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In brief

Non-recourse carve-outs are the specific exceptions under which named principals of a HUD borrower become personally liable despite the loan being non-recourse. The multifamily Regulatory Agreement's Section 50 Addendum limits that liability to three categories: project funds or property received that the party was not entitled to keep, authorizing an unapproved transfer or encumbrance of the property, and the party's own acts (or acts it authorized) in violation of the addendum. Liability survives foreclosure, so the carve-outs matter long after a loan goes bad.

Written by Bravo Capital, a HUD-approved MAP and LEAN lender. Bravo’s Bridge-to-HUD page covers how it finances these transactions.

Key points

  • The HUD loan is non-recourse for payment of the note and reserve deposits.
  • Section 50 parties are named in the firm commitment and sign the addendum.
  • Liability focuses on misuse of project funds and unauthorized transfers.
  • Obligations survive foreclosure, deed in lieu, and termination of the Regulatory Agreement.
  • HUD's carve-outs are narrower than many conventional loan guaranties, but the conduct they cover is common.

How HUD non-recourse is structured

The MAP Guide says the HUD mortgage note contains a non-recourse provision as to the borrower entity, but certain parties may be held personally liable for losses arising from bad acts and malfeasance as set out in the Regulatory Agreement, and those parties are identified in the firm commitment. In the multifamily Regulatory Agreement, Section 50 incorporates an addendum that names each Section 50 party.

The addendum states that each named party does not assume personal liability for payments under the note and security instrument, for reserve deposits, or for matters not under its control. Each is personally liable only for the matters listed.

What the Section 50 carve-outs cover

These obligations survive foreclosure, a foreclosure sale, a deed in lieu, termination of the Regulatory Agreement and release of the security instrument. Separate federal statutes also give HUD civil and criminal remedies for misuse of project assets, so carve-out exposure is not the only consequence of diverting funds.

  • Funds or property of the project coming into the party's hands that it is not entitled to retain under the agreement.
  • Authorizing a conveyance, assignment, transfer, pledge, encumbrance or other disposition of the property or any interest in it in violation of Section 35(a), without HUD's prior written approval.
  • The party's own acts and deeds, or acts of others it authorized, in violation of the addendum.

How carve-out liability arises in practice

The first category is the one sponsors most often trigger, usually without intending to. Examples include distributions taken when the property did not have true surplus cash, repaying owner advances without HUD approval, paying affiliates more than the Regulatory Agreement allows, using tenant security deposits for operations, and keeping rents collected after a default. The second category arises when owners pledge membership interests to a mezzanine lender, admit a new controlling partner, or record a second mortgage without HUD approval.

Each of these is avoidable with ordinary controls: separate property accounts, a compliance review before any distribution, HUD approval before changes in ownership, and auditors who flag issues early.

Carve-outs when moving from a bridge loan to HUD

Bridge loans typically come with a sponsor guaranty package: completion, carry or interest guaranties and a broad bad-boy guaranty covering bankruptcy filings, environmental liabilities and more. Moving to a HUD loan usually narrows the sponsor's personal exposure. That is a real benefit, but it comes with operating discipline: HUD's carve-outs focus on how money moves and who controls the property, which are exactly the areas where bridge-era habits differ.

At the HUD closing, make sure bridge-era arrangements that would violate the Regulatory Agreement, such as pledges of interests, affiliate loans and asset management fees from operations, are terminated or conformed. Leaving them in place is a direct path to carve-out exposure.

What principals should watch for

Know who signs. The Section 50 parties are named in the firm commitment, and individuals should understand what they are signing before closing. Put written procedures in place for distributions and affiliate payments. Treat any change in the org chart as a HUD approval question. And in distress, stop distributions and communicate with the servicer early; the carve-outs are designed to punish diversion, not market downturns.

How carve-outs connect to other HUD terms

Non-recourse carve-outs sit inside the Regulatory Agreement and depend on its surplus cash and prior-approval provisions. They apply to the key principals HUD underwrites, and the transfer carve-out is the reason a Transfer of Physical Assets is required before ownership changes.

Where to go next

For how HUD's recourse terms compare with other permanent debt, see HUD vs agency and bank loans.

For common sponsor questions, see HUD loan FAQ.

Related guides: HUD Borrower Entities, Principals and Key Principals; After the HUD Closing: Asset Management Obligations; How to Structure a Bridge Loan Around the HUD Exit.

Related terms: What Is a Key Principal in a HUD Loan?; Regulatory Agreement: The HUD Contract That Governs Operations; Surplus Cash: How HUD Limits Owner Distributions; Transfer of Physical Assets (TPA): How HUD Loan Assumptions Work.

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).

Primary sources

This page is based on public guidance from the U.S. Department of Housing and Urban Development. Program rules are transaction-specific and subject to change.

Common questions

Frequently asked questions

Is a HUD loan really non-recourse?

Yes for repayment. The borrower and principals are not personally liable for the debt itself, but named Section 50 parties are personally liable for the specific bad acts listed in the Regulatory Agreement addendum.

Does a bankruptcy filing trigger personal liability on a HUD loan?

The Section 50 Addendum does not list bankruptcy filing as a carve-out, unlike many conventional springing guaranties. Review the full loan documents with counsel, since other provisions and federal law still apply.

Who are the Section 50 parties?

They are the individuals or entities named in the firm commitment, typically the key principals who control the borrower. They sign the addendum at closing.

Editorial review

Created by Bravo Capital, a HUD-approved MAP and LEAN lender, and expert-reviewed by the Bravo Capital HUD Underwriting Team. Last updated . This page is educational and is not a credit decision or commitment to lend.