B. “Principals” may include any of the following:

1. “Active Principals” are individuals or entities who singly or with others direct and control the Borrower and are responsible for the Borrower’s ability to execute any and all actions for the benefit of the project, regardless of the extent of their equity interest. A Principal is any entity that has an ownership interest of 25% or more in the project to be insured, which is reduced to 10% or more for corporations. However, and regardless of the percentage of ownership interest, principals are subject to both a financial underwriting review and a previous participation review if they possess a substantial financial interest or have decision making authority in the Borrower.

   • Active principals of a borrowing entity that possess a substantial financial interest and/or have decision making authority are subject to a credit and financial underwriting review. A substantial financial interest is an interest that would create an ability by the investor to direct the operations of the Borrower, or influence, either directly or indirectly, the decision-making authority of the managing member or general partner and those member(s) of business entities which, if they suffered material negative financial or legal problems, would pose a risk to HUD. The MAP Lender must determine whether a principal is Active by reviewing the organizational chart and identifying the various partners and their relation to the borrowing entity and to each other.

2. “Passive Principals” are persons or entities who singly or with others have limited or no decisionmaking power or control over the Borrower but who have an ownership interest of 25% or more (10% for corporations) in the Borrower. Language in the Partnership Agreement or Organizational Documents should evidence that the Passive Principal has no operational or decision-making authority.

3. “Borrower” is the single asset Borrower entity.

MAP Guide, March 2021 Go to beginning of Chapter 8

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

Chapter 8 Page 8-2

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

4. Foreign National individual and/or business entity. See Section 8.3.5.

5. A Special Limited Partner Entity (SLP) [This principal type applies only to LIHTC transactions]. This permits the admission of a “Special Limited Partner” in case of default by or other failure of the initial General Partner. Provision of Notice to the Investor by HUD and pre-approval of a Special Limited Partner can be achieved through a “Rider to the Security Agreement for LIHTC Properties” available at: http://portal.hud.gov/hudportal/documents/huddoc?id=Security_Instrument_Rider.pdf. In addition, instructions for the use of this Rider are provided at: http://portal.hud.gov/hudportal/documents/huddoc?id=Pre-appr_Process_Instru.pdf. When passive partners are replaced after final endorsement, HUD requires a modified Transfer of Physical Assets (“TPA”). The Production Office will process submissions for Pre-Approval of the Special Limited Partner Entity, which must occur at or before Initial Endorsement or Initial/Final Endorsement; otherwise the SLP shall be treated as a passive investor.

6. Requirements for General Contractors (GC): A General Contractor will be treated as a principal if it has an ownership interest in the project of over 10%.

7. A Principal may be a public or private entity, whether an individual or business, proposing to participate in a project as an owner or General Contractor. Under certain conditions specified in Section 8.3.5, the individual or entity may also be a foreign national. A Principal maintains significant decision-making authority regarding an FHA-insured loan transaction, and/or retains the significant percentage of ownership in a single asset Borrower entity. The Principal’s role can involve active participation in directing the activities and affairs of the Borrower entity or passive participation when an ownership interest has been acquired in the entity. All types of Principals are subject to financial and credit disclosure and underwriting.