thFQN0S1DOCombining HUD-insured multifamily construction financing (like Section 221(d)(4) loans) with historic tax credits (“HTC”) can seem like an impossible feat given their respective mazes of rules and requirements. Notwithstanding, each are valuable sources of capital for developing multifamily projects, and, if you can manage through those mazes, HUD financing and HTCs can be successfully combined. So, if you’re sizing up a combined HUD-HTC deal, here are points to consider:

  1. Team. No matter what side of the deal you’re on – developer, investor, HUD lender – having team members that have closed combined HUD-HTC deals makes a big difference. It’s particularly helpful if the HUD lender’s counsel and the HTC investor’s counsel have worked on twinned HUD-HTC deals. This experience eliminates the steep learning curve for each about the other’s various program requirements. You’ll find significantly more guidance from HUD on combining low income tax credits with HUD financing.
  2. Bridge Loans. If your project will need a bridge loan, work to shore up that source of funding as soon as you are able. HUD’s general policy is the borrower on the bridge loan cannot be the HUD borrower. It is important to understand early on how the bridge lender will be repaid and to make sure that source of repayment and flow of monies is acceptable to both investor and HUD counsel. For example, on the HUD side, you want to make sure the source of funds aren’t from HUD “project assets” – or else those monies will become subject to surplus cash rules which could inhibit the timing of repayment.
  3. Master Lease Structures. If the HTC investment will be structured using a master lease pass through, then the investor must be prepared for two tough pills to swallow: First, the master tenant entity (the entity into which the federal HTC investor invests) will be required to sign HUD’s form of Subordination, Non-Disturbance and Attornment Agreement (“SNDA”) which HUD generally does not negotiate. This SNDA gives HUD broad latitude to terminate the master lease in the event of default and foreclosure – this is opposite of the investor’s desired outcome to preserve the master lease in these situations. As a result, it is important for the investor and investor’s counsel to review and understand this SNDA as soon as possible in a transaction (before the investor’s term sheet is signed, if possible). Second, HUD requires the master tenant to execute its own Regulatory Agreement (see form HUD-92466M (06/14)). Again, this is something the HTC investor will need to be comfortable with and should be reviewed as early on in the transaction as possible.
  4. Logistics. Finally, logistics of closing… HTC deals seem to get negotiated right down to the last minute with closing emails zooming in cyberspace to meet wire deadlines. HUD wants none of that last minute drama! Rather, HUD has a very methodical closing process. HUD requires review of a “HUD package” (e.g. HUD and bridge loan documents, organizational documents, final construction invoices, projections) generally three to four weeks before closing. HUD lender’s counsel should make sure the deal team understands the HUD closing process early on in the deal so parties can accommodate and prepare.