HUD recently released Notice H 2013-17 to update and consolidate previous guidance on the prepayment of Section 202 Direct Loan projects. Notice 2103-17 touches on guidance for HUD approval and processing of the prepayment of old (1959-1974) and new (1974-1990) Section 202 projects and supersedes guidance from previous Notices 2002-16, 2004-21, 2010-14, 2012-08. Updates to previous Notices and new 202 prepayment requirements / additions include:

  • Owners are authorized to receive a rent increase under either the Mark-up-to-Market or Mark-up-to-Budget option, provided they are eligible to use either option
  • New rules for selling to a qualified buyer; in the event of a sale of a 202 project (as opposed to refinance), the owner may realize the full amount of the net proceeds, whereas HUD used to keep the sale proceeds.  
  • HUD will allow owners to use loan proceeds, or the funds that come into the project (i.e. the new loan, or other sources such as LIHTC equity or soft debt) as a result of the prepayment transaction, for the following activities:
    • For the benefit of existing project residents
    • To convert units to reduce vacancies
    • To construct or add facilities
    • To pay a developer fee and / or
    • For the benefit of elderly residents of other HUD-assisted senior housing in the same geographical region (i.e. MSA)
  • HUD is now allowing Section 202 owners that wish to refinance to take a developer fee in certain circumstances; (see below for updated information)
  • HUD is also requiring that owners that wish to prepay a 202 loan must agree to a 20-year extension of their Use Agreement; HUD previously only required an owner to live out the remainder of the previous Use Agreement.

Click here to read Notice H 2013-17

UPDATE: Since issuing Notice 2013-17, the agency has received feedback from industry partners and subsequently released a memo providing guidance on a few items that needed clarification and correction.  HUD asks that its partners immediately adhere to the following directions with regard to the implementation of Notice 2013-17.

  1. Developer Fee

    In Section IX.A.7, please strike the fourth bullet on the 223(f) Developer fee and replace with the following language:

    223(f): Developer fee is allowed under the following circumstances:

    • Projects with non-profit owners (defined in Section V.L of this Notice) refinancing a Section 202 direct loan with a Section 223(f) FHA-insured mortgage, are eligible for a developer fee and equity-out if the project is at or below market rents. If the project has above market rents, said project is eligible for a developer fee but not equity take-out;
    • Projects participating in the Multifamily Low-Income Housing Tax Credit Pilot; or
    • Projects converting under the Rental Assistance Demonstration (RAD) Program.

    Owners should refer to the MAP Guide for additional policies and procedures regarding the use of FHA financing to refinance a 202 and Section VII.B.4 of this Notice for guidance on calculating the Developer Fee.

    Section IX.B.2, which pertains to re-refinanced Section 202 Directo Loans should be amended to read:

    No Developer Fee is allowed from the proceeds of an FHA-insured mortgage in the case of a re-refinanced 202 project, unless the new financing provides for a Developer Fee (e.g. LIHTC).  For Section 223(f) loans limited to 80 percent Loan to value based on market rents and valuation which generate mortgage proceeds exceeding recognized closing requirements (i.e. cash out) such proceeds may be used for any purpose, including a Developer Fee.

  2. Use of Loan Proceeds

    Housing Notice H 2013-17 places a constraint on the use of loan proceeds at other HUD-assisted properties, requiring that the other HUD-assisted projects receiving the proceeds be located in the same geographical region as the Section 202 project. HUD notes that this stipulation was included because of the administrative challenge of administering the use of loan proceeds at properties outside of the geographic region.  Owners are able to submit a waiver request with prepayment approval packages if they would like to use the loan proceeds at a project outside of the initial 202 project’s geographic region.

  3. Grandfathering Under Housing Notice H 2012-08

    Applicable Housing Notice

    Prepayment Application

    FHA Financing Application

    Housing Notice H 2012-08 and FAQs

    Submitted to HUD prior to June 4, 2013

    OR

    Associated FHA Financing Application was submitted to HUD prior to June 4, 2013.

    Submitted to  HUD prior to June 4, 2013

                                  OR

    Associated prepayment application was submitted to HUD prior to June 4, 2013.

    Housing Notice H 2013-17

    Submitted to HUD on June 5, 2013 or after

    Submitted to HUD on June 5, 2013 or after.

The guidance outlined in the most recent memo from HUD is effective as of June 26, 2013.

Click here to read the memo.