A Boost for Owners: Updated HUD Guidance on Section 236 Decouplings Contains Favorable Changes

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On August 25, the U.S. Department of Housing and Urban Development (HUD) issued a notice (H 2013-25) that provides updated guidance regarding the “decoupling” of Section 236 multifamily properties and the refinance of decoupled 236 projects.

In a decoupling transaction, the existing Section 236 mortgage is paid off and the subsidy stream from HUD (Interest Reduction Payment), which buys down the monthly mortgage payment on a Section 236 loan, is separated – or decoupled – from the 236 mortgage. The IRP is then attached to support a portion of the new mortgage taken out by the owner. The remaining subsidies from the IRP contract reduce the monthly debt service payments on the new mortgage and allow the owner to get a larger loan. Decouplings are typically done in conjunction with acquisition/rehabilitation transactions, frequently using low-income housing tax credits.

The new guidance applies to HUD-insured, HUD-held, and state agency-financed non-insured Section 236 projects.

The guidance outlines the required content and elements of applications to HUD requesting approval of a decoupling transaction and of requests to refinance a project that was previously decoupled, and the features of the new IRP contract. The notice also outlines the procedures for processing such applications, which must now be submitted – and will be processed – by HUD’s Office of Affordable Housing Preservation.

“I think overall [the updated guidance] makes the decoupling process clearer,” says Boston attorney David Abromowitz, a partner at Goulston & Storrs. “And the changes are designed to encourage decouplings and make them more compatible with tax credit transactions, which should expand the number of feasible preservation transactions.”

Abromowitz said the new notice formalizes some policies and practices already implemented by HUD but never written down. One, for instance, requires renewals of Section 8 contracts to have a 20-year term – a longer term that has been pushed by the Obama Administration.

Abromowitz cited several other favorable changes for owners and developers made by the notice, especially for decoupling transactions using housing credits. One expands the scope of costs classified as project expenses for purposes of calculating budget-based Section 8 contract rents, adding in items such as asset management, compliance monitoring, and deferred development fees. The result will allow increased contract rents that enable an owner or developer to get a larger new mortgage in a decoupling transaction.

A second area, Abromowitz said, codifies the policy of allowing an owner a 6% limited distribution after a decoupling, which is calculated based on the equity amount for the new transaction. The notice also expands the scope of items counted in the equity calculation, adding in amounts such as a deferred developer fee.
(Notice: http://tinyurl.com/63owm5g)