What Is a Key Principal in a HUD Loan?

Key points

• HUD looks through the single asset borrower to the people and entities that control it.
• The MAP Guide treats anyone with 25% or more ownership (10% for corporations), or with decision-making control regardless of percentage, as a principal subject to review.
• Key principals sign the Section 50 non-recourse addendum, which makes them personally liable only for listed bad acts.
• Principals with more than $500 million of FHA-insured debt need HUD prior credit approval before a new application, per the 2020 MAP Guide.
• Adding or removing a principal after closing generally requires HUD approval through a Transfer of Physical Assets.

How HUD defines the people behind the borrower

Every HUD multifamily and healthcare loan is made to a single asset entity, usually a newly formed LLC or limited partnership that owns only the subject property. Because that entity has no history of its own, HUD underwrites the people and companies above it. The 2020 MAP Guide describes principals in three contexts: parties with financial or legal control of the borrower, parties who will execute Section 50 of the Regulatory Agreement, and parties who must disclose for previous participation review.

The guide separates Active Principals, who direct and control the borrower regardless of their equity percentage, from Passive Principals, who hold a large ownership stake but have no operational authority. The ownership trigger in the guide is 25% or more, reduced to 10% or more for corporations. In everyday deal language, key principal usually means the active sponsor individuals and the sponsor entity whose names appear in the firm commitment and the Section 50 addendum.

What the lender and HUD review

Key principal underwriting is not a formality. The MAP Guide calls for experience with properties comparable in kind and scale to the subject, meaning similar size and building type, similar financial profile, similar tenant population and similar transaction purpose. A sponsor whose experience is suburban garden apartments may face questions on a high-rise with ground-floor retail, and a multifamily owner buying a skilled nursing facility will be judged on the operator it brings in.

• Personal or entity financial statements and a schedule of real estate owned with debt detail.
• Credit reports for individuals and entities.
• Searches of SAM.gov, OFAC and HUD delinquency and default records.
• Previous participation disclosure covering prior HUD and other federally assisted projects.
• Liquidity and net worth adequate for the deal, including any cash needed at closing.

What a key principal is actually liable for

The HUD Regulatory Agreement states that the loan is non-recourse. Its Section 50 Addendum names the individuals or entities who do not assume personal liability for loan payments or reserve deposits, but who are personally liable for three categories of conduct: keeping project funds or property they are not entitled to retain, authorizing a transfer or encumbrance of the property without HUD approval, and their own acts (or acts they authorized) that violate the addendum. Those obligations survive foreclosure.

In practice the most common way a sponsor gets into trouble is the first category: taking distributions that were not true surplus cash, or paying affiliates out of project accounts without approval. Treat the project operating account as belonging to the property, not to the sponsor group.

Where key principals show up in a bridge-to-HUD deal

The bridge lender and the HUD lender often look at the same sponsor, but they ask different questions. A bridge loan may be sized on business plan and sponsor guaranty. The HUD exit will be sized on in-place operations, and the HUD lender will want the same principals to carry through from bridge to permanent loan. If the ownership group plans to bring in new equity, buy out a partner or change the managing member before the HUD refinance, do it early enough that the final org chart is the one submitted with the firm application.

Changes made after the firm commitment can force re-underwriting or an amended commitment. Changes made after closing generally require a Transfer of Physical Assets review.

What sponsors should watch for

Most key principal problems are disclosure problems. A previous participation issue that is explained up front is usually manageable. The same issue discovered by HUD during review slows the file and damages credibility.

• Unresolved defaults, delinquencies or adverse previous participation history on any prior HUD property.
• Large FHA portfolios that approach the prior credit approval threshold, which adds a separate review step.
• Org charts that hide control: HUD looks at decision-making authority, not only percentages.
• Foreign nationals or foreign entities in the structure, which carry added review requirements in Chapter 8 of the MAP Guide.
• Section 50 signers who do not understand the bad-act provisions they are signing.

How key principal interacts with other HUD terms

Key principals sit at the intersection of several concepts. The single asset entity is the borrower they control. The Regulatory Agreement is the contract that binds them. Non-recourse carve-outs define their exposure. Previous participation review (the 2530 process) screens their history. And a Transfer of Physical Assets is the process used when principals change after closing. Reading these terms together gives a sponsor an accurate picture of what HUD expects for the life of the loan, which can run 35 years on a 223(f).

Where to go next

For how Bravo structures bridge loans that exit into HUD permanent debt, see Bridge-to-HUD financing.

For common sponsor questions about HUD loans, see HUD loan FAQ.

Related guides: HUD Borrower Entities, Principals and Key Principals; The First-Time Borrower’s Guide to a HUD Exit; Using a HUD Refinance to Buy Out a Partner.

Related terms: Single Asset Entity: Why HUD Requires a Special-Purpose Borrower; Non-Recourse Carve-Outs: Where HUD Personal Liability Applies; Previous Participation (2530) Review in HUD Lending; Regulatory Agreement: The HUD Contract That Governs Operations.

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).