HUD 202: Big changes
William C. Fisher
The HUD 202 program had a major policy change in 2012 that will permit numerous not-for-profit providers to take capital from their existing HUD 202 properties, deploy this capital for a wide range of uses, and generate meaningful development fees.
One benefit is lower interest rates for HUD 202 loans originated prior to 1990, when rates were as high as 9.25%. HUD will permit the loan amount to increase and allow the additional capital to be used for a variety of purposes. It is possible to extract an additional $1 million to $3 million per property (or even more) or lower interest rate costs, according to Ziegler's Frank Rockwood, a senior vice president with this investment banking firm who helped provide information for this article.
Potentially, the biggest benefit is to allocate the HUD capital to other properties, known as “cash out” transactions. While subject to greater scrutiny, this benefit will provide many borrowers with 202 properties in high-rent markets an opportunity to generate new capital.
HUD also clarified development fees as being not restricted, and that they may be up to 15% of the acceptable development cost. Such acceptable costs might include acquisition, rehabilitation, initial reserve deposits, loan fees and closing costs. Accordingly, if the existing loan balance were, for example, $5 million, the development fee earned by the sponsor could be at least $750,000 (15% of $5 million).
New capital grants for new construction projects have effectively been eliminated. However, the policy changes provide new sources of capital to assist low-income seniors. New HUD 202 developments will increase the number of HUD applications, resulting in longer approval time frames.
If your community has HUD 202 housing and needs assistance in generating lower interest rates or new capital, I encourage you to discuss your situation with your investment advisor.