My Website

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 consent.

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 mortgage insurance.

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 and components.

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 transaction.