HUD issues Notice H 2012-8 with updated requirements for prepayment and refinancing of Section 202 D

June 07, 2012

On May 4, 2012, HUD issued Notice H 2012-8 (“Notice”), which revised HUD requirements applicable to the prepayment and refinancing of Section 202 direct loan projects for the elderly. The Noticestates that it supersedes all outstanding policy guidance with respect to Section 202 prepayments and refinancings.

However, the Notice makes reference to certain provisions in Notice H 2004-21 that addressed the refinancing ofSection 202 projects with FHA insurance as well as the ability of a seller in a section 202 sales transaction to obtain proceeds from the sale in an amount limited to the lesser of the purchase price or the unassisted market value of the property and so Notice 2004-21 remains in effect in some circumstances.

Section VII of the Notice contains provisionswith respect to the requirements for the reduction in debt service and the use of the proceeds resulting from the reduction in debt service. The Notice states that the provisions of Section VII do not apply to transactions involving the sale of a Section 202 project. There are some references in Section VII to eligibility of certain low-income housing tax credit (“LIHTC”) costs that would only apply in the case of a sales transaction. However, we understand from discussionswith HUD that the intent of the Notice is that Section VII will not be applied to sales transactions.

HUD clarifies in Section VII of the Notice that a refinancing proposal must compare the debt service under the existing Section 202 loan to the debt service under the loan obtained for the project under the refinancing, including the portion of the new loan that may be used for therehabilitation of the project, and the debt savings must be quantified in aspecific dollar amount. However, there is no minimum dollar amount of savings that must be achieved by the refinancing.

Section VII provides that the owner must submit a narrative description of the use of the proceeds from the refinancing, which must be approved by HUD. The approval by HUD of the owner’s prepayment application constitutes approval of the proposed use of proceeds. Among the approvable uses of proceeds is the rehabilitation of the Section 202 project, reconfiguring units in the project, e.g., conversion of unmarketable efficiency units to one-bedroom units, building additional facilities on site, including assisted living facilities, and a developer fee. The revised Use Agreement at Attachment 1 of the Notice incorporates the requirements with respect to the use of proceeds into the Use Agreement.

As indicated above, Section VII includes somediscussion of fees and transaction costs in projects financed in part by use of the LIHTCs. However, since an LIHTC transaction would only be possible in the context of the sale of a Section 202 project from the current nonprofit owner to a for-profit limited partnership with a nonprofit controlled general partner, the other provisions in Section VII would not apply to a sale transaction, including one financed with the benefit of LIHTCs. Consequently, the provisions of Notice 2004-21 with respect to sales transactions would appear to be still in effect.

One of the uses of proceeds from a refinancing transaction is the provision of affordable rental housing and related social services for elderly persons who are residents of other HUD-assisted seniorhousing. Such uses need to be specified in the prepayment proposal and the other project receiving the benefit of the proceeds of the refinancing would be required to enter into a use agreement or regulatory agreement requiring the operation of the project as affordable housing for seniors for at least 10 years. In addition, the Notice provides that all proceeds from the refinancing must be expended within five years of the refinancing.

Other provisions to note in the Notice are the provisions on additional financial and other reporting requirements. There is also a provision that requires an owner to execute an attachment to the Section 8 Renewal HAP contract that requires the owner to agree to renew the HAP contract upon its expiration subject to all applicable laws and regulations in effect at the time of the expiration of the Section 8 Renewal HAP contract.

With respect to contract rents in a Section 202 project that is under a Section 8 Renewal HAP contract, it is our understanding that the renewal and adjustments would continue to be governed by the applicable provisions of the Section 8 Renewal Guide.