Eligible Borrowers for HUD 223(f) Loans
If you're an investor or developer who wants to use a HUD 223(f) loan to acquire or refinance a multifamily property, you'll need to make sure you that your borrowing entity has the correct legal structure. In general, HUD 223(f) loans require that the borrower is a single asset, special purpose entity (SPE), which can either be a for profit or a non-profit entity.
What is a Single Purpose Entity (SPE)?
A Single Purpose Entity, or SPE, also known as a special purpose entity is a legal entity created to fulfill a narrow, or specific objective, such as owning and operating an apartment building. Due to the fact that the SPE is a different entity from the borrower themselves, the entity can often remain profitable, even if the borrower faces dire financial issues, such as bankruptcy. Therefore, having an SPE owning the multifamily property protects both the lender and HUD in the case that the borrower runs into financial trouble. In addition to being an SPE, the borrower must be a single-asset entity (SAE). This simply means that the multifamily property should be the only asset that it owns.
How are Single Purpose Entities Structured?
While SPEs can have a variety of structures, they are most commonly structured as a limited liability company (LLC), or as a limited partnership (LP). A limited partnership has general partners, which control the partnership's financial activities, and have unlimited liability. It also has limited partners, which invest, but do not actively participate in the management of the partnership, and do not incur any liability. Both general partners and limited partners can themselves be corporations or LLCs in order to further reduce risk.