SECTION 202 AND SECTION 811- DEVELOPMENT TEAM REFERENCE GUIDE
For Project Development and Preservation
Richard Silverblatt Associates, Inc.
Refinancing a Section 202 Direct Loan
Projects originally funded under the Section 202 Direct Loan Program, have the opportunity to
refinance their HUD loans. Many of the 202 Direct Loans that were funded in the 1980's for example,
have relatively high interest rates. Refinancing allows a project to reduce interest rates to current
levels and free up funds to make needed capital repairs. Refinancing does not apply to a Section 202
(or Section 811) Capital Advance.
As a first step, the Owner corporation should make a determination if the original mortgage note,
signed at the HUD Intiial Closing, requires HUD consent to prepay the Section 202 mortgage.
The key HUD guidance and requirements for refinancing which require consent by HUD to undertake
this transaction, is HUD Notice H 2013-17, subject: Updated Requirements for Prepayment and
Refinance of Section 202 Direct Loans. As stated in the Notice, "Owners of Section 202 Direct Loan
properties have the option of prepaying the Section 202 Direct Loan and/or refinancing the Section
202 property for the purpose of reducing the interest rate and debt service, and/or making capital
improvements." See the Notice, Part VI, for guidance for prepayments which do not require HUD
If the HUD Section 202 Direct Loan is prepaid, there is no HUD restriction on whether the refinanced
loan is to be insured under a HUD mortgage insurance program or not. Where rehab work is not
substantial, Sponsors have used the 223(f) Mortgage Insurance Program as part of the refinancing in
order to provide funds to complete repair work on the project. HUD requires that with 223(f), that an
approved MAP Lender serves as the new mortgagee and submits the application to HUD for
If your project is contemplating a refinancing and repayment of the existing Section 202 Direct Loan,
the Guide recommends that you contact the HUD Office person who supervises this process, to
discuss your plan. The HUD NY Office requires that two members of the Owner board of directors
attend the initial meeting in addition to any project staff.
According to the HUD Notice cited above, all Section 202 Direct Loan prepayments requiring HUD
approval must meet the following:
1. Use Agreement that will ensure the continuing operation of the project until at least 20 years
following the maturity date of the original loan under terms that are at least as advantageous to the
project tenants as the terms stated in the original loan agreement.
2. Annual financial HUD reporting requirements.
3. Renewal of Housing Assistance Payments (HAP) contract plus a Preservation Exhibit which
provides that the current HAP will be terminated and replaced by a new executed HAP with a 20-year
term. The Preservation Exhibit provides that upon expiration of the 20-year renewal HAP, the
renewal contract will automatically renew for an additional term equal to the number of years
remaining on the (original) HAP agreement that is being terminated.
4. Coordination of the HAP contract renewal application and, if applicable, FHA refinancing and
prepayment approvals, so rent adjustment amounts in each are the same.
5. HUD requirements regarding Section 8 Rents. Rent adjustments under the renewal contract will be
based upon contract renewal options in the Section 8 Renewal Policy Guidebook. Rents are adjusted
annually in accordance with the policy in the Renewal Contract. Comply with other HUD policies
concerning how debt service will be affected by the renewal of the HAP contract.
6. Requirements regarding allowable distribution from surplus cash in cases where the Section 202
project is owned by a for-profit limited partnership.
7. Requirements in the case of repayment that includes a sale or acquisition.
8. In transactions that include capital repairs, HUD encourages the use of "Energy Star" appliances
9. Policies regarding the allowable elimination of units that are functionally obsolete or not
economically viable and with HUD approval, the conversion of efficiency units which are not renting
to one-bedroom apartments.
10. In connection with a refinance, the Owner may consider renovating existing space within the 202
project or adding new space to include cafeterias, dining areas, community rooms or buildings, or
infirmaries or other inpatient or outpatient health facilities, etc. or the improvement of these spaces if
they are currently inadequate. HUD's objective is to encourage such spaces which contribute to the
benefit of frail elderly in the project. HUD will evaluate the impact upon contracts to support such
development. NOTE: As per the Notice: "If FHA financing is proposed, neigher meals, infirmaries,or
other facilities intended to address resident needs with Activities of Daily Living may be included in
any additions. No licensed care is permitted under FHA Multifamily Mortgage Insurance program.
11. The 202 project must meet published accessibility standards in order to provide elderly persons
with disabilities an alternative to institutionalization.
12. HUD requrements regarding organization structure following a sale, prepayment, or refinance of
the Section 202 project.
13. Conditions for the use of a project's Residual Receipts as a means to increase or provide for
supportive services or for other approved purposes, such as rehab, modernization, or retrofitting
components of the project.
14. HUD requirements regarding tenant involvement.
15. HUD environmental review of a prepayment transaction.
16. Compliance with HUD requirements for temporary relocation of existing tenants, if applicable. A
relocation plan is required to be submitted. Permanent relocation is not permitted as a result of this
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