Chapter 3: Commit to Project and Construct Units 100
• Disbursement order and procedures. Most lenders and developers assume that public
funds like HOME should be the first disbursed to a project, as these funds usually have the
lowest interest rates. However, the first dollars disbursed are the riskiest dollars in the
project. The PJ has a number of competing needs to balance when negotiating this point. To
equally share risk with the other investors, the PJs may want to seek pro-rata distribution
from the various sources. By investing HOME funds early in the construction process,
however, the PJ may be able to reduce the need for construction financing, thereby reducing
the cost of the project, and reducing the overall need for HOME funds. Additionally, if the PJ
funds are invested early and the contribution of equity from the LIHTC investor is delayed,
this may result in a higher price for the tax credits (as discussed in Chapter 2).
• Enforcement of provisions. The PJ needs to be able to enforce all HOME rules, both during
construction and in occupancy. Typical subordination requirements limit a junior lien
holder’s ability to enforce provisions without the consent of the senior lien holder. This needs
to be resolved in advance. Senior lenders will need assurance that rule enforcement will not
jeopardize the viability of the project.
• Foreclosure rights and procedures. In the event of default and foreclosure, the senior
lender usually wants to reserve all rights to itself, and to be able to proceed as necessary
toward foreclosure, unfettered by junior lien holders. However, PJs need to communicate
their repayment risk in the event of foreclosure, and secure agreement with the senior lien
holder to give the PJ rights to prevent foreclosure or take action in lieu of foreclosure to
ensure continued affordability. Senior lien holders cannot be expected to have endless
patience, but may accept terms which provide for a notification of delinquency to the PJ and
forbearance on foreclosure for a short period of time to allow the PJ to intervene, correct the
default, and even assume or assign control.
These and other issues are usually contained in an inter-creditor agreement, which must be
negotiated among the lien holders. PJs should not assume that the other lenders understand the
repayment risk of the PJ. PJs need to communicate this issue to the lenders, and negotiate for the
rights the PJ needs to protect its interest.
Inter-creditor negotiations also might address longer-term control issues, including balloon debt,
partnership buyouts, and other long-term strategies. This is important to a PJ. A newly
constructed tax credit project has a HOME compliance period of 20 years, while the partners can
be bought out in 15 years, and the senior debt might be structured to this term. This issue is
explored in more detail in Chapter 6 of this guide.