19.4.9.5 Restrictive Covenants and Use Agreements for Secondary Financing

A. The sources of the secondary financing or of the Project’s other approved financing structures (e.g., LIHTCs, tax-exempt bonds, etc.) may contain affordability restrictions on rents and occupancy based on tenant incomes. When imposed in connection with the HUD-approved financing, such affordability

MAP Guide, March 2021 Go to beginning of Chapter 19

Bookmarked Version Go to Acronym and Abbreviation List, Glossary, Index

Chapter 19 Page 19-46

To return to this page after clicking a link, press ALT + Back Arrow

Chapter 19 Closing Guide 19.4 Document and Diligence Requirements

Go to Table of Contents

restrictions (and the accompanying encumbrances on title, such as use agreements and other restrictive covenants) must be documented in the Firm Commitment and be consistent with Program Obligations.

B. The HUD Closing Attorney will ensure that the HUD Rider/Amendment to Restrictive Covenants (the Restrictive Covenants Rider, found in Section 19.15), is used. The Restrictive Covenants Rider ensures, in part, that nothing in the restrictive covenants prevents HUD from enforcing its Loan documents and Program Obligations, and further ensures that the agency’s enforcement of the restrictive covenants will not conflict with the National Housing Act and related regulations. The document also provides that the use restrictions terminate upon foreclosure.

C. The affordability restrictions may be permitted to remain in place following a foreclosure of the FHAinsured Loan in one of the three following scenarios, keeping in mind that only pure restrictive covenants without lien rights may be recorded prior to the HUD Security Instrument under the NHA.

1. Individual Transaction. As long as any risks are appropriately mitigated from a business perspective, the RC Director may, on a case-by-case basis, permit affordability restrictions to remain in place after foreclosure. Such an exception to the termination requirement must be expressly provided for in the Firm Commitment, otherwise there is no guarantee that HUD will be able to accommodate last minute requests to permit the use restrictions ahead of the HUD-insured financing. Any approval under this section for an individual transaction is specific to that transaction only and does not obligate HUD to approve the same exception for affordability restrictions on a subsequent transaction.

2. HOME Program Use Restrictions. See 24 CFR 92.252.

3. HOME-like Use Restrictions. State and local affordable housing use restrictions that are substantially similar to the HOME Program may be recorded prior to the HUD Security Instrument, provided that:

   • The affordability levels are similar to the HOME program, and

   • The state or local program risks recapture of funds (i.e., statutory or regulatory required payback to HUD or other original funding source, such as a state treasury) in the event the use restrictions are terminated prior to the mandated use period.

4. Counsel for state or local programs seeking HOME-like use restriction treatment should send written requests to the RC Director and HQ MHP for a determination. Such requests must be accompanied by a detailed explanation of the state or local program and precisely how it is similar to the HOME program in terms of affordability restrictions and threat of recapture, including a discussion of the governing statutes and/or regulations. HUD will only consider requests for HOME-like designation of a program if the request is submitted with the Project loan application or earlier. If it is established that a state or local affordable financing program satisfies these conditions, as determined and approved by HUD in writing, HUD will permit the associated use restrictions to be recorded ahead of the HUD Security Instrument for that specific program.

5. Notwithstanding the foregoing, prior to determining that affordable use restrictions may be recorded in first position, the MAP Lenders and RC Directors must properly underwrite all secondary financing and related use restrictions for their impact on the Project viability and marketability.

6. When use restrictions or other restrictive covenants are permitted ahead of the HUD Security Instrument , the Restrictive Covenants Rider must still be used with appropriate modification (approved by the HUD Closing Attorney) of the form to remove the requirement that the restrictions

MAP Guide, March 2021 Go to beginning of Chapter 19

Bookmarked Version Go to Acronym and Abbreviation List, Glossary, Index

Chapter 19 Page 19-47

To return to this page after clicking a link, press ALT + Back Arrow

Chapter 19 Closing Guide 19.4 Document and Diligence Requirements

Go to Table of Contents

terminate upon foreclosure. No exceptions are permitted, as the HUD Rider serves other important objectives beside termination of use restrictions upon foreclosure. See Section 19.4.1.6.

7. All other requested changes to the HUD Rider must be processed in Headquarters as requests for substantive changes under Section 19.4.1.6.

8. If there are affordability use restrictions imposed on the Project that are not in connection with new secondary financing but remain from previous financing sources, the Restrictive Covenants Rider must be used when required by the Firm Commitment or when the RC Director and HUD Closing Attorney determine that the Rider is necessary to comply with the Project’s underwriting or Program Obligations. Any request to allow the use restrictions to have recording priority ahead of the HUD Security Instrument must be addressed following the procedures found above.