HUD Borrower Entities, Principals and Key Principals

Key points

• The borrower must be a single asset entity registered in the United States; natural persons, Delaware statutory trusts, Maryland business trusts, foreign entities and tenants in common cannot be the borrower.
• Under the March 2021 MAP Guide, owners of 25 percent or more (10 percent for corporations) are principals, and anyone with control is reviewed regardless of percentage.
• Key principals sign the regulatory agreement and are personally liable to the extent it provides, which is how HUD's non-recourse carve-outs work.
• Controlling participants file previous participation certification through HUD's electronic system or form HUD-2530.
• The organizational chart must show every tier to the ultimate equity source, reconcile to 100 percent, and name at least one natural person.

The single asset borrower

HUD requires a single asset borrower for every multifamily insured project. Acceptable forms include general and limited partnerships, corporations, LLCs, trusts whose term is at least as long as the note, nonprofit corporations, and joint ventures, as long as the borrower itself is single asset. Natural persons, Delaware statutory trusts, Maryland business trusts, foreign entities and tenants in common cannot be the borrower, though they can own interests in it.

Owners coming off a bridge loan often hold property in an entity that has other assets or a tenancy-in-common structure. Plan the conversion early: forming a new borrower, transferring title, and amending operating agreements to include HUD's required provisions all take time and may have transfer tax consequences.

Who HUD treats as a principal

The MAP Guide defines principals as individuals and entities with operational or financial control of the project. Active principals direct and control the borrower, regardless of ownership percentage. Under the March 2021 guide, any party with 25 percent or more ownership, reduced to 10 percent for corporations, is a principal, and passive investors at that level are passive principals. A general contractor with more than a 10 percent ownership interest is also treated as a principal. Confirm current thresholds under HUD guidance.

Active principals must show experience with properties comparable in kind and scale, meaning similar size, building type, financial profile, tenant population and transaction type. Reviews include credit reports, financial statements, a schedule of real estate owned, and searches of federal debarment, delinquency and sanctions databases. Principals whose total FHA-insured debt would exceed $500 million need prior approval. Large loans carry extra requirements; the March 2021 guide asks principals of large loans, primarily those above $75 million, to show aggregate net worth of at least 20 percent and liquidity of at least 7.5 percent of the loan amount.

Key principals and carve-out liability

HUD loans are non-recourse, with standard carve-outs. The carve-outs are enforced through Section 50 of the regulatory agreement, and the parties who sign it are commonly called key principals. HUD's required organizational document language states that the key principals identified in the regulatory agreement are liable in their individual capacities to the extent set out in that agreement.

For privately held sponsors, the MAP Guide says the provision generally requires two signatures: an individual signing personally and the sponsor entity signing in a corporate capacity. An entity with enough control, credit and financial strength may serve as sole signatory, and the lender can point to a recent Fannie Mae, Freddie Mac or Federal Home Loan Bank deal where that entity was approved for similar carve-out provisions. For publicly traded companies, REITs and nonprofits, the parent entity can be the sole signatory and individuals signing for it do not take personal liability.

Previous participation review

Controlling participants must certify their history with HUD and other federal housing programs, either electronically or on form HUD-2530. Firm commitments are typically conditioned on that approval. Flags such as past defaults, unresolved findings or enforcement referrals do not always block a deal, but they need explanation and resolution, and a concept meeting may be required.

Preparing the structure and org chart

The organizational chart drives both underwriting and previous participation review. It must show every ownership tier from the borrower to the ultimate equity source, give each entity's legal name, type and ownership percentage, reconcile each tier to 100 percent, list at least one natural person, and mark who signs Section 50. Widely held interests can be grouped. Public companies should show their exchange and ticker.

Most delays come from structure changes mid-process: a new investor admitted after the firm application, a change in managing member, or a fund vehicle whose investors were not disclosed. Settle the capital stack before applying.

• Borrower formation documents and good standing certificates
• Operating agreement with HUD-required provisions
• Full organizational chart with percentages at each tier
• Personal and entity financial statements, real estate schedules and credit authorizations
• Previous participation certifications for each controlling participant

Where to go next

For common questions on HUD borrower requirements, see HUD loan FAQ.

For Bravo's 223(f) requirements, see HUD 223(f) loans.

Related guides: The First-Time Borrower’s Guide to a HUD Exit; Using a HUD Refinance to Buy Out a Partner; Changing Management Companies before a HUD Refinance; Bridge-to-HUD Document Checklist by Stage.

Related terms: What Is a Key Principal in a HUD Loan?; Single Asset Entity: Why HUD Requires a Special-Purpose Borrower; Previous Participation (2530) Review in HUD Lending; Non-Recourse Carve-Outs: Where HUD Personal Liability Applies.

For portfolio figures by state, metro and program, see the HUD multifamily data hub. Bravo Capital’s record: all 26 HUD firm commitments received since April 2022 have closed, totaling $526.0 million (HUD Closing Scorecard).