HUD Revises Previous Participation Certification Requirements, Final Rule – October 14, 2016

On October 14, 2016, HUD published in the Federal Register a Final Rule, “Improving the Previous Participation Reviews of Prospective Multifamily Housing Program Participants.”

 

This rule revises HUD regulations for review of Previous Participation Certifications (PPC) for certain participants in multifamily housing and healthcare programs. This memo applies only to the changes relating to the multifamily housing programs.

 

The final rule clarifies which individuals and entities will undergo review, and fully replaces the current PPC regulation. This rule is effective on November 14, 2016.

 

All applicants for HUD program funding must complete HUD Form 3560 (Previous Participation Certification). The form requires disclosure of all principals involved in a project, a list of prior projects they were involved in, and assurances that they met their responsibilities in the prior projects.

 

Projects covered by this requirement (“covered projects”) include:

• FHA-Insured Projects;
• Section 202 and 811 Projects;
• Risk Share Projects;
• Projects subject to HUD Use-Restrictions or Affordability Restrictions;
• Subsidized Projects – if 20% or more of units receive subsidy from:
  • Section 236;
  • Rent Supplement; and
  • Project-Based Section 8

 

Note – single-family projects are not subject to this requirement.

 

Controlling Participants

 

A “controlling participant” is a participant or entity that is serving as a “Specified Capacity.” A Specified Capacity is defined as any of the following:

• An owner of a covered project;
• Borrower of a loan financing a covered project;
• A management agent;
• A master tenant of an FHA-insured project; or
• A general contractor

 

 

Control of Entities

 

If the Specified Capacity is an entity, rather than an individual, any individuals with control of the financial or operational decisions of the entity will be considered a “controlling participant.”

 

Individuals or entities with the ability to direct the day-to-day operations of a Specified Capacity or a Covered Project may also be considered a controlling participant, as will

• Individuals or entities that own at least 25% of an entity that is a Specified Capacity; and
• Individuals or entities with the ability to direct the entity to enter into agreements.

 

There are exclusions from the definition of Controlling Participant, including:

• Passive investors and investor entities with limited liability in Covered projects benefitting from tax credits (e.g., the low-income housing tax credit). This applies to both syndicators and direct investors;
• Individuals/entities that do not exercise financial or operational control;
• Unless determined by HUD to exercise day-to-day control, Board members of a nonprofit who are not officers or part of the nonprofit management team;
• Mortgagees acting in their capacity as such; and
• Public Housing Agencies.

 

Triggering Events

 

The following events will trigger the PPC requirements:

1. Application for FHA Mortgage insurance;
2. Application for HUD funds for a program administered by HUD’s Office of Housing;
3. A request to change any controlling participant; and
4. A request for consent to assign a Section 8 HAP Contract.

 

The Appendix to the Final Rule is the Processing Guide for the PPC process and should be carefully reviewed by anyone who may be considered a Controlling Participant under this new guidance.