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Presentation, discussion, and possible action regarding a waiver of 10 TAC §13.8(b)(4) of the 2022 Multifamily Direct Loan rule for Rio Manor
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RECOMMENDED ACTION
recommendation
WHEREAS, Rio Manor was previously approved for a $1,257,000 loan of HOME funds which is structured as fully repayable with an interest rate of 0.50%;
WHEREAS, the Department is in the process of closing that loan, and the borrower has requested that the Department subordinate its loan to an $8,645,000 unsecured, non-amortizing bridge loan from Wells Fargo Bank, NA;
WHEREAS, 10 TAC §13.8(b)(4) may prohibit the Department’s loan from subordinating to non-amortizing loans during the construction period, and therefore, the closing of the loan cannot proceed as requested without either a waiver of this rule, or a determination from the Board that the proposed financing structure complies with the rule; and
WHEREAS, staff is unable to determine that compelling reason exists for a waiver, and the ability to have a waiver is not allowed per the language in 10 TAC §13.1 without amending the Department’s One Year Action Plan; however, does believe that the proposed financing structure could be read in a manner to comply with the existing rule;
NOW, therefore, it is hereby
RESOLVED, that the waiver for Rio Manor is hereby denied, and instead, the Board determines that the proposed financial structure complies with 10 TAC §13.8(b)(4) if the Wells Fargo loan is ahead of the Department’s loan in payment during the Development Period only, but in no case more than four years from the Contract Execution Date .
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BACKGROUND
Rio Manor has previously been approved for a $1,257,000 loan of HOME funds for the reconstruction of 60 units in Del Rio, Val Verde County. The loan is fully repayable at 0.50% interest. The Department is in the process of closing that loan, and the borrower has requested that the Department subordinate its loan to an $8,645,000 unsecured, non-amortizing bridge loan from Wells Fargo Bank, NA. The Department is in the process of closing that loan, and the borrower has requested that the Department subordinate its loan to an $8,645,000 unsecured, non-amortizing bridge loan from Wells Fargo Bank, NA. 10 TAC §13.8(b)(4) requires that:
(4) Loans shall be secured with a deed of trust with a permanent lien position that is superior to any other sources for financing including hard repayment debt that is in an amount less than or equal to the Direct Loan amount and superior to any other sources that have soft repayment structures, non-amortizing notes, have deferred forgivable provisions, or in which the lender has an identity of interest with any member of the Development Team. Parity liens may only be considered with federal loan funds from USDA Rural Development
Because the loan is non-amortizing, is related party debt, and is not a lien against the property, this rule may prohibit the Department’s loan being behind in payment in the case of foreclosure; however, the rule in question could be read to only refer to the permanent lien position. The Department cannot subordinate its lien position to a debt where there is no lien, but upon Board direction could agree to have the Department’s payment behind the Wells Fargo loan during the Development Period. Should the bridge loan be fully repaid during the latter of the Wells Fargo loan’s construction period or the Department’s Development Period, it would remove the concern of the Department’s loan being behind payment to it during the permanent period.
Should the Board determine that the proposed financial structure would violate 10 TAC §13.8(b)(4), then a waiver of that rule would be necessary. Because the rule in question is part of the Department’s One Year Action Plan (OYAP) with the U.S. Department of Housing and Urban Development, staff does not believe that such a waiver could be granted without first amending that plan, and then the Borrower would no longer have received an Application Acceptance Date under the NOFA. Rather than a waiver, staff recommends the Board determine that the proposed payment structure during the construction period meets the requirements of 10 TAC §13.8(b)(4) so long as the Department’s loan would not be behind in payment during the permanent period. If the Board, does not make this determination, it is likely that this HOME loan will not close, and the funds could be repurposed by the Department to other transactions.