HUD Sets Policy for Subordination of Section 202 Direct Loans

HUD issued Notice 2010-26 on December 20, 2010, which sets some procedures for reviewing requests to subordinate Section 202 direct loans in cases where refinancing these loans under Notice H 04-21 (post-1974 Section 202 projects) is not feasible. HUD says that subordination of Section 202 direct loans may assist owners and developers of housing for the elderly that use low income housing tax credits (LIHTC) for substantial rehabilitation.

Requests to subordinate Section 202 direct loans are reviewed by Hub/Program Center staffs. Applicants can include: single-purpose private nonprofit organizations with tax-exempt status under Section 501(c)(3) or Section 501(c)(4) of the Internal Revenue Code of 1986; a nonprofit consumer cooperative; or for-profit limited partnerships with a nonprofit entity that want to develop mixed-finance projects.

An owner requesting a loan subordination must be in compliance with all HUD business agreements and project operations must meet HUD standards. These include, but are not limited to:

• A current 60 or above REAC PASS score or submitting a repair plan that demonstrates all physical needs of the project will be addressed as part of the subordination transaction.
• Satisfactory management and occupancy review ratings for the prior three cycles. If a managing agent received an unsatisfactory or below-average review, the manager must show that the agent will be replaced with someone who is acceptable to HUD.
• No outstanding notices of default or violation.
• The site’s compliance with all applicable fair housing and civil rights requirements, including the Fair Housing Act.