501(c)(3) Organizations in Relation to HUD 223(f) Loans

501(3)(c) organizations are charitable entities (i.e. trusts, corporations, etc) that are exempt from paying federal income tax. 501(c)(3) is the most common type of nonprofit and/or charitable organization in the US. Common examples are churches, universities, and charitable foundations. Some 501(c)(3) organizations use HUD 223(f) loans to acquire or refinance affordable properties for certain underserved populations.

501(c)(3) ORGANIZATIONS, LIHTC CREDITS, AND THE HUD SECTION 8 PROGRAM

501(c)(3) organizations that decide to acquire or refinance a property with a HUD 223(f) loan may decide to take advantage of the HUD Section 8 program, which offers both relaxed underwriting requirements and permits higher LTV ratios than market-rate HUD 223(f) loans. Specifically, the HUD Section 8 program offers housing vouchers to low-income families, and, in exchange, offers building owners a specific per-unit subsidy. This can be beneficial, since it guarantees a steady source of income for building ownership, but it has the potential downside of preventing the owner from raising rents. This, however, is likely of much less concern to non-profit borrowers.

In most cases, 501(c)(3) borrowers cannot take advantage of the Low-Income Housing Tax Credit (LIHTC) program, since, as charitable organizations, individuals are not allowed to financially benefit from their activities.

To recap, the LIHTC program offers a 10-year tax credit for investors who agree to reserve a certain number of units for low-income residents. Investors or owners using LIHTC credits must typically follow one of two rules; the 20/50 rule, which mandates that 20% of a building’s units are reserved for tenants making 50% or less of the area median income (AMI), or the 40/60 rule, which mandates that 40% of a building’s units are reserved for tenants making 50% or less than the area median income.

Additional Information About 501(c)(3) Organizations and HUD 223(f) loans

As 501(c)(3)s are intended to be charitable organizations, no individuals or private shareholders may benefit from them. The name comes from 501(c)(3) of Title 26 of the United States Code under which these bodies are approved by the IRS. To learn more about how to make sure your organization is classified as a non-profit by HUD, check out HUD’s guide to becoming a non-profit.

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