8.3.2 Underwriting Active Principals and Those with Control

A. Principals must have positive experience and qualifications in developing, owning or building multifamily properties reasonably comparable in kind and scale to the subject of the proposed transaction. Comparable in kind and scale means: (a) similar in physical size (e.g. number of units) and building type and uses (e.g., low rise, high rise, commercial spaces); (b) similar financially (e.g. revenues, expenses, size of mortgage, required liquidity ); (c) similar operationally (e.g. target markets/tenant population, elderly, subsidized or affordable); and (d) similar in kind of transaction purpose (e.g. acquisition, re-positioning/turn-around, rehabilitation, new construction).

B. Underwriting a Principal requires their financial and credit disclosure including: (1) a designated person and an entity to sign Section 50 of the Regulatory Agreement, (2) individual or entity credit reports, (3) individual or entity financial statements, HUD forms, documents and Schedule of Real Estate Owned (REO)/debt schedules, (4) Internet searches (e.g. SAM.gov (System for Award Management) and searches of debarment and delinquencies (i.e. MDDR Multifamily Delinquency and Default Report), OFAC (Office of Foreign Assets Control) and any other relevant databases, and (5) pre-approval in cases where their total FHA-insured debt is greater than $500,000,000.

• C. Credit and Financial Underwriting Review Required on Other Principals (individuals and entities):

1. Investors (passive principals) that have exceeded the $500,000,000 threshold or wish to avoid exceeding that threshold and wish to invest in a project as a passive investor.

MAP Guide, March 2021 Go to beginning of Chapter 8

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

Chapter 8 Page 8-3

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

Chapter 8 Mortgage Credit 8.3 Reviewing Principals and Other Parties in Control

Go to Table of Contents

2. An investor (passive principal) whom the Borrower relies upon for both their financial strength and cash requirement contribution.

• D. Principal Types Not Subject to Credit Review:

1. Investor entities with limited liability benefiting from tax credits, including but not limited to lowincome housing tax credits pursuant to Section 42 of Title 26 of the United States Code, whether such investors are syndicators, direct investors or investors in such syndicators and/or investors.

2. Parties whose sole interest is that of a purchaser or owner of less than five individual unit(s) in the same condominium or cooperative development; (ii) parties whose sole interest is that of a tenant in not more than two units in an FHA mortgaged insured property.

3. Public Housing Agencies (PHAs) where the PHA is acting in its capacity as a PHA owning and/or operating public housing. However, PHAs are expected to form single asset entities to hold properties financed with FHA mortgage insurance.

4. Passive Principals who have limited or no decision-making power or control over the ownership entity. A passive Principal’s financial or other obligations to the Borrower and the property must be fixed and defined before endorsement, with the Borrower or its Principals having limited or no power to compel a passive Principal to increase its obligations. A passive Principal may have limited power singly or with others, or no power to remove, replace or diminish the powers, or alter the compensation of Principals. As used here “limited” means that the rights of a passive Principal to exert control or effect decisions that are defined in organizational documents and are limited to specific actions intended to remedy negligence or default by a Principal, or to protect the passive Principal from loss due to a default or failure of performance by the Borrower.

5. Shell Entities that do not take actions themselves but only serve as legal vehicles through which the partners, members or owners of such entity take actions.

E. Organizational Charts. An organizational chart of the single asset Borrower entity must be submitted with each application. Organizational charts are a visual/graphical disclosure of the participants that constitute the ownership structure, which facilitate HUD’s loan underwriting and the separate process of a Previous Participation certification and review.

• F. Acceptable organizational charts for the typical HUD project have the following attributes:

1. Depicts all tiers of the ownership structure, starting with the single asset Borrower entity and concluding with the ultimate source of equity. Ultimate sources of equity are often an individual, trust, or a widely held corporation.

2. Displays all intermediate entities such as pass-through entities, which results in a full disclosure of all participants. Controlling and limited ownerships are depicted as separate intermediate individuals/entities.

3. Displays each entity’s legal name, type (e.g. LLC or LP) and ownership percentage of its parent. Ownership percentages reconcile to 100% for entities (including intermediate entities).

4. Lists at least one natural person. Tax credit investors and limited investors need not always trace to a natural person.

MAP Guide, March 2021 Go to beginning of Chapter 8

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

Chapter 8 Page 8-4

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

Chapter 8 Mortgage Credit 8.3 Reviewing Principals and Other Parties in Control

Go to Table of Contents

5. Denotes individuals or entities that will sign Section 50 of the HUD regulatory agreement (i.e. using an asterisk and footnote or other means).

6. Discloses if any entity is publicly held, its exchange, and ticker symbol (e.g. “XYZ Corp. (NYSE: XYZ)”).

7. Consolidates or groups widely held interests to achieve conciseness. For example, a group may be labeled on the organizational chart (e.g. “10 Additional Limited Partners”), along with aggregate ownership percentage.

8. Provides additional disclosure in narrative form or a separate organizational chart, avoiding unnecessary visual complexity of the Borrower’s organizational chart.