HUD Improves Tax Credit Pilot Program

HUD’s Low Income Housing Tax Credit (LIHTC) Pilot Program, which started in 2012, is designed to attract multifamily borrowers to FHA’s low rates and very good terms, increasing its inventory of affordable housing units for families in need.

Recently, HUD unveiled major changes to make this program even more attractive, hoping that current tax credit sites won’t leave the affordable side as their compliance periods end.  Based on feedback from prospective borrowers, HUD has focused on reducing unnecessary costs and administrative burdens.  The primary changes:

—  In the past, all repairs had to be funded at closing.  HUD will now allow applicants to submit a disbursement schedule, allowing for the repairs to be done over time, and promises to accept it as long as it’s reasonable, and at least 20% of the tax credit equity is funded at the closing of the FHA-insured loan.

—  For past projects, the rule was that the combination of the insured first mortgage with any secondary debt couldn’t exceed 92½% of the appraised value.  Most of the proposed deals just wouldn’t work.  HUD has changed this rule for all LIHTC transactions, as long as certain requirements are met. So deferred developer fees and seller take-back notes are allowed with no limitations.

—  Another problematic requirement mandated an assurance of completion escrow equal to 20% of the financed repairs.  This set-aside has now been reduced to 10%, and waivers down to 0% can be permitted if they are properly supported.

— Other improvements will reduce inconsistencies in how tax abatements are treated, and will grandfather LIHTC deals that require 3-year waivers.

HUD also sends reminders to its Field Offices regarding which principals in a tax credit transaction are to be underwritten.