14.11 Structuring of Secondary Debt

A. LTV Ratio and Private Secondary Debt. For transactions that do not have LIHTC, Section 223(f) limits the combination of FHA insured and secondary financing to a loan to value limit of 92.5% (except when the debt source is a public sector or quasi-public sector entity[65] ).

B. Conditions for Secondary Debt. For LIHTC projects (new construction, substantial rehabilitation, and refinance transactions), debt limits can restrict property basis and tax credit amounts unnecessarily. Accordingly, for LIHTC projects only, HUD does not impose a loan to value limit on secondary financing, regardless of the source (public debt or private debt). This means that in some cases debt may exceed value. However, all such secondary debt remains subject to the following conditions:

1. Payments on all secondary debt are restricted to 75% or less of the annual surplus cash, and/or the proceeds of a sale or refinancing of the property. (See 24 CFR 200.85(b)). This limit applies cumulatively to all secondary debt, private and public, to ensure that at least 25% of the surplus cash remains as an incentive to the owner. Owners may make additional payments on the debt out of their remaining 25% of cash flow, or from other sources.

2. The FHA insured loan and the total combined public and or private secondary debt may not exceed 100% of total mortgageable and nonmortgageable project costs as confirmed by the HUD Underwriter’s analysis of a comprehensive Source and Uses of Funds Statement.

3. The maturity date of the secondary debt must be coterminous with, or later than that of the first mortgage. The HUD Underwriter may consider exceptions on a case-by-case basis for public debt when other HUD programs (e.g., the HOME program) require shorter amortizations and the risk is mitigated. Examples of mitigants include significant additional public funds, low loan-to-value or loan-to-cost ratios, below market rents or higher than minimum debt service coverage.

4. The secondary debt can reasonably be expected to be paid off over its term with 75% of the project’s surplus cash.

5. The debt is documented in HUD’s form of Surplus Cash Note (form HUD-92223M) or subsequent version with simple interest. HUD will permit compounding of interest if the Lender provides a thorough analysis demonstrating that project cash flow will be sufficient to avoid accruals of interest that would undermine the long term financial and physical integrity of the project, and all other risks have been adequately mitigated; and

6. Private debt of up to 100% of Total Project Costs may be secured with the project under all Sections of the Act but it must be subject to automatic re-subordination in any refinancing of the first mortgage.

C. Bridge Loans. Temporary bridge loans are treated differently from other secondary financing and are described in detail below in Part 14.16.

D. Publicly Funded Loans or Public Debt. Loans funded with HOME Funds or other federal, state or local public sources, as well as those funded by quasi-public agency programs such as the Federal Home Loan Bank’s Affordable Housing Program (AHP), may be granted or lent directly to HUD’s Borrower, or to the GP or Sponsor of the Borrower, who will then loan it to HUD’s Borrower. All such sources will be

65 A quasi-public entity or corporation is defined as a company in the private sector supported by the government with a public mandate to provide a given service, such as the Federal Home Loan Bank or utility companies.

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treated as public secondary financing sources, and as such need not be included in the calculation of the 100% of total project cost limit applied to private secondary debt. However, none of these sources may be substituted for Tax Credit Equity required by the pay-in schedule provided below and all remain subject to the 75% cap on payments from surplus cash.