14.15 Equity Bridge Loans in Tax Credit Projects

A. Equity Bridge Loans (EBL) may be used by Borrowers and/or tax credit investors as a substitute for the pay-in of equity during a project’s development and stabilization phases, thereby deferring the pay-in of equity and increasing the return on equity. The EBL may be the obligation of one or more of the investors or other upper-tier partners to the ownership entity (i.e. the limited or general partners), or an obligation of the project ownership entity/single-asset mortgagor itself.

B. In addition, the following conditions must be met:

1. EBLs must be made expressly subordinate to the HUD insured first mortgage through use of the Equity Bridge Loan Rider, see Chapter 19, Section 19.16. EBLs may not be secured by a lien on the real estate or on any other “Mortgaged Property” as defined in the Security Instrument, and do not require a subordination agreement. They may be secured by a pledge of tax credits, tax credit equity, and/or an upper tier (i.e., the limited or general partner or managing member) or investor members’ interests in the project’s ownership entity. Any security for the EBL may be held by the Borrower in a separate, segregated account, specifically labeled as non-project funds, and which are not part of the Mortgaged Property in Section 1(w) of the Security Instrument. As with any transfer of the controlling partner of an ownership entity, any entity that intends to acquire the general partner’s position in the ownership entity whether under certain triggering default conditions set forth in the Borrower’s partnership or operating agreement or otherwise, is subject to HUD approval under the modified Transfer of Physical Assets process and Previous Participation Certification (form HUD-2530) clearance, including financial statement review.

2. EBLs must be non-recourse to the Borrower (except for Surplus Cash or residual Receipts, as applicable, of the Borrower), and the bridge Lender shall have no claim even in an event of default

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against the Project, FHA mortgage loan proceeds, the Mortgaged Property, or any reserve or deposit made with the FHA Lender.

3. In the event HUD acquires title to the Project by foreclosure or deed in lieu of foreclosure, the equity bridge loan documents shall be discharged with respect to the FHA Borrower, and the FHA Borrower shall be released of all of its obligation with respect to the EBL. Notwithstanding the required discharge of the FHA Borrower imposed by this paragraph, the equity bridge loan documents may provide that such discharge neither:

   • Excuses or relieves any co-signer, guarantor or any other party from the obligation to repay the indebtedness evidenced by the bridge loan note and bridge loan documents; nor,

   • Affects, limits, or impairs the bridge Lender’s ability to seek a monetary judgment and pursue other remedies against any co-signer, guarantor or other party.

4. The obligation must be evidenced by a promissory note with appropriate subordination provisions and limitations on recourse against the Borrower.

5. The term of the note may last through the construction or rehabilitation period but must be paid in full no later than the following dates:

   • In the case of EBLs provided by private, for-profit Lenders, the earlier of the filing of the form HUD-8609 or (a) one year after (a) Final Endorsement for Section 221(d)(4)/220 loans, or (b) one year after the end of the repair period for 223(f) loans; and

   • In the case of EBLs provided by not-for-profit, public sector or quasi-public sector entities, no later than ten years following (a) the end of the repair period for 223(f) loans, or (b) Final Endorsement for 221(d)(4) loans.

6. The FHA Borrower must provide evidence to the Lender’s and HUD’s satisfaction that the bridge loan will be paid in full by the timeframes noted above. At application, HUD will accept the Lender’s review of the LPA pay-in schedule/EBL term sheet and sources, uses and draw schedule in the form HUD92013-C, LIHTC Summary Report. Following endorsement, HUD will accept the Bridge Loan documents and a loan satisfaction. When applicable, the Borrower’s audited financial statement (AFS) must reflect that the EBL was paid on time. This must be reflected in the AFS due in the reporting period after the due dates for full EBL repayment noted above.

7. At Firm Application, or as soon as the need for an EBL is known, the Lender must submit for HUD’s approval a term sheet describing the key terms of the bridge loan, as well as a certification that the loan will be secured only by a pledge of tax credits, tax credit equity, and/or an upper tier (i.e., the limited partner or general partner of managing member) or investor members’ interests in the project’s ownership entity and that the bridge Lender will have no claim against the Project, the Mortgaged Property, mortgage proceeds, or any reserves or deposits with respect to the Project, for repayment of the bridge loan.

8. The EBL Documents may not be amended, assigned, transferred, sold, or otherwise held without the prior written consent of HUD.

9. For identity of interest Bridge Lenders, indemnification provisions in the EBL Documents shall not be construed to require the HUD Borrower to make indemnification payments beyond those permitted by the HUD required provisions to be added to the Borrower’s Organizational Documents.

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C. Bridge loans for other purposes, (i.e. that are not used to advance equity in tax credit projects) are described in Chapter 8.