Davis-Bacon Wages and FHA-Insured Loans
Some FHA-insured loan programs require that Davis-Bacon (DB) wages are paid to construction workers. Here’s an overview of what you need to know about DB wages and FHA’s requirements.
What are Davis-Bacon Wages? The Davis-Bacon Act requires contractors and their subs working on federally funded jobs to pay a minimum of area “prevailing” wages. The Act is administered through the Wage and Hours Division (WHD) of the Department of Labor (DOL).
Are they union wages? DB wages are based on WHD surveys, so they may or may not be consistent with union wages.
Which FHA loans are exempt from DB wage requirements?
Acquisitions or Refinances under Section 223(f),
Refinances under Section 223(a)(7), and
Section 241(a) Supplemental loans for projects with existing Section 223(f) or 223(a)(7) first mortgages.
Which FHA loans require DB wages?
All New Construction and Substantial Rehabilitation loans under Sections 220, 221(d), & 231, and
Section 241(a) Supplemental loans on projects with first mortgages under those programs.
What is the threshold between a Section 223(f) with some repairs and a Substantial Rehabilitation? FHA uses a formula which varies by location. In many areas, when the work exceeds roughly $40,000/unit the project is a substantial rehab. Contact AGM to check on a specific location. Note: the “two-systems” test has been eliminated.
How can I build or rehab a project without DB wages and still use an FHA loan? Use conventional construction financing and then apply for a Section 223(f) refinance to get the benefits of an FHA-insured permanent loan. The “3-year rule” which prevented an immediate take-out no longer applies.
Is any work excluded from the DB wage requirement? Panelized, modular, or other pre-fabrication work done off site are excluded from the DB wage requirements. Off-site improvements, site demolition, or improvements which were completed before the creation of a federal nexus are excluded as well.
Do other programs require DB wages? Yes, projects using funds from other federal sources for development or rehabilitation activities may require DB wages on their own merit. Examples include the use of HOME and CBDG funds and RAD projects.
How much do DB wages add to the cost of a project? This varies widely by location. In high cost areas, there may be no real increase in cost. Since Building wages are typically higher than Residential, developers target the Residential classification when possible (scroll down to see "What are the Davis-Bacon Construction Categories?").
What are multiple or “split wage” decisions? Sometimes certain components of larger or more complex projects are assigned a classification which is different from its primary classification. For example, most of a multifamily project may be subject to Residential wages but its first floor retail space could be subject to Building wages due to the commercial use.
How can I check the DB wages for my project? Look up the current DB wage rates through DOL’s website using this link: beta.SAM.gov | Search
When are the DB wages for my project finalized? New wage decisions for a given area may be published at any time. The contractor must pay the rates in effect when the FHA-insured loan closes, so it is wise to check as that date approaches.
Who documents DB wage compliance? The contractor must document payment of the appropriate wages for each worker depending on the type of work done. If there are multiple wage rates they must track the rates paid for work done under each classification.
What are the Davis-Bacon Construction Categories?
There are four broad categories: Residential, Building, Highway, and Heavy. The first two can be applied to multifamily projects. Incidental components of the project are those which would be classified differently if not included in the multifamily development.
Residential (aka “low-rise”): Applied to apartments up to four stories in height, including incidental items.
Building (aka “high-rise”): Applied to apartments exceeding four stories as well as commercial uses (retail, office, etc.); includes incidental items.
Highway: Includes construction of roads, streets, highways and parking areas that are not incidental to construction in the other categories.
Heavy: Non-incidental construction projects that do not fit the other categories, such as antennas, canals, drainage and irrigation projects, sanitary and storm sewers, water mains and supply lines, and storage tanks.
Incidental: Items that support the primary purpose of residential apartments: site work, parking areas, utilities, streets, sidewalks, swimming pools, mail kiosks, carports, landscaping, retaining walls, signage, storm water and sanitary sewers, open spaces, playgrounds, and any others.
How are DB Construction Categories assigned?
HUD staff is primarily responsible for selection of the appropriate classification and they consult with DOL.
Structures of four stories and less are classified as Residential and those of five stories and more are Building. Story height is not relevant, but if the fifth level is less than half the size of the floor below, it is classified as a “partial floor” and the project remains Residential. In addition, there are some exceptions for below-grade and partially below-grade levels. Contact AGM for details. When a community contains a mix of structure types that fall into different wage classifications, a multiple decision would be applied.
HUD will review the incidental components to determine if they are large enough to require a separate wage rate. New guidance from the DOL and HUD has updated and clarified their policy. Moving forward, a single wage determination should apply to the entire project as long as each separate incidental construction category is less than $2.5M and 20% of total construction costs, or if local practice dictates. The $2.5M threshold will be re-evaluated annually to account for inflation and current trends. This should reduce the burdensome use of multiple wage decisions.
To see how AGM can help get your deal done, contact Steve Rudow at 443.573.2061 or srudow@agmfinancial.com.
