HUD Announces that Non-Profits May Retain Sales Proceeds

by Anthony Ruvolo on Nov 16, 2011

This article is reprinted with the permission of Nixon Peabody LLP

Today, HUD issued a long-awaited clarification of its policy allowing non-profit owners to retain sales proceeds in certain circumstances. The Notice, signed by Carol Galante, Acting Assistant Secretary for Housing – Federal Housing Commissioner, clearly signals that if a non-profit owner sells a property to a purchaser who will preserve the project as affordable housing for the long-term, the seller will be free to use its equity in the project as permitted by its charter and state law.  The Notice does not address sales that have already occurred and that are subject to trust agreements concerning the use of proceeds.  The Notice is not applicable to 202s.

The Notice sets forth six major requirements to obtain HUD’s approval for a non-profit owner to receive sale proceeds, which are summarized as follows:

  1. Execution and Recordation of a New Use Agreement
    a. Must extend 20 years beyond the original maturity date
    b. Must be recorded ahead of new financing
    c. Legal opinion that it is in a first lien position
  2. Renewal and Assignment of Project-Based Section 8 Housing Assistance Payments (HAP) Contracts
    a. Minimum 20-year HAP contract
    b. Existing HAP may be terminated for this purpose
  3. Rent-Setting and HAP Contracts
    a. Section 8 rules govern assisted units
    b. Chapter 15 increases to post-rehab rents capped at market allowed
    c. No option 4 exception renewals permitted
    d. 10% cap on increase for unassisted low – and moderate- income tenants
  4. Physical Improvements
    a. Perform a Capital Needs Assessment
    b. Provide repair plan as necessary
    c. Meet 250(a), decoupling, or TPA requirements as necessary
  5. Financing Plan:  HUD will review new financing to determine long-term feasibility
  6. Purchaser Capacity:  New owner and management must demonstrate experience and capacity to address the project’s physical and financial needs

The Notice is a positive step to address an issue that has prevented the long-term preservation of numerous subsidized properties where HUD’s unwritten policy of disallowing non-profit sales proceeds in transactions involving pre-payments had arisen.  Particularly when the capital markets were strongest, many non-profit owners simply were deciding to wait for the project restrictions to expire so that they would be able to obtain the benefit of their long-term ownership.  The Notice correctly points out that the policy has existed for a long time with respect to sales by non-profit owners involving the assumption of a HUD-insured or HUD-held mortgage, i.e., TPA transactions.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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