation stays a 223(f) deal as long as the total construction cost stays under HUD’s aggregate cost limit: $20,406 per unit in 2026, times the area’s high-cost percentage, times the number of units. Above that line the work is substantial rehabilitation, and the loan has to be a 221(d)(4).

At the 270% high-cost percentage that applies across the contiguous states in 2026, the line is about $55,100 a unit; in Alaska, Hawaii, Guam and the U.S. Virgin Islands (405%) it is about $82,600.

How HUD counts the cost

The MAP Guide (section 5.1.2) defines the aggregate cost as everything spent on construction at the property: hard costs, the general contractor’s fee and the architect’s fee, plus whatever gets spent from the contingency and completion escrows, plus change orders. For a tax credit deal HUD assumes the whole contingency is spent. And the test applies to the final number, at completion, not just the estimate at application.

So a 223(f) budget that starts at $50,000 a unit can cross the $55,100 line through change orders after closing.

A worked example

A 160-unit property in a 270% area. The line is 160 × $20,406 × 2.70, about $8.82 million.

• Plan A: $7.2 million of work, $45,000 a unit, plus a $720,000 contingency (10%) that goes unspent. A 223(f) with repairs: no Davis-Bacon, a 35-year term, HUD’s quicker existing-property process.
• Plan B: $9.6 million, $60,000 a unit. Substantial rehabilitation. A 221(d)(4): Davis-Bacon wages on the work, the construction-loan process, up to 40 years, and an upfront premium of 0.25% for each construction year.

If Plan A’s contingency gets spent and change orders add $900,000, the final cost is $8.82 million, which meets the line exactly. A few more dollars and it fails. Owners that close to it either cut scope or plan for 221(d)(4) from the start.

What else pushes a deal to 221(d)(4)

• Adding units. 223(f) allows repairs, not new dwelling units (MAP Guide 3.7.5).
• Work that needs the construction-loan structure: tenants moving out, phased gut renovation, long construction periods.

Sources

• HUD Mortgagee Letter 2026-05 (May 20, 2026): 2026 base per dwelling unit $20,406; high-cost percentages.
• HUD MAP Guide, 2020 edition revised March 2021, sections 3.7.5 and 5.1.2.