HUD proposes updates to post-M2M policies

September 09, 2020

Affordable Housing Alert

Author(s): Richard Michael Price

On August 28, HUD issued draft policies governing Mark To Market (M2M) properties (the proposed policies). HUD had not issued updates to the M2M policies since 2012. The new proposed guidance is available at HUD’s Multifamily Drafting Table, and the comment period is open until September 28, 2020. Comments can be submitted to

HUD’s Office of Recapitalization (Recap) administers the M2M and the post-M2M programs. The proposed policies make changes to the underwriting parameters applicable to the waiver of “due on sale and refinancing” clause in subordinate M2M debt. HUD also changes the qualified non-profit (QNP) guidance and replaces the M2M Operating Procedures Guide at Appendix C. Lastly, the proposed policies add in two new sections: (i) a section detailing HUD’s policies on matured, maturing, and defaulted M2M debt and (ii) a section applying Section 8(bb) budget authority transfers to M2M properties. HUD states that the purpose of the proposed policies is to streamline and revise pre-existing guidance and to reduce processing requirements.

The proposed policies reflect Recap’s ongoing experience with post-M2M transactions over the last eight years. Some of the key proposed changes in the proposed policies are listed below:

  • Subjects refinancing’s with no proceeds, that also increase debt or extend the term, to Recap review
  • Subjects portfolio transfers, that include one or more M2M properties along with non-M2M properties, to Recap review of the entire portfolio
  • Sets new debt term requirements for the new transaction underwriting
  • Requires demonstration that M2M debt can be repaid from surplus cash by maturity of new first mortgage debt
  • Grants the field office additional discretion on approving operating account and vacancy estimates
  • Clarifies Recap’s latest thinking on “proceeds” to include “indemnification payments” to either buyer or seller of the “pay-down” amount
  • Adds in “IOI operating contract” disclosure post-closing
  • Eliminates strategic community properties (SCP) and replaces it with high priority project (HPP) designation. This would allow excluding development fee from calculations for repayment to HUD, known as the “pay-down,” for properties that demonstrate significant market demand for affordable units as well as significant physical, financial, or operational needs, that will be addressed by the new transaction
  • Sets forth a new net present valuation analysis
  • Clarifies that Chapter 16 of Handbook 4350.1 governs partial releases of land from the M2M-use agreement
  • Provides a significant overhaul of the QNP and debt relief guidance, including more analysis of community advisory boards and assurances that the QNP is independent of for-profit entities
  • Encourages owners of properties with maturing, matured/defaulted M2M notes to submit a sale or a refinancing proposal to Recap and request a work-out (i.e., an extension of the M2M note(s)). These owners are also encouraged to submit a similar request to obtain short-term extensions of the M2M notes
  • Allows M2M properties to participate in Section 8(bb) transfers, supplementing the 8(bb) notice, whether the M2M property is the terminating or the receiving contract

Recap has indicated it seeks comments from the industry, and we will be seeking clarification, confirmation, and feedback.

The foregoing has been prepared for the general information of clients and friends of the firm. It is not meant to provide legal advice with respect to any specific matter and should not be acted upon without professional counsel. If you have any questions or require any further information regarding these or other related matters, please contact your regular Nixon Peabody LLP representative. This material may be considered advertising under certain rules of professional conduct.

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