Many of these requirements are addressed via the Subordination Agreement (HUD-92420-ORCF), but it doesn’t appear to address the points below. I am not aware of any policy that permits subordinate documents not to comply with the handbook, unless a waiver is obtained, or to omit the features of a surplus cash note. However, borrower’s counsel contends that any requirements not dealt with in the Subordination no longer apply and/or are dealt with solely in the Subordination Agreement, and no waivers are necessary.
As best I can tell, the Subordination Agreement does not address the following: (a) that the term of the subordinate loan must be extended if: (i) the note matures, there is no available surplus cash, and the first mortgage has not been paid in full, (ii) if the HUD-insured loan is refinanced and the maturity date of the HUD-insured loan is extended thereby and (iii) if HUD grants a deferment or forbearance that results in an extended maturity of the HUD- insured mortgage. In addition, it does not address the requirement that the holder of any subordinate mortgage cannot require that more than 75% of the net proceeds of the sale (as such term is defined in the 232 handbook provision) or transfer be applied to the reduction of the loan. A surplus cash note should also state it is non-negotiable, and cannot provide for compounding of interest.
The contention of borrower’s counsel that ORCF’s governmental secondary financing requirements are covered solely by the Subordination Agreement is not correct. In the third “WHEREAS” paragraph of the Subordination Agreement, HUD puts the subordinate lender on notice that the terms of its loan must comply with “Program Obligations”, a term that encompasses the 232 Handbook. To the extent that the 232 Handbook’s secondary financing requirements are not explicitly restated in the Subordination Agreement, HUD Counsel should strive to ensure that they are included in the subordinate financing documents. If ORCF staff is inclined to allow deviations from the Handbook requirements on a specific transaction, they must waive those requirements using form HUD-2.
With regard to your office’s practice of requiring governmental subordinate notes to include all features of HUD’s form of surplus cash note, please bear in mind that ORCF’s Surplus Cash Note (HUD-92223-ORCF) is intended for use strictly in connection with private secondary financing (see Section 3.15.B of Section II of the 232 Handbook). Therefore, insofar as requirements in the HUD-92223-ORCF are not made applicable to governmental funding by the Handbook or Subordination Agreement (e.g., the requirement that the Note not provide for the compounding of interest), HUD Counsel should not insist on incorporating such requirements into the governmental note.
Thank you for bringing this matter to our attention. HUD will revisit the Subordination Agreement during the next PRA review of the documents and attempt to capture Handbook requirements not currently restated in the form.
2. The Subordination Agreement – Financing (HUD-92420-ORCF) does not expressly address the requirement that the mortgage be assumable when a sale or transfer of physical assets occurs and the insured mortgage remains in place. However, there is an FAQ on the Multifamily side where someone raised the issue that the MF Subordination Agreement did not include this requirement. The response stated that the Subordination Agreement adequately addresses this point via the following provisions in the MF form: (a) 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.
As the ORCF form is similar, I am assuming I can rely on the above FAQ as to this particular requirement. Can you confirm that the ORCF forms committee agrees with the MF FAQ as applied to the ORCF form? (11/6/15)
Yes, you can rely on the MF FAQ with regard to this particular issue. The following excerpt from the MF FAQ is hereby made applicable to ORCF’s Subordination Agreement – Financing:
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.
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