Affordable multifamily housing is a valuable investment class that has many upsides for savvy commercial real estate stakeholders. It is a secure asset over time, and demand for affordable housing is reliable. It can help diversify your portfolio during times of market uncertainty. Sometimes, these investments are even required by REITs or other investment vehicles looking to expand their portfolio to include assets that provide security, tax credits, and/or government funding.
As such, US Department of Housing and Urban Development (HUD) programs, including Transfer of Physical Assets (TPA) and Housing Assistance Payment (HAP) contract renewals are particularly in demand during economic downturns. Affordable housing contract renewals occur on 10- or 20-year cycles, which means many contracts initiated during the last recession are coming due. Other newer stakeholders, who may not have experience with HUD Asset Management programs, may be executing these deals for the first time in preparation for a potential downturn.
Asset Management-related HUD deals are unlike other CRE transactions, as they may include unique reporting requirements and stringent compliance standards. To optimize success in your business goals, these are the most important things you should know before initiating a TPA or HAP deal.
1. There are Related Due Diligence Requirements Whether you are renewing/reassigning a HAP deal, or executing a TPA with a new entity or some form of ancillary financing, you must submit related due diligence assessments and reporting requirements, which include Environmental Site Assessments (ESAs) and Capital Needs Assessments (CNAs, as per the HUD published reporting requirements, a fact that many times is overlooked! Engage the services of a qualified, licensed and knowledgeable consultant who will be able to help you navigate the environmental, physical/structural and related reporting requirements to ensure you meet your business goals in a timely manner.
2. Your Multifamily Financing May Still have a HUD Component So, you are negotiating a Fannie Mae or Freddie Mac-financed multifamily deal involving affordable housing. That means you don’t have to worry about HUD/FHA reporting standards or requirements, right? Unfortunately, that is incorrect! It is incredibly important to understand that even if your source of lending for a transaction doesn’t involve HUD/FHA-insured financing, if the project is affordable housing, there is a fair chance the HUD TPA and/or HAP standards will apply. So be careful, because overlooking these potential reporting standards and understanding their implications may result in delays or even liability issues on your transaction.
3. HUD’s Handbook is an Essential Guide HUD has notoriously intricate set policies and clarification notices, particularly for Section 8 housing deals and contract renewals. But the good news is that they are all documented in the HUD policy guide handbook, as well as related Housing Notices and statutory regulations. These documents are essential tools for understanding the related requirements, particularly for the stakeholder and their general counsel. During the closing process, compared to a typical financing transaction (where a lender will generally be the controlling entity), for HUD TPA or HAP deals, the general counsel may be the one who controls everything. If you plan on executing one of these deals and do not have reliable general counsel, attain one. Secondly, ensure that your general counsel is familiar with the related HUD standards and practices.
4. NEPA Compliance Can Vary Based on Transaction Type Section 8 housing transactions can have a TPA, HAP or FHA component, and they all have differing NEPA compliance requirements. This is critical for carrying out environmental assessments as part of pre-transaction due diligence. For example, HAP requirements may be slightly less stringent than TPA, both of which may vary slightly from those required for loans administered by the Federal Housing Administration (FHA). One may conform to ASTM environmental standards with an IH component, while others may have stringent radon testing requirements, or State-specific requirements for lead paint, vapor intrusion, etc. Your environmental consultant needs to know the big picture of your transaction – i.e., source of financing, whether it is an acquisition or internal transfer of property, and how this deal fits in your broader portfolio.
If you think these deals sound complex, you are correct! Say for example you want to take advantage of a Low-Income Housing Tax Credit (LIHTC) deal in Texas that may have a HAP or TPA component (which it will if you are introducing Section 8 affordable housing as part of the development). Your financing comes from Fannie Mae or Freddie Mac, which has their own proprietary report requirements. The LIHTC tax credit compliance, which can vary greatly by state, must conform to the State of Texas Department of Housing. But because there is Section 8 housing involved, you also have a HUD HAP or TPA component. Therefore, you must report to all three standards, which all have different components, requirements and compliance thresholds. One report will typically not suffice, and each report needs to touch on unique nuances for a specific reporting requirement.
Because any deals involving HUD are multi-disciplinary and complex in nature, even if your source of lending is non-HUD, it is critical to choose a team of licensed, experienced professional consultants that can advise you on due diligence, compliance and meeting all local, State and agency reporting requirements. These could include civil, mechanical and structural engineers; environmental professionals; geologists; architects and energy specialists. As requirements increase, reporting and adherence to the standards becomes essential for approval. A suite of risk management and due diligence services are essential for all stages of implementation, including environmental site assessments, building science, industrial hygiene surveys, and more. Your team should possess the technical skills, staff resources and HUD-related portfolio experience needed when navigating the meticulous requirements of a deal.