HUD Relaxes Six LIHTC Pilot Program Requirements
In 2012, HUD and the Federal Housing Administration (FHA) introduced a new Multifamily Low Income Housing Tax Credit Pilot Program intended to speed project financing of tax credit sites. Before, the Section 223(f) program for FHA-insured loans couldn’t be used for substantial rehabilitation projects; however, HUD expanded its usual concept of moderate rehabilitation to allow certain tax credit projects to take advantage of the streamlined 223(f) process.
By its original design, the key features of the pilot include:
- Up to $40,000 per unit in hard construction costs;
- Possibility of not being subject to Davis-Bacon wage rates;
- Construction with residents in place or no more than two weeks’ temporary relocation;
- Multifamily Accelerated Processing (MAP) Guide underwriting;
- Replacement of existing multi-year Section 8 HAP contracts with new 20-year contracts;
- Maximum loan of $25 million; and
- Targets of firm commitment issuance within 60–90 days of application submission and a closing within 90–120 days.
On Feb. 28, HUD issued a memorandum entitled “FHA Low Income Housing Tax Credit Pilot Program Provisions.” It outlined six policy changes in the program intended to provide more flexibility to the program and make it available to a wider array of projects. If you want to take advantage of the following changes, you’ll need to obtain a waiver from your Hub director until the policy changes are published more formally in the MAP Guide later this year. Here are the policy changes outlined in the memorandum:
Total debt load allowed under 223(f). Current policy limits total debt load on a site to 92.5 percent of appraised value. “Total debt” includes the FHA-insured 223(f) loan plus any subordinate debt that’s not issued by a public source.
Now, for all future tax credit projects, HUD will remove the 92.5 percent limit on total debt and allow subordinate sources, when combined with the first mortgage, to exceed 92.5 percent as long as the subordinate debt meets all the following conditions:
- The debt is “soft” cash flow debt—that is, only payments from surplus cash, if available, can be required;
- Any such payments required under the note(s) may not exceed 75 percent of surplus cash;
- The debt is documented in a promissory note;
- The debt is not secured with a lien against the property or evidenced by any recorded instrument; and
- The debt is subject to automatic re-subordination in any subsequent refinancing of the first mortgage.
Three-year waiver transactions. The 223(f) program is limited to existing projects, defined by HUD as “...originally completed or substantially rehabilitated less than 3 years prior to the date of application for the Firm Commitment.” The latest Mortgagee Letter waiving this three-year rule is set to expire on Sept. 18, 2014.
Now, HUD is adjusting the time at which the clock starts under the current Mortgagee Letter to allow eligible pilot projects with building permits obtained before the current Mortgagee Letter expires to be “grandfathered” and remain eligible for a three-year rule waiver. This enables borrowers submitting tax credit deals that meet the amended timing to apply for 223(f) through the pilot program upon completion.
IOI and mortgage calculations. When there’s an “Identity of Interest” (IOI) between the buyer and seller, the MAP Guide requires treatment of the transaction as a refinancing rather than an acquisition. This limits mortgage proceeds to 80 percent of value rather than 85 percent of value for LIHTC transactions. Since many LIHTC transactions involve a transfer in which at least one party remains in the transactions, HUD has changed the policy so that all LIHTC refinancing transactions involving transfers of title will be treated as an acquisition rather than as a refinance.
Completion assurance. Originally, a non-mortgageable Assurance of Completion Escrow in the amount of 20 percent of the rehabilitation cost in addition to the estimated non-critical repair costs was required. Now, HUD has reduced this requirement to 10 percent with the discretion to increase the amount if the scope of the work and total cost suggest a need for additional protection.
Timing of repair escrow funding and general equity pay-in schedule. HUD has relaxed the rule requiring 100 percent of non-critical repair costs be funded at closing to allow gradual pay-in of equity, including the equity needed to fund the repair reserved contingent, upon two conditions:
- At least 20 percent of the total project equity (syndication proceeds) must be paid in at closing; and
- A disbursement agreement is provided by the lender and approved by HUD specifying that the rehab escrow, including loan proceeds and initial equity remaining after closing and acquisition, and subsequent equity installments, is dispersed in approximate equally ranked proportions.
Tax credit and bond cap allocation timing. At the time you apply for the pilot, you don’t need to have your 9 percent tax credit allocation, or bond cap allocation in the case of 4 percent credits, in hand. Hub directors can waive the requirement and accept the application subject to the owner’s securing its allocation prior to Firm Commitment, or in some cases, Hub directors can waive this requirement and issue a Firm Commitment with a condition that the owner secure its allocation prior to closing.