Last week's alert discussed the new proposed regulations for the 2530 process. In that Alert, we mentioned an earlier 2530 working group meeting attended by our own Monica Sussman and other industry experts. We have received several calls about that earlier meeting, and in light of that interest we are reprinting here our written comments for the 2530 working group. Monica reports that there were wide-ranging discussions at the 2530 working group meeting but those discussions will likely yield operational changes sometime after the proposed rules go into effect. The following were our comments:
| TO: | Stillman D. Knight Deputy Assistant Secretary for Multifamily Housing Programs |
| FROM: | Monica Hilton Sussman Richard Michael Price |
| DATE: | March 16, 2004 |
| RE: | Multifamily Housing 2530 Policy Task Force |
Thank you for the opportunity to provide feedback on our experiences with the 2530 process. Much of the information has been previously provided to HUD. We think a revision to the regulations at Part 200 Subpart H and HUD Handbook 4065.1 is necessary. We believe the focus should be on updating and modernizing the 2530 process by further defining who should provide information and what that information should be.
The 2530 process was developed when real estate was typically owned by small groups of partners, often family and friends. Today, the typical owners include multinational and institutional investors. It is very difficult to obtain the required 2530 information from board members and other individuals in these institutions and the purpose for such information is not clear.
In addition, HUD's procedures as set forth in 2.1D of the Handbook and the regulation are out of sync with actual practice in some instances. For example, the Handbook provides a process for notification of flags, removing flags, and for receipt of approvals. However, it is unusual for any of that to actually happen. Separately, the regulations refer to a previous participation control officer (24 CFR § 200.226) who makes certain decisions, which we understand are not presently followed.
As indicated above, a growing number of owners have large institutional investors as part of its ownership structure. The affordable housing industry has seen a lot of consolidation, and we expect that trend to continue. Major stockholders and board members of large, publicly traded companies are not inclined to provide social security information or complete 2530 forms because of a relatively small affordable housing transaction. Increasingly, the HUD component is provided as an adjunct to a low-income housing tax credit investment. Indeed, senior corporate officials often have nothing more than a generalized knowledge of the investment strategy. We would suggest limiting disclosure of principals in large public entities, or in affiliates, to persons or divisions with operational control over the property at issue.
Also, many parties are using LLCs instead of LPs in their deal structure, but the 2530 guidance is silent as to LLCs. The only HUD guideline on LLCs is an expired Notice H95- 66, written before LLCs were widely used. H95-66 is confusing and bears little resemblance to actual transaction structures. We suggest treating LLCs like LPs.
A somewhat related point is what information should be listed. The comments here differ between general partners (and managers), who are actively involved in projects, and limited partners (or their equivalent, like stockholders or members), who are typically passive once their initial investment is made. Indeed, limited partners, by law, cannot be active in the limited partnerships. As a result, limited partners often do not receive or maintain current project status information.
Another clarification, applicable to all filers, is the scope of the programs at issue. The regulations currently list specific HUD programs and RHS programs (the forms should be updated to refer to RHS, rather than FmHA). There is still confusion over 2530's application to some Section 8 programs (i.e., project-based vouchers) and other programs outside of the Office of Housing, Multifamily. Also, the issue of state or local housing finance agency programs is confusing developers. Many tax credit investors believe that all tax credit transactions not otherwise involving HUD should not be listed. The 2530 regulations were written before tax credits existed and we believe the reference to state and local agency programs was intended to refer to HUD programs with state assistance, such as the 236 non-insured state agency bond financed transactions. Traditionally, HUD staff have not required these programs be listed.
We hope that you find this information helpful.
If we can be of further assistance, please contact either Monica Sussman or Richard Price at 202-585-8000.
Suite 900
401 9th Street, N.W.
Washington, D.C. 20004-2128
(202) 585-8000
Fax: (202) 585-8080
Monica Hilton Sussman
Direct Dial: (202) 585-8833
Direct Fax: 866-947-3749
E-Mail: MSUSSMAN@nixonpeabody.com
April 12, 2004
VIA FACSIMILE
Mr. Stillman D. Knight
Deputy Assistant Secretary for Multifamily Housing Programs
U.S. Department Of Housing and Urban development
451 7th St., SW
Washington , DC 20410
RE: 2530 Policy Task Force
Dear Mr. Knight:
In mid-March, we submitted our comments regarding 2530 concerns for the upcoming policy task force meeting. I look forward to discussing 2530 issues with you next week. I would like to take this opportunity to supplement our earlier submission with the following additional matters.
Confirmation of approval.
The 2530 procedures call for advising a principal if total principal has been approved. However, in actual practice, a principal is often never advised if their 2530 has been cleared by a local office. When we have requested e-mail confirmation of approval, we have been told by certain offices that they do not put approvals in writing. This is especially the case where the 2530 submitted is for a tax credit investor limited partner in a transaction that has closed from a HUD perspective. Often in LIHTC transactions, the investor fund (typically the limited partner) and the ultimate investor (typically the limited partner of the limited partner) are admitted to the ownership entity after the closing has occurred. HUD's focus generally has been on the FHA loan closing, approving an assignment of HAP contract, or approving a 236 decoupling transaction. To the extent the investors are admitted after the closing, a 2530 is still required. In order to enable funds to flow into these transactions, we suggest the requirement for 2530 approvals for limited partners be dropped altogether. In any event, parties must either be notified in a timely manner that they have been approved, or a time period (perhaps a week at most) must be set after which, absent a response, the 2530 is deemed approved.
Definition of Interest
The 2530 procedures require submission for all limited partners with more than 25% interest and stockholders with more then 10% interest in the property. However, there isn't a definition of what constitutes an interest. In many transactions, the interest in front-end and back-end benefits change pursuant to the terms of the partnership agreement. For example, a special limited partner (SLP) may have a 1% ownership interest, which would not require the submission of a 2530, but may be entitled to 60% of sale or refinancing proceeds. Is the SLP required to file a 2530? Again, this issue would not be relevant if limited partners were not required to file 2530s.
Thank you for your consideration of these issues.
Very truly yours,
Monica Hilton Sussman
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If you have any questions about these or other 2530 developments please call Monica Sussman, Richard Price, or Anthony Ruvolo at (202) 585-8000.