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Reviewing Assumption Of FHA-Insured Loans: The ‘TPA’

03/06/2013

The Federal Housing Administration, a division of the Department of Housing and Urban Development, provides mortgage loan insurance for the purchase, refinance, construction and substantial rehabilitation of apartments, assisted-living facilities and skilled-care nursing homes. One of the benefits of FHA-insured loans is that they are fully assumable, subject to the requirements of HUD’s transfer of physical assets (TPA) review and approval.

Owners of multifamily projects have been taking advantage of the low interest rates available for FHA-insured loans. Eventually, however, interest rates will rise. When interest rates increase, FHA-insured mortgages, which are fully assumable, will enhance the value of multifamily assets. Purchasers will want to purchase the asset and assume the existing low-interest loan, rather than obtain new financing.

The TPA Process. HUD uses the term “transfer of physical assets” to mean a change in the ownership of a project on which there is an FHA-insured mortgage. HUD identifies two categories of TPAs: full and modified. A modified TPA is the procedure for approval when a transaction does not involve a complete change in deeded ownership of the project, but rather involves a change in the ownership structure. A full TPA is the procedure for approval when there is a transfer of title to the property to a new entity. In a full TPA, the purchaser assumes the note and mortgage, and either assumes the existing regulatory agreement (which is the central contract with HUD), or enters into a new regulatory agreement with HUD.

The full TPA review process occurs in two phases: 1) application phase and 2) the preliminary approval phase. In the application phase, HUD reviews the TPA application, along with several required exhibits prepared by the prospective borrower and counsel. A few of the more onerous exhibits include: (i) the purchaser’s resume and credit reports (including personal credit reports of the principals); (ii) the purchaser ’s financial statements; (iii) a “purchaser’s letter” describing the entire transaction, including details of the financial consideration flowing to the project and mortgagor/seller, all funds allocated to the project operations as well as funds designated for use to correct any deficiencies in the physical capital needs of the project; (iv) the borrower’s proposed organizational documents, with HUD-required provisions; and (v) previous participation certificates. For a full TPA, HUD requires an application fee in the amount of 50 cents per $1,000 (five basis points) of the original face amount of the mortgage.

One of the hurdles of TPA approval is the requirement of “previous participation certificates” (referred to as “2530s” in reference to the form number for the required Previous Participation Certificate Form). Under the 2530 process, all principals must disclose their previous participation history in any HUD projects. The stated purpose of the regulations is to allow HUD to ensure that project participants are responsible individuals and entities who will honor their obligations and do not have unacceptable performance records under HUD programs.

In a multitiered ownership structure (which often occurs with institutional capital), 2530 review applies to “principals” including not only the proposed property owner, manager, general partner and controlling stakeholder, but also to parties with certain direct or indirect interests within the principal’s tier of ownership. HUD requires 2530s to be executed and submitted down to the individual level within each covered tier – thus the officers and directors of your capital investor may be required to sign a disclosure form and provide a Social Security number for the 2530 review process.

The preliminary approval process can take several weeks (or in extreme cases, months). The purchase and sale agreement should account for the lengthy approval process. If the transfer is approved, HUD issues a “preliminary approval letter,” which states the terms and conditions of HUD’s approval, including any changes required by HUD to the documents. The purchaser has 45 business days from the date of preliminary approval to close and submit the final approval package to HUD, including the executed and recorded closing instruments, and an audit of seller’s project financial statements through the date of closing.

In any HUD transaction, it is important to have experienced counsel, as HUD regulations and local field office practices can be a minefield for attorneys and clients without HUD experience.

Originally published in the Colorado Real Estate Journal.

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