HUD/FHA 221(d)(4) Borrower Eligibility
If you're looking to construct or renovate a multifamily real estate project using a HUD 221(d)(4) loan, how do you need to structure your company to be eligible for a loan? In most cases, HUD/FHA 221(d)(4) loan borrowers should be structured as single-asset/single-purpose, bankruptcy-remote entities. These can be owned or operated by nonprofit or for-profit groups.
Single Asset and Single Purpose Entities
A single purpose entity (SPE), sometimes referred to as a special purpose vehicle (SPV) is "a legal entity created for one very limited, particular task." Usually, an SPE is part of a larger company or corporation. The purpose of an SPE is to isolate the liability of the entity's business from that of the larger company. And, while the SPE is usually funded by capital from the parent company, the more the two entities can be isolated, the greater degree of legal protection. Most single-purpose real estate entities will hold one property as their only asset, which would also make the entity a single-asset entity. Often, another company may be responsible for operating and managing the property.
Bankruptcy Remote Entities
A bankruptcy remote entity is a company, often within a larger group of companies, that is legally shielded (to a certain extent) from the bankruptcy of the other companies (and vice versa.) Lenders, as well as the FHA/HUD, prefer bankruptcy remote entities because the entity has a much lesser change of defaulting on its loan commitments, even if the entity's parent company files for bankruptcy. While bankruptcy remote entities are not bankruptcy proof, it's usually much more difficult for creditors to "pierce the corporate veil" and seek repayment of debts from the parent company.
Bankruptcy remote entities are almost always single purpose entities, but not all SPEs are bankruptcy remote. In general, groups will have to take special precautions to make sure an entity is truly bankruptcy remote. This includes ensuring that the SPE has "one director, general partner, managing member or controlling person who is not otherwise affiliated or associated with the borrower."
It's important to realize that both SPEs and bankruptcy remote entities can be operated by either for-profit or non-profit groups, and either can use them to potentially get FHA 221(d)(4) financing.