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Multifamily Document Reform Implementation Frequently Asked Questions

Subordinate Financing Agreements (Subordination Agreement and Secondary Financing Rider)

 

(If you have additional questions about this document, please submit it to MultifamilyDocumentReview@hud.gov)

 

 

  1. Does the Subordinate Financing Agreement preclude the use of MOUs or inter-creditor agreements with local partners?

 

  1. Can the Subordinate Financing Agreement be modified to meet the demands of state and local housing finance agencies? If so, what is the extent of the modifications permitted and who has the authority to accept the proposed changes?

 

  1. Under specific notices, the term of a secondary financing note did not have to be co-terminus or terminate prior to the HUD insured mortgage, as long as payments were being made from surplus cash or non-project funds. The Closing Guide references back to compliance with Section 8.9 of the new MAP Guide. However, section 8.9 of the new MAP Guide does not specifically indicate what the term of the junior note must be, but instead references an extension requirement. Both the subordination agreement and the secondary financing rider indicate the "junior note may not mature prior to the date on the senior note." Can you clarify if the term of the junior loan can be less than the term of the HUD insured loan? Is this a change that would be permitted under the instructions of the Closing Guide section 3.3?

 

  1. When should we use the Subordinate Financing Agreement versus a Secondary Financing Rider? If form HUD-92420M, Subordination Agreement is being entered too, do we also need to have the HUD Secondary Financing Rider attached to the documents?

 

  1. I'm working towards a (d)(4) initial closing with LIHTCs. The owner will obtain a new tax credit equity bridge loan secured only by future capital contributions of the investors. Am I right in thinking that, since the loan is not secured by the real estate, the bridge loan documents do not need to include the new HUD Secondary Financing Rider? If the Rider is required, that would create a problem because the Rider limits the source of repayment to surplus cash (see paragraph 11), whereas the parties intend to repay the bridge loan with capital contributions.
  1. Paragraph 11 of the new Secondary Financing Rider states that, so long as HUD insures or holds the Senior Note, payment on the Junior Note must come strictly from surplus cash. Read alone, that would seem to indicate that payments of P & I on the Junior Note before the maturity of the Senior loan are OK, so long as such payments come only from surplus cash. Paragraph 13 states that "to the extent that the Junior Note provides for payment of principal & interest, such principal & interest shall be due & payable on or after the maturity date of the Senior Loan..." These provisions appear to conflict with one another; is there a way to reconcile them that I'm failing to see? I'm working on a (d)(4) involving seller financing, and the seller has agreed to accept repayment solely from surplus cash, but the seller naturally wants to receive some P & I payments (again, strictly from surplus cash) before the maturity of the senior note. Is that acceptable, despite the apparent restriction in paragraph 13 on P & I payments before Senior Note maturity? Should paragraph 13 be read to mean simply that the Junior Note can't be accelerated prior to the Senior Note maturing?
  1. Section 8.9.D.3.e of the MAP Guide provides the following: "The subordinate mortgage must be assumable when a sale or transfer of physical assets occurs and the insured mortgage remains in place. (1) The holder of the subordinate mortgage cannot require that more than 75% of the net proceeds of the sale or transfer be applied to the reduction of the loan." By contrast, paragraph 3(a) of the new Secondary Financing Rider seems to state that no more than 70% of the net proceeds can be used to reduce the junior loan. Don't the MAP Guide and the Rider conflict on this point, and if so, how do we resolve the conflict?
  1. If secondary financing was originally provided by a governmental entity but the loan has subsequently been sold to a private investor, should the Subordinate Agreement form HUD-92420M be used, or should the Secondary Financing Rider be used?
  1. Pursuant to MAP Guide Chapter 8.9.D.3.e & 8.9.D.3.f a subordinate mortgage from a government agency which is to be recorded against the property must: 1) "be assumable when a sale or transfer of physical assets occurs and the insured mortgage remains in place" (see 8.9.D.3.e); and 2) "automatically terminate if HUD acquires title to the project by deed in lieu of foreclosure" (see 8.9.D.3.f.). Shouldn't these required provisions be incorporated directly into the HUD Subordination Agreement?
  1. 2/15/2012
    Short-term tax-exempt bonds are being fully redeemed/paid off at closing for an FHA-insured loan pursuant to Section 223(a)(7).  However, bond tax-exemption rules require the Declaration of Restrictive Covenants to remain of record for 15 years, so the Declaration of Restrictive Covenants, requiring tenancy by low income and very low income tenants, remains of record.  Is the Subordination Agreement necessary?  Should the Rider/Amendment to Declaration of Restrictive Covenants, found at Section 5.3 of the Closing Guide, be used?  Does either document need to be modified for this situation? 
  1. 4/25/2012
    MAP Guide Chapter 8.9(c) requires the language be inserted into the soft note that restricts payment due under the soft note to 75% of available surplus cash. However, the Subordination Agreement, in Section 3(b), states that payments to the soft note may be made from (i) 75% of available surplus cash or (ii) from monies received from Non-Project Sources. I assume the Subordination Agreement language is correct and that the MAP Guide language needs to be updated?
  1. 6/27/2012
    I have two questions on the subordinate financing documents. First, the 2/6/12 Q&A indicates that we should negotiate the inclusion of the language relating to termination with a deed in lieu. Does that language also need to be included in the Rider to Restrictive Covenants, or do we permit the covenants to remain on the property? Second, lender's counsel (and probably the funding agency) in one of my current deals is arguing that CDBG HOME and Disaster loans, which are secured by a mortgage, are not in fact soft notes and therefore the notes would not need to include the language from 8.9(C) relating to payments from surplus cash. My understanding is that, absent a waiver permitting payments from operating funds, the language would need to be included to clarify the restriction on the source of payment. Is this understanding correct, or do we not include the language if the note is secured by a mortgage?
  1. 3/14/2013
    Can the Subordination Agreement be modified to meet the demands of state and local housing finance agencies? If so, what is the extent of the modifications permitted and who has the authority to accept the proposed changes?
  1. 3/26/2013
    HUD-92420M Subordination Agreement: per the 12/9/11 FAQ on this document; this form should be used to subordinate governmental secured second mortgages. My question is should this form be used to subordinate HUD held secured second mortgages; i.e., are HUD held secured seconds considered governmental loans for the purposes of this subordination agreement? If form HUD-92420M should be used to subordinate HUD held secured seconds, what revisions if any would be necessary?
  1. 4/18/2013
    I am reviewing a closing package that includes secondary financing in the form of Home funds. However, instead of the funds flowing directly from the public entity to the FHA Borrower, the public entity is providing the Home funds to the sole member of the Borrower's general partner. The entity is then loaning the funds to the FHA Borrower. Because the public funds are coming to the FHA Borrower by way of a private entity, should I use the Secondary Financing Rider? Or does the mere fact that these funds are public in nature necessitate the use of the Subordination Agreement?

   

  1. 9/19/2013
    The FAQ published on 4/18/13 indicates that private secondary financing may be secured if one of "Housing's limited exceptions to allow secured, private secondary financing is present." I have not seen a list of such exceptions in either the MAP Guide or Closing Guide, but do note that the Secondary Financing Rider does contemplate that a mortgage is placed on the property in connection with the private subordinate loan. Might you know where to direct us to those "Housing's limited exceptions?" We would like to advise clients appropriately as to what circumstances may allow private subordinate financing to be secured.

 

 

 

 

 

 
1.  There is no Section 13 in the Subordination Agreement.  Should we add: “Section  13.  Intentionally deleted”? 

The phrase “Intentionally omitted” will be included at section 13 when the documents are published in HUDCLIPS on September 1, 2011.

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2.  The definition of Borrower refers to “the Note.”  Which note?  Senior note?  Or junior note? 

The word “Note” in this context refers to the Senior Note.  This reference will be clarified when the documents are published in HUDCLIPS on September 1, 2011.

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3.  In the definition of Affiliate, it appears there is a stray word.  Can we delete the word “Borrower”? 

Yes.  The insertion of the word “Borrower” into the definition of “Affiliate” is a typographical error and will be corrected when the documents are published in HUDCLIPS on September 1, 2011.

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4.  The terms “Enforcement Action Notice” and “Senior Loan Enforcement Action” are defined (at length) but not used in the document.  Why?  Can we delete these definitions for the sake of clarity?

These terms will be deleted in version published in HUDCLIPS on September 1, 2011.

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5.  Should the Subordination Agreement to be used in LIHTC deals?  Would the tax administrator be a party?  Or will the MAP Guide rider be sufficient?   Some comments made during the Advanced Closing School seemed to indicate that Riders would be disfavored in the new paradigm.

Yes, if a transaction includes subordinate debt, the Subordination Agreement should be used, regardless of whether or not the transaction includes LIHTCs.  The Subordination Agreement is for use between public body lenders.  Therefore, the tax administrator should only be a party when are providing subordinate financing.  The “MAP Guide rider” is now located in the Closing Guide at Section 5.1, entitled “HUD Secondary Financing Rider.”  This rider is to “be used when private, non-governmental sources provide secured, secondary financing.

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6. In the Subordination Agreement, should we get the junior lender to agree to carve the HAP payments (if any) out of its collateral description so we don't run afoul of the Section 8 Renewal Guide?

No.  Provisions in the Subordination Agreement relating to the assignment of rents dictate that any right the Subordinate Lender may have to collect rents is subordinate to HUD's rights as described in the Agreement.  However, the question likely seeks to add a provision to the Subordination Agreement where the Subordinate Lender agrees to carve out the Subordinate Lender's rights to HAP rents as collateral, if the Subordinate Lender's loan documents claim that right.  The Multifamily program does not prohibit a Subordinate Lender from taking a collateral interest in HAP rents if the Subordinate Lender follows the proper procedures and has the appropriate Collateral Assignment of HAP Contract approved by HUD.  In this case, the Subordinate Lender would have a  legitimate claim to the HAP rents, subordinate to HUD's rights, as set forth in the Subordination Agreement.  If a Collateral Assignment of HAP Contract is not properly executed and approved by HUD, the Subordinate Lender will not have an enforceable claim to the HAP rents. 

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7.  Should the subordinate financing agreement be used in connection with Low Income Housing Tax Credit Extended Use Agreements?  It doesn't seem to be set up to be used with tax credits, but I want to be sure. 

If a transaction includes subordinate debt, the Subordination Agreement should be used, regardless of whether or not the transaction includes LIHTCs.  The Subordination Agreement is for use between public body lenders.  Therefore, the Subordination Agreement should not be used if the transaction includes only LIHTCs, but no subordinate loan.

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8.  Does the Subordinate Financing Agreement preclude the use of MOUs or inter-creditor agreements with local partners?

No. To the extent that providers of subordinate financing require or find the use of MOUs or inter-creditor agreements between such providers or between such providers and the Borrower, desirable, such agreements may be used so long as it is clearly stated in such documents that to the extent of any conflict between the terms of such additional documents and the Subordination Agreement, the terms of the Subordination Agreement control. Since the Subordination Agreement governs the relationship of the HUD-insured loan to the subordinate financing, there should be no need for MOUs or other agreements between the lender of the HUD-insured loan and a subordinate lender.

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9.  Can the Subordinate Financing Agreement be modified to meet the demands of state and local housing finance agencies? If so, what is the extent of the modifications permitted and who has the authority to accept the proposed changes? 

The Subordination Agreement is used when publicly-financed subordinate financing is used in a project. The Subordination Agreement may be modified in order to comply with the requirements of the governmental program providing such secondary financing, subject to approval by the Multifamily Development Field Staff and HUD Closing Attorney. The HUD Closing Attorney shall bring any requests for modifications to the Subordination Agreement to the attention of the Assistant General Counsel for the Multifamily Mortgage Division and the Headquarters Multifamily Development Director. The final form of the Subordination Agreement shall be subject to the approval of the Assistant General Counsel for Multifamily Mortgage Division and Headquarters Multifamily Development.

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10.  Under specific notices, the term of a secondary financing note did not have to be co-terminus or terminate prior to the HUD insured mortgage, as long as payments were being made from surplus cash or non-project funds. The Closing Guide references back to compliance with Section 8.9 of the new MAP Guide. However, section 8.9 of the new MAP Guide does not specifically indicate what the term of the junior note must be, but instead references an extension requirement. Both the subordination agreement and the secondary financing rider indicate the "junior note may not mature prior to the date on the senior note." Can you clarify if the term of the junior loan can be less than the term of the HUD insured loan? Is this a change that would be permitted under the instructions of the Closing Guide section 3.3? 

In no event may a subordinate loan become due before the term of the HUD-insured first mortgage. Consequently, all subordinate loans must have a term of 35 or 40 years (depending on the program). This requirement will be clarified in the MAP Guide.

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11.  When should we use the Subordinate Financing Agreement versus a Secondary Financing Rider? If form HUD-92420M, Subordination Agreement is being entered too, do we also need to have the HUD Secondary Financing Rider attached to the documents?

The Subordination Agreement is used when publicly-financed subordinate financing is used in the HUD-insured transaction. The Secondary Financing Rider is used when private subordinate financing is used in the HUD-insured transaction. Note that either one or the other should be used: do not attach the HUD Secondary Financing Rider to a governmental entity's loan documents, because the Subordination Agreement is used in those instances. Please refer to Closing Guide Section 3.3.

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12.  I'm working towards a (d)(4) initial closing with LIHTCs. The owner will obtain a new tax credit equity bridge loan secured only by future capital contributions of the investors. Am I right in thinking that, since the loan is not secured by the real estate, the bridge loan documents do not need to include the new HUD Secondary Financing Rider? If the Rider is required, that would create a problem because the Rider limits the source of repayment to surplus cash (see paragraph 11), whereas the parties intend to repay the bridge loan with capital contributions.

The Subordination Agreement should not be used for a bridge loan.
The purpose of a bridge loan is to provide funds during the gap between initial endorsement and the receipt of tax credit equity. The owner may not look to Project Assets, as defined in the Security Instrument, to repay a bridge loan. As a result, bridge loans may not be secured by the property. When the equity proceeds are received from the equity investor, the bridge loan must be repaid. The operating agreement or limited partnership agreement should indicate which equity infusion will be used to repay the bridge loan. Please note that the equity proceeds are not considered Project Assets. Use of the Subordination Agreement would frustrate this process.

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13.  Paragraph 11 of the new Secondary Financing Rider states that, so long as HUD insures or holds the Senior Note, payment on the Junior Note must come strictly from surplus cash. Read alone, that would seem to indicate that payments of P & I on the Junior Note before the maturity of the Senior loan are OK, so long as such payments come only from surplus cash. Paragraph 13 states that "to the extent that the Junior Note provides for payment of principal & interest, such principal & interest shall be due & payable on or after the maturity date of the Senior Loan..." These provisions appear to conflict with one another; is there a way to reconcile them that I'm failing to see? I'm working on a (d)(4) involving seller financing, and the seller has agreed to accept repayment solely from surplus cash, but the seller naturally wants to receive some P & I payments (again, strictly from surplus cash) before the maturity of the senior note. Is that acceptable, despite the apparent restriction in paragraph 13 on P & I payments before Senior Note maturity? Should paragraph 13 be read to mean simply that the Junior Note can't be accelerated prior to the Senior Note maturing?

No, the provisions are not in conflict. If the note is “soft,” allowing for payments from surplus cash, only, then there is no required, absolute monthly or annual payment on the junior Note. The required “due” date for the principal and interest must be after the maturity of the HUD-insured loan. However, the junior note may allow or require pre-payments on the junior note to the extent that surplus cash is available, from up to 75% of available surplus cash, provided that there is no penalty to borrower if the project does not yield any, or any minimum amount, of surplus cash.

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14.  Section 8.9.D.3.e of the MAP Guide provides the following: "The subordinate mortgage must be assumable when a sale or transfer of physical assets occurs and the insured mortgage remains in place. (1) The holder of the subordinate mortgage cannot require that more than 75% of the net proceeds of the sale or transfer be applied to the reduction of the loan." By contrast, paragraph 3(a) of the new Secondary Financing Rider seems to state that no more than 70% of the net proceeds can be used to reduce the junior loan. Don't the MAP Guide and the Rider conflict on this point, and if so, how do we resolve the conflict?

Yes, these provisions are in conflict. The Secondary Financing Rider in the Closing Guide will be revised to provide, as the MAP Guide provides, that no more than 75% of proceeds may be used to reduce the junior loan.

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15.  If secondary financing was originally provided by a governmental entity but the loan has subsequently been sold to a private investor, should the Subordinate Agreement form HUD-92420M be used, or should the Secondary Financing Rider be used?

Yes, the Secondary Financing Rider / Amendment should be used. Since this loan is now privately-held, secured subordinate debt (which we do not otherwise allow), the Subordinate Financing Rider / Amendment should be used to amend the mortgage.

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16.  Pursuant to MAP Guide Chapter 8.9.D.3.e & 8.9.D.3.f a subordinate mortgage from a government agency which is to be recorded against the property must: 1) "be assumable when a sale or transfer of physical assets occurs and the insured mortgage remains in place" (see 8.9.D.3.e); and 2) "automatically terminate if HUD acquires title to the project by deed in lieu of foreclosure" (see 8.9.D.3.f.). Shouldn't these required provisions be incorporated directly into the HUD Subordination Agreement?

No and yes. (1) Provisions in the Subordination Agreement already provide for the Subordinate Loan to stay in place upon a TPA if the HUD-insured loan remains in place. These provisions include the following: (a) Most importantly, Section 6(b) states that Subordinate Lender will not exercise its remedies upon a default (and “default” in this case is defined in terms of the Subordination Agreement, not as defined in the Subordinate Loan Documents), without Senior Lender’s consent; (b) Section 9(c) prohibits the Subordinate Lender from increasing the payments due on the Subordinate Loan or decrease the term; (c) Section 3(d) states that the Term of the Subordinate Loan “does not end” before the term of the Senior Loan; and (d) the definition of "Borrower" contemplates successors and assigns, including those that assume the Note. However, (2) there is no provision in the Subordination Agreement stating that the Subordinate Loan is extinguished if the Senior Lender takes a deed in lieu of foreclosure. While the background law may vary by state, it is likely that in most, if not all states, a deed in lieu of foreclosure does not extinguish subordinate debt. Therefore, thank you for bringing this deficiency to our attention. We recommend negotiating the addition of the following sentence to Section 5(a): “Subordinate Lender agrees to extinguish and release its lien on any and all Mortgaged Property in the event Senior Lender, HUD, or a designee of either acquires the Mortgaged Property pursuant to a deed in lieu of foreclosure.”

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17.  2/15/2012
Short-term tax-exempt bonds are being fully redeemed/paid off at closing for an FHA-insured loan pursuant to Section 223(a)(7).  However, bond tax-exemption rules require the Declaration of Restrictive Covenants to remain of record for 15 years, so the Declaration of Restrictive Covenants, requiring tenancy by low income and very low income tenants, remains of record.  Is the Subordination Agreement necessary?  Should the Rider/Amendment to Declaration of Restrictive Covenants, found at Section 5.3 of the Closing Guide, be used?  Does either document need to be modified for this situation? 

Because the Declaration of Restrictive Covenants remains on record, the Rider/Amendment to Restrictive Covenants (at Section 5.3 of the Closing Guide) should be executed to amend those provisions in accordance with HUD requirements. Because the Declaration of Restrictive Covenants is already executed and in place, the Rider/Amendment should be set up to be an "amendment" rather than a "rider."  Aside from choosing the alternate language choices that make it clear that the Rider/Amendment is an Amendment to an already executed and recorded document in this case, no other modifications to the Rider/Amendment should be necessary, unless some deal-specific issues arise.  Since the bonds are being redeemed, the Subordination Agreement is not necessary.

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18.  4/25/2012
MAP Guide Chapter 8.9(c) requires the language be inserted into the soft note that restricts payment due under the soft note to 75% of available surplus cash. However, the Subordination Agreement, in Section 3(b), states that payments to the soft note may be made from (i) 75% of available surplus cash or (ii) from monies received from Non-Project Sources. I assume the Subordination Agreement language is correct and that the MAP Guide language needs to be updated?

Yes, thank you. No more than 75% of surplus cash may be used to pay subordinate financing, but Non-Project Sources are outside the Mortgaged Property and may also be used to repay subordinate
financing.

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19.  6/27/2012
I have two questions on the subordinate financing documents. First, the 2/6/12 Q&A indicates that we should negotiate the inclusion of the language relating to termination with a deed in lieu. Does that language also need to be included in the Rider to Restrictive Covenants, or do we permit the covenants to remain on the property? Second, lender's counsel (and probably the funding agency) in one of my current deals is arguing that CDBG HOME and Disaster loans, which are secured by a mortgage, are not in fact soft notes and therefore the notes would not need to include the language from 8.9(C) relating to payments from surplus cash. My understanding is that, absent a waiver permitting payments from operating funds, the language would need to be included to clarify the restriction on the source of payment. Is this understanding correct, or do we not include the language if the note is secured by a mortgage?

With regard to the first question: yes, deeds in lieu should also be accounted for in the Rider to Restrictive Covenants. The suggested Rider to Restrictive Covenants set forth in the Closing Guide will be revised to read "... in the event of a foreclosure (or deed in lieu of foreclosure), the Restrictive Covenants [will terminate]..." With regard to the second question, a waiver is necessary to allow hard debt payments for secondary financing; the terms agreed to by Housing shall govern in such situation.

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20.  3/14/2013
Can the Subordination Agreement be modified to meet the demands of state and local housing finance agencies? If so, what is the extent of the modifications permitted and who has the authority to accept the proposed changes?

The Subordination Agreement shall be executed and recorded when publicly-financed subordinate financing is used in a project that is secured by an inferior lien. Hub Directors, in consultation with HUD field OGC, have authority to negotiate the Subordination Agreement with public agencies in order to facilitate, to the extent feasible, compliance with the requirements of the governmental program providing such secondary financing. The final form of that negotiated Subordination Agreement shall be subject to the review of the Assistant General Counsel for Multifamily Mortgage Division and Headquarters Multifamily Housing Development. Once HUD has agreed to a final form of the modified Subordination Agreement, that version shall become a uniform template that must be used for subsequent transactions involving the same governmental program in that state (referred to as “the “state/local program-specific template”).

To further facilitate the use of other public funds, the Office of Multifamily Housing Development has given Hub Directors authority to permit limited changes to the business terms, on a case-by-case basis, to said template (as well as to the HUD Rider/Amendment to the Restrictive Covenants, if applicable) that are necessary due to the unique characteristics of a given transaction. These limited changes may include provisions relating to the subordination of use restrictions/covenants (e.g., a land use restriction might be permitted if it is an encumbrance, but not if it is a lien that would place the FHA-insured mortgage in a subordinate position to another loan). Another provision that might be permitted on a case-by-case basis is a modification to Section 3, which prohibits early balloon payments on subordinate debt from being made prior to maturity of the HUD senior loan. Such business-driven changes may be made if the Hub Director ensures that the changes are supported from a business and HUD mission perspective and that resulting risks are appropriately mitigated pursuant
to Housing policy and are reflected in the deal terms. Changes to the legal terms of the transaction may not be made absent approval by the Assistant General Counsel for the Multifamily Mortgage Division.

Any other requested changes to the state/local program-specific template must be submitted to Headquarters to be approved by the Assistant General Counsel for the Multifamily Mortgage Division. Further, if either the negotiated changes found in the state/local program-specific template or the deal-specific changes to the HUD template will result in significant changes to other closing documents, a request for such changes to the other documents must also be submitted to Headquarters OGC, Multifamily Mortgage Division, in accordance with the established protocols for closing form changes and Closing Guide waivers.

All deal-specific deviations from the previously agreed upon state/local program-specific Subordination Agreement template must be evidenced pursuant to the procedures set forth below. Note that any required redlines and list of modifications must be compared to the established state/local program-specific template and not to the originally published Subordination Agreement form.

Draft Submissions
A draft Subordination Agreement submitted to the HUD field office for review must include a clean version as well as a redline of the draft to show any and all changes to the established state/local program specific Subordination Agreement, including any changes required by the HUD firm commitment.

Closing Submissions
A redlined version of the Subordination Agreement shall be submitted at the closing table. All changes from the established state/local program specific template shall be shown in the redline, including any inapplicable provisions, deal-specific changes, and changes required in the HUD firm commitment.

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21.  3/26/2013
HUD-92420M Subordination Agreement: per the 12/9/11 FAQ on this document; this form should be used to subordinate governmental secured second mortgages. My question is should this form be used to subordinate HUD held secured second mortgages; i.e., are HUD held secured seconds considered governmental loans for the purposes of this subordination agreement? If form HUD-92420M should be used to subordinate HUD held secured seconds, what revisions if any would be necessary?

Yes, the Subordination Agreement (HUD-92420M) should be used to subordinate all governmental secured second mortgages, including HUD-held second mortgages, such as those used to secure Mark-to-Market restructuring or Partial Payment of Claim notes. The only necessary revisions are those non-substantive changes to reflect the HUD-held second mortgage, as would be the case with any other subordinate governmental mortgage.

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22.  4/18/2013
I am reviewing a closing package that includes secondary financing in the form of Home funds. However, instead of the funds flowing directly from the public entity to the FHA Borrower, the public entity is providing the Home funds to the sole member of the Borrower's general partner. The entity is then loaning the funds to the FHA Borrower. Because the public funds are coming to the FHA Borrower by way of a private entity, should I use the Secondary Financing Rider? Or does the mere fact that these funds are public in nature necessitate the use of the Subordination Agreement?

Generally, since the funds in the present situation are loaned to the FHA Borrower from a private entity (i.e., the sole member of Borrower entity’s GP), an unsecured promissory note (either the Surplus Cash Note or Residual Receipts Note) should be used, as the MAP Guide and Closing Guide indicate secondary financing from a private source may not be secured, unless one of Housing’s limited exceptions to allow secured, private secondary financing is present. If one of these exceptions is present permitting the private loan to be secured, the Secondary Financing Rider should be used; provided, however, that the junior lien may only be used to secure repayment of the funds to the sole member of Borrower’s GP, and not any of the obligations that party may have under the HOME program. We are not aware of any Housing policy that would routinely permit a lien to be recorded against the FHA-insured project to secure the obligations of the sole member of Borrower entity’s GP, as opposed to the obligations of the actual Borrower entity. As a general rule, if the parties wish to bring HOME funds into the transaction and have any HOME obligations secured by a mortgage on the insured project, the Borrower entity should be in direct privity with the agency providing the HOME funds, and the HUD Subordination Agreement should be used.

The Office of Housing is aware, however, that there may be certain compelling deal-specific reasons supporting a transaction structured according to the fact pattern in the incoming question. Consequently, any such request to deviate from the guidance contained in this answer and existing MAP Guide secondary financing policies and procedures based on the same or similar facts should be brought to the attention of HQ Office of Housing Multifamily Development for consideration prior to issuance of a firm commitment.

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23.  9/19/2013
The FAQ published on 4/18/13 indicates that private secondary financing may be secured if one of "Housing's limited exceptions to allow secured, private secondary financing is present." I have not seen a list of such exceptions in either the MAP Guide or Closing Guide, but do note that the Secondary Financing Rider does contemplate that a mortgage is placed on the property in connection with the private subordinate loan. Might you know where to direct us to those "Housing's limited exceptions?" We would like to advise clients appropriately as to what circumstances may allow private subordinate financing to be secured.

This is a question of Housing policy that must be addressed to Housing. Housing's most recent thinking on questions of secondary financing and when the various forms of secondary financing may be secured can be found on their FAQ page for FHA LIHTC

pilot:http://portal.hud.gov/hudportal/documents/huddoc?id=Tax_Credit_Pil_FAQ5_053013.pdf

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