Four ways to finance apartment construction

Apartment construction is typically financed with one of four structures: HUD’s 221(d)(4), a bank construction loan, a debt fund, or 4% tax credits with tax-exempt bonds. HUD’s loan is fixed-rate and runs up to 40 years, with HUD’s longer review process. Bank loans float over SOFR and are bounded by federal limits. Debt funds aren’t, and price accordingly. Tax-credit deals replace much of the debt with investor equity.

	HUD 221(d)(4)	Bank construction loan	Debt fund	4% tax credits with bonds
Loan size	Up to 87% of cost market rate, 90% affordable (ML 2025-03)	Within 80% of value (supervisory limit); 15% as-completed equity keeps it out of HVCRE	Negotiated	Credit equity plus debt; bond financing of at least 50% of basis (25% for qualifying post-2025 deals)
Rate	Fixed for construction and term	Floating over SOFR	Floating over SOFR	Bonds plus credit equity
Term	Construction plus up to 40 years	Construction, then a take-out	Construction, then a take-out	Varies with the debt
Coverage test	1.15 market, 1.11 affordable, MIP included	Lender’s policy	Lender’s policy	Lender’s policy
Other costs	0.25% MIP; upfront 0.25% per construction year; Davis-Bacon wages	Interest reserve	Higher spread and fees	Bond and syndication costs

The sizer runs the first three side by side on your numbers.

HUD 221(d)(4)

One loan funds construction and converts to a fixed-rate, fully amortizing term without a second closing. Market-rate projects borrow up to 87% of cost at 1.15 debt service coverage, affordable ones 90% at 1.11 (Mortgagee Letter 2025-03), and since January 2026 qualifying middle-income projects also get 90% at 1.11 (Mortgagee Letter 2026-01). The annual premium is 0.25%, with 0.25% up front for each year of construction (90 FR 45789).

The costs are time and process. A 221(d)(4) goes through a pre-application stage and then a firm application; once HUD invites the firm application, the MAP Guide gives the developer 120 days to submit it, with one 90-day extension (section 4.2.2.3). Davis-Bacon prevailing wages apply. The lender escrows working capital of 4% of the mortgage, half of it construction contingency, and an initial operating deficit reserve (MAP Guide 3.2.10, 8.14).

Bank construction loans

Banks lend against the federal supervisory loan-to-value limit, 80% of value for multifamily construction (12 CFR Part 365, Appendix A, mirrored in the OCC’s and Fed’s rules). To keep a loan out of the high volatility commercial real estate category and its 150% capital charge, the borrower has to put in capital of at least 15% of the as-completed appraised value before the bank funds, and the loan has to stay within the supervisory limit (12 CFR 324.2). Projects that would qualify as community development investments are outside the HVCRE definition.

Bank loans float, are usually interest-only during construction, and need a take-out at stabilization: a permanent loan, an agency loan, or a HUD 223(f).

Debt funds

Non-bank lenders aren’t subject to the supervisory limits or HVCRE, so they can lend deeper into the capital stack. The price is a wider spread and fees, and the same take-out risk as a bank loan. Everything about their terms is negotiated, so the sizer treats them as inputs.

Tax credits

A 4% low-income housing tax credit deal needs tax-exempt private activity bonds to finance a minimum share of the building’s aggregate basis. Public Law 119-21 (July 4, 2025, section 70422) kept the 50% test and added a 25% test for buildings placed in service in taxable years beginning after 2025, when bonds issued after 2025 finance at least 5% of basis. The same section made the 12% increase in states’ 9% credit allocations permanent for calendar years after 2025. See what the 25% test changes.

Where the market is

The Federal Reserve’s survey of bank loan officers shows construction lending standards roughly flat in 2026 after the 2022-2023 tightening. See starts, the pipeline and the survey.