Chapter 02. Tax Credit Bridge Loan Insurance
Regulation .01 Scope.LinkCopy Citation
The Fund may provide limited insurance for bridge loans that provide interim financing until equity capital contributions are made by investors when the Fund expects a rental housing project to qualify for federal tax credits. The Fund may insure these bridge loans under this chapter instead of COMAR 05.06.01, except as provided in Regulation .14 of this chapter.
Regulation .02 Definitions.LinkCopy Citation
A.
In this chapter, the following terms have the meanings indicated.
B.
Terms Defined.
(1)
“Act” means Housing and Community Development Article, Title 3, Subtitle 2, Annotated Code of Maryland.
(2)
“Borrower” means the original borrower under a loan and the borrower's successors and assigns by operation of law or as approved by the Fund.
(3)
“Bridge loan” means a loan to provide interim financing until equity capital contributions are made by investors in a project that qualifies for federal low income housing tax credits.
(4)
“Construction risk” means the risk that a borrower will be unable to complete construction or rehabilitation of a project in the time anticipated at closing of the bridge loan.
(5)
“Default” means the failure of the borrower to:
(a)
Make required payments under the loan when due; or
(b)
Perform any other obligation under the loan after the notice, lapse of time, and opportunity to correct, if any, which may be provided in the loan.
(6)
“Fund (MHF)” means the Maryland Housing Fund, an agency within the Division of Credit Assurance, and, when appropriate, its authorized officers or personnel.
(7)
“Initial rent-up” means that period before the number of units required to qualify for low-income housing credits is rented.
(8)
“Insurance Agreement” means the Amended and Restated Multi-Family Insurance Agreement governing insurance of multi-family rental housing developments by the Fund dated August 30, 1988, as amended and restated on February 16, 2006, by and between the Fund and the Community Development Administration.
(9)
“Investor” means an individual or an entity that makes an equity capital contribution to the borrower in exchange for a limited partnership or nonmanaging member interest in the borrower.
(10)
Mortgage.
(a)
“Mortgage” means a written instrument evidencing or creating a lien against real property for the purpose of providing collateral to secure the repayment of a debt.
(b)
“Mortgage” includes a deed of trust.
(11)
“Mortgagee” means the original lender under a loan and its successors and assigns.
(12)
“Multi-family reserve” shall have the meaning ascribed to that term in the Insurance Agreement.
(13)
“Operating fund” means the net amount of money or securities on deposit to the credit of the Fund with the State Treasurer and not allocated to any of the Fund's reserve funds.
(14)
“Project” means a development of one or more structures containing residential units and which may include ancillary commercial, service, and social facilities, and the real property upon which the development is situated.
(15)
“Secretary” means the Secretary of Housing and Community Development.
Regulation .03 Risks Insured.LinkCopy Citation
A.
The Fund may insure bridge loans to the extent of defaults on the bridge loan, including failure to make payments on the bridge loan, by the borrower which arise when an investor fails to make the capital contributions required to make timely payments on the bridge loan by reason of:
(1)
A direct reduction or elimination of tax credits due to a change in the provision of the Internal Revenue Code authorizing the credit, issuance of regulations under that provision, or a ruling interpreting that provision. A reduction in the amount of the tax credit shall only be insured to the extent of the reduction.
(2)
The borrower's failure to qualify for low-income housing credits because it failed, for reasons other than failure to complete construction in the time anticipated at loan closing, to rent a sufficient number of units in the project to qualified tenants with low incomes.
(3)
The borrower's failure to complete construction or rehabilitation of a project in the time anticipated at closing of the bridge loan. Under most circumstances the Fund will require the bridge loan lender to retain the construction risk, but may insure some construction risk under the following circumstances:
(a)
The Fund may insure construction risk in an amount not to exceed 75 percent of the insured amount of the bridge loan if the insured amount of the bridge loan, when added to the amount of any superior liens on the project, equals or exceeds:
(i)
85 percent of the project's appraised value as of completion of the improvements, taking into consideration the value of the tax credits for a for-profit borrower; or
(ii)
90 percent of the project's appraised value as of completion of the improvements, taking into consideration the value of the tax credits for a borrower which is either wholly owned by a nonprofit entity or whose general partner is a nonprofit entity; or
(b)
The Fund may insure construction risk in an amount up to the insured amount of the bridge loan if the insured amount of the bridge loan, when added to the amount of any superior liens on the project, is less than:
(i)
85 percent of the project's appraised value as of completion of the improvements, taking into consideration the value of the tax credits for a for-profit borrower; or
(ii)
90 percent of the project's appraised value as of completion of the improvements, taking into consideration the value of the tax credits for a borrower which is either wholly owned by a nonprofit entity or whose general partner is a nonprofit entity.
(4)
The inability of the borrower to claim an historic investment tax credit if:
(a)
Upon completion of construction, the United States Department of the Interior notifies the borrower that it will not certify the project for historic tax credit purposes; and
(b)
The borrower has secured:
(i)
Preliminary approval of Parts I and II of the Certificate of Rehabilitation by the National Park Service before beginning construction, and
(ii)
Approval by the National Park Service of all change orders which the Fund determines will affect historic elements of the building.
B.
The Fund may not insure a general failure to pay by the investor (for example, insolvency or bankruptcy of the investor limited partner).
Regulation .04 Amount of Insured Loan.LinkCopy Citation
A.
Except as provided in §B of this regulation, the insured amount of the bridge loan, when added to the amount of any superior liens on the project, may not exceed 95 percent of the project's appraised value as of completion of the improvements, taking into consideration the value of the tax credits.
B.
The insured amount of the bridge loan may exceed the limit set forth in §A of this regulation if 100 percent of the tax credit units in the project are subsidized as to rental payments by the United States Department of Housing and Urban Development for the term of the bridge loan.
C.
The insured amount of the bridge loan may not exceed the amount of the investor's capital contributions.
Regulation .05 Permitted Uses of Insured Loan Proceeds.LinkCopy Citation
A.
The Fund may insure bridge loans only if the loan proceeds are used for acquisition, construction, or rehabilitation and directly related soft costs, including developer fees, syndication fees, and an amount to cover a reasonable profit for the developer, required to complete the project.
B.
If the bridge loan is made from the proceeds of tax-exempt bonds, or other obligations on which the interest is excluded from gross income for federal income tax purposes, the bridge loan may only be used for costs approved by the Department's bond counsel.
Regulation .06 Term of Insurance.LinkCopy Citation
A.
The Fund may insure a bridge loan having a term longer than the term of the Fund's insurance, but the insurance shall expire on the first to occur of the date which is:
(1)
One month after the date on which the investor makes the final payment of all scheduled capital contributions to the borrower; or
(2)
Five years after closing of the bridge loan.
B.
Insurance of the bridge loan shall terminate on the first to occur of:
(1)
A change in the terms and conditions of the bridge loan without the prior written approval of the Fund;
(2)
Five business days following the date on which the investor has made the final payment of all scheduled capital contributions to the borrower;
(3)
Thirty business days after the maturity date of the bridge loan, unless extended with the prior written approval of the Fund;
(4)
Repayment in full of the bridge loan;
(5)
Payment in full of any claim; or
(6)
Expiration of the term of the insurance.
Regulation .07 Collateral.LinkCopy Citation
Bridge loans shall be secured by:
A.
A pledge of the investor's note or notes or other instruments evidencing the investor's obligations to make capital contributions; and
B.
One or more of the following:
(1)
A mortgage on the project, which may be subordinate to mortgages securing new or existing debt on the project;
(2)
A guaranty of payment equal to the insured amount of the bridge loan, backed by assets of quality and liquidity satisfactory to the Fund;
(3)
A guaranty of completion of the project; or
(4)
Such other collateral as the Fund deems appropriate related to the risk of the bridge loan and the project and other factors it deems relevant.
Regulation .08 Superior Mortgagee's Agreement.LinkCopy Citation
The holder of any superior mortgage on the project shall agree that:
A.
The Fund shall have an opportunity to cure any monetary defaults under the superior mortgage;
B.
Any defaults that the Fund is unable to cure shall be suspended for a reasonable period, if the Fund elects to keep current any payments due under the superior mortgage; and
C.
The superior mortgagee shall notify the Fund of any events of default under the superior mortgage.
Regulation .09 Assurance of Completion.LinkCopy Citation
Completion of construction of the project shall be assured by provision of either:
A.
Performance and payment bonds, each in an amount equal to 100 percent of the construction contract amount;
B.
Two irrevocable letters of credit equal to 25 percent, or cash or a pledge of depository accounts equal to 50 percent, of the construction contract amount; or
C.
Other assurances of equivalent value.
Regulation .10 Approval of Project, Loans, and Disbursement.LinkCopy Citation
A.
Before closing of the bridge loan, the Fund shall review and give its written approval to the completed drawings and specifications for the project, and all loans relating to the project, whether junior or senior to the insured bridge loan.
B.
The Fund shall review financial statements and resumes for the general partners, the general contractor, and the management agent for the project. The financial statements shall show adequate liquidity to complete the project for the general partners and a consistent or increasing net worth for the contractor. The general contractor and the management agent shall have successfully constructed or managed, respectively, at least one comparable project and the general contractor shall have a record of timely completion of projects.
C.
The Fund shall approve the total budget for the project and each disbursement of the bridge loan.
D.
After closing of the bridge loan, the Fund shall review and give its written approval to any changes to the plans and specifications, any modifications to the bridge loan documents or documents relating to any superior loans, any change orders, and all requisitions for disbursement of the bridge loan.
Regulation .11 Project Management.LinkCopy Citation
The Fund requires that either the holder of the first mortgage or the Fund be able to require replacement of the management agent, if either the first mortgagee or the Fund in conjunction with the first mortgagee determines that rent-up or other operation of the project is not progressing satisfactorily.
Regulation .12 Insurance Reserves.LinkCopy Citation
A.
The Fund may not permit more than 10 percent of its multi-family reserve to be committed for insurance of bridge loans under this regulation.
B.
Subject to §C of this regulation, the Fund may insure bridge loans from the multi-family reserve or any other monies of the Fund as may be restricted for that purpose. However, the Fund may not:
(1)
Issue insurance under this section payable from the multi-family reserve in an aggregate principal amount greater than 8 times the amount of the multi-family reserve available for insurance of bridge loans; and
(2)
Insure from any source more than an aggregate of $30 million of bridge loans that are not secured by a mortgage.
C.
The Fund shall insure a bridge loan during construction and initial rent-up from restricted funds in the operating fund and may, at its election, insure the bridge loan from the multifamily reserve upon completion of construction and initial rent-up.
Regulation .13 Fees.LinkCopy Citation
The Fund may charge an application fee, closing fee, and insurance premium. The amount of the premium shall be determined on the basis of each insured loan relative to the degree of risk, as determined by the Fund in its sole discretion. The amount of the fees shall be determined by the Fund in its sole discretion.
Regulation .14 Requirements of COMAR 05.06.01.LinkCopy Citation
The requirements of COMAR 05.06.01.06, 07, .10, .11, .18—.21, .23, and .24 shall also apply to bridge loans insured under this chapter.
Chapter annotations
Authority: Housing and Community Development Article, §§3-203 and 3-206, Annotated Code of Maryland
History: Effective date: April 30, 1990 (17:8 Md. R. 976)
History: Regulation .03A amended effective February 1, 1993 (20:2 Md. R. 111)
History: Chapter revised effective October 20, 2008 (35:21 Md. R. 1823)