HUD Announces Rollout of Sections 221(d)4, 220 LIHTC Pilot Program

Published by Ray Landry on Thursday, April 4, 2019
Journal cover thumb April 2019

After two-and-half years of planning, U.S. Department of Housing and Urban Development (HUD) Secretary Ben Carson announced the expansion of the low-income housing tax credit (LIHTC) pilot program to include new construction and substantial rehabilitation projects under the Section 221(d)4 and Section 220 loan programs at the National Association of Homebuilders’ Show in February. 

HUD launched its LIHTC pilot program in 2012 to streamline processing of Section 223(f) LIHTC transactions with repairs up to $40,000 per unit. The success of the pilot program can’t be disputed, as 34 percent of HUD’s 912 loans insured in 2018 were LIHTC transactions. Of the 148,726 apartment units insured last year, 31 percent were LIHTC units. When the pilot program started in 2012, less than 5 percent of HUD’s loan volume was LIHTC. The expansion to include Section 221(d)4 and Section 220 transactions will now make the majority of LIHTC transactions eligible for the pilot program.

The goal of the pilot program is to ensure faster and more efficient processing for low-risk LIHTC transactions by eliminating redundant reviews. HUD’s average processing time for its LIHTC construction loans is 90 days. The pilot program promises a 30-day processing time for loans processed under the expedited approval process and 60 days under the standard approval process. The maximum loan amount for pilot transactions is $25 million, and at least 25 percent, but not more than 75 percent, of the developer fee must be deferred.

There are three types of transactions eligible for the new pilot program:

  1. New construction 9 percent LIHTC transactions with at least 90 percent of the units restricted to LIHTC rents and the achievable LIHTC rents are at least 10 percent below comparable market rents for each unit type.
  2. Substantial rehabilitation developments with 9 percent or 4 percent LIHTCs with project-based Section 8 contracts covering at least 90 percent of the units. These developments must have a 20-year housing assistance payment (HAP) contract in place at closing. The new 20-year HAP contracts have been commonplace since the last Multifamily Accelerated Processing Guide revision in 2016.
  3. Substantial rehabilitation projects without Section 8 assistance that are being resyndicated with 9 percent or 4 percent LIHTCs and have at least 90 percent of the units restricted to LIHTC rents, and the achievable LIHTC rents are at least 10 percent below comparable market rents for each unit type. These properties must demonstrate sustained occupancy, which HUD defines as maintaining an occupancy of at least 85 percent, and a 1.0:1 debt coverage ratio for the six months before filing an application.

To qualify for expedited approval processing, the loan-to-cost ratio on new construction 9 percent LIHTC developments cannot exceed 65 percent of mortgageable costs. For substantial rehabilitations of properties with at least 90 percent HAP units, the loan-to-cost ratio is increased to 75 percent. This limit applies to both 4 percent and 9 percent transactions. The goal is to issue a firm commitment within 30 calendar days of receipt of an acceptable application and to close transactions within 60 days of firm commitment issuance. 

In an effort to reduce processing costs, an appraisal prepared for the LIHTC allocating agency that is also MAP Guide-compliant may be submitted with the application. A borrower-ordered market study is also acceptable. More responsibility is being placed on the MAP lenders, but HUD staff will continue to perform the 2530 previous participation clearance, approval of the affirmative fair housing marketing plan and conducting the environmental review. 

Per regulation 24 CFR 50.32, environmental assessments on properties of more than 200 units must be reviewed by the HUD regional environmental officer, therefore, these developments are not eligible for expedited approval processing. Properties with radon mitigation, asbestos or lead-based paint remediation, removal of intact underground storage tanks and previously contaminated sites with a no further action letter are eligible for expedited processing as long as they have fewer than 200 units. 

Substantial rehabilitation developments being resyndicated with both 4 percent and 9 percent LIHTCs and no Section 8 rental assistance, qualify for the standard approval processing, provided the loan-to-cost ratio is less than 75 percent of mortgageable costs. Historic properties not using historic tax credits (HTCs) qualify for standard approval processing, as well as those with environmental issues such as noise measurements over 65 decibels, contaminated sites that will require construction period remediation, sites in the floodplain or with acceptable separation distances from aboveground storage tanks or high-pressure pipelines, and asbestos or lead-based paint abatement. The goal is to issue a firm commitment within 60 calendar days of receipt of an acceptable application and to close transactions within 60 days of firm commitment issuance. 

The pilot program supports development in opportunity zones (OZs), which are generally census tracts in low-income communities that meet the new markets tax credit (NMTC) definition of “low-income community.” At the recent Mortgage Bankers Association’s Commercial Real Estate Finance conference, Deputy Assistant Secretary Lamar Seats reiterated HUD’s commitment to participating in OZ transactions and indicated HUD was analyzing several potential incentives to spur loan activity in OZs.

As alluded to earlier, not all LIHTC transactions will be eligible for the pilot program. These ineligible properties will be processed under current LIHTC underwriting guidelines and include 4 percent LIHTC new construction transactions, Rental Assistance Demonstration properties, HTC and NMTC transactions, adaptive reuse of nonresidential structures, developments involving significant demolition or gut rehabilitation, and those involving inexperienced development team members, including property managers.

A copy of Notice H 2019-03 can be found at www.hudresourcecenter.com, or you can contact a MAP lender for more information. 

Ray Landry is a senior vice president of Davis-Penn Mortgage Company. He has been originating HUD-insured multifamily loans for more than 20 years, specializing in affordable housing.