CDBG-DR Small Rental Rehab Subordination ... - HUD Exchange



Subordination Procedures, Form & Guidance

Small Rental Rehabilitation Implementation Tool #5

Description: As part of the Disaster Recovery Small Rental Rehab Program Design & Implementation Toolkit, the Subordination Procedures, Form and Guidance can be adapted and used to subordinate the CDBG-DR grantee’s lien status on the property to another lienholder. In these programs, typically a private bank lender will require that their lien be in first position. In case of default or foreclosure, the lender will be the first party entitled to receive the proceeds generated by the property.

Modification of Source Documents Provided by: State of Mississippi

Caveat: This is an informational tool and/or template that should be adapted to each grantee’s specific program design.

This is not an official HUD document and has not been reviewed by HUD counsel. It is provided for informational purposes only. Any binding agreement should be reviewed by attorneys for the parties to the agreement and must conform to state and local laws.

U.S. Department of Housing and Urban Development

Community Planning and Development, Disaster Recovery and Special Issues Division

SUBORDINATION PROCEDURES, FORM AND GUIDANCE

Procedures & Requirements

Once the Grantee receives a request to subordinate the Covenants, Loan Agreement and/or Deed of Trust ("Covenants") for the Small Rental Assistance Program ("SRAP"), correspondence outlining the requirements below can be issued. It is responsibility of the requestor to provide this documentation to a grantee for evaluation of the request.

A. Requirements for [insert name of administrative entity] Subordinations

1. In support of a request for subordination from [insert name of administrative entity], the documentation identified in Section B below must be submitted to [insert name of administrative entity] for review. The [insert name of administrative entity] reserves the right to require additional information and/or documentation based upon a review of this material.

2. Subordinations will not be granted for a loan which exceeds the difference between the appraised value of the program property and the outstanding indebtedness to [insert name of administrative entity].

3. If the subordination request is for a line of credit, draws from the line of credit must be used for construction, maintenance or management of the program property.

4. The [insert name of administrative entity] program property cannot be used to cross collateralize another loan for non-program property.

5. The [insert name of administrative entity] will provide an executed subordination for the Applicant's loan closing which must include the name of the lender, the amount of the loan as evidenced by the lender's deed of trust, and the date of the deed of trust. The [insert name of administrative entity]’s executed subordination will include blanks for the recording data of the lender's deed of trust. These blanks must be filled in for the recording information for the lender's deed of trust (provided to [insert name of administrative entity] in support of the request for subordination) prior to recordation of the subordination. Other than these blanks, approved forms of subordination which have been executed by [insert name of administrative entity] cannot be materially changed or altered without prior approval of [insert name of administrative entity].

6. The [insert name of administrative entity]'s preference is to only subordinate to permanent financing which has a term that extends beyond the remaining compliance period on the application.

B. Collection of Information and Documentation

1. If construction is not complete or a Certificate of Occupancy has not been issued, a written estimate must be provided of the cost to complete construction.

2. Identification, in writing, must be received on whether or not the subordination is for the purpose of a line of credit, temporary construction loan or permanent financing, and provide [insert name of administrative entity] with a draft of the proposed loan documents – i.e. Promissory Note and Deed of Trust.

3. A copy of a recent (within six (6) months) appraisal of the property must be provided. The appraisal must be an independent appraisal which conforms to the Uniform Standards of Professional Appraisal Practice (USPAP) and cannot be an in-house bank appraisal.

4. A copy of a recent (within six (6) months) preliminary title certificate, title commitment or pro-forma title policy for the program property evidencing the pre-loan status of title, the priority of the Covenants, the priority of other liens or encumbrances on the program property, and the title requirements for the closing of the loan must be provided.

5. A draft closing statement for the disbursement of the loan, evidencing any loans to be paid off, and whether or not the Applicant will be withdrawing equity from the program property must be provided.

6. Identification of the proposed use of the proceeds of the loan must be submitted.

7. Leases for any tenants who reside in the property must be provided.

8. After closing of the Applicant's loan, the following documents must be provided: (1) updated title certificate, commitment or policy; (2) a copy of the recorded subordination and deed of trust; and (3) final closing statement.

C. Documentation Review

When a grantee is in receipt of all the documentation, a comprehensive review will be conducted to verify the requirements are adhered to. The following recommendations will be made and forwarded to the Director: Approved, Denied, or Tabled/Rework.

Subordination Form and Guidance

[This space reserved for Recorder’s Use]

Prepared By: After Recording return to:

SMALL RENTAL ASSISTANCE PROGRAM: SUBORDINATION AGREEMENT TO LOAN AGREEMENT AND DEED OF TRUST AND LENDER’S ACKNOWLEDGMENT OF TENANT LEASES

FOR AND IN CONSIDERATION of the sum of {Insert Amount} Dollars cash in hand paid and other good and valuable consideration, the receipt and sufficiency of all of which is hereby acknowledged, the [INSERT NAME OF ADMINISTRATIVE ENTITY], an agency of the State of [insert name of State], does hereby agree to subordinate the terms and provisions contained in Part C of the following instrument:

Covenants, Loan Agreement, and Deed of Trust executed by _________________________ (“Grantor”) to [insert name of administrative entity], Beneficiary, dated ________________, filed on ____________________ at _____ __.m., and recorded in Book ____, Page _____, in the office of the Chancery Clerk of ____________ County, [insert name of State], in the maximum amount of $_____________, which covers the land described on Exhibit A attached thereto (the “[insert name of administrative entity] Covenants, Loan Agreement and Deed of Trust”),

to that certain Deed of Trust executed by Grantor and dated as of ________________, 20XX, for the benefit of ________________________ (the “Lender”), and recorded in Book ___ at Page ___ of the records aforesaid (the “Lender Deed of Trust”).

1. Subordination. It is the intention of the [insert name of administrative entity] that the terms and provisions of Part C, entitled “Deed of Trust Provisions,” of the [insert name of administrative entity] Covenants, Loan Agreement, and Deed of Trust in its favor be subordinated so as to make the lien thereof as to the real and/or personal property described therein subordinate to the Lender Deed of Trust insofar, and only insofar as it secures the Promissory Note in the amount of ${enter amount} described therein and the premium, if any, and interest earned thereon (the "Stated Amount"), and it is the intention of the [insert name of administrative entity] to subordinate, and it does hereby subordinate, the terms and provisions of said Part C of the [insert name of administrative entity] Covenants, Loan Agreement and Deed of Trust to any future advances made under the Lender Deed of Trust, up to the Stated Amount. This Subordination Agreement applies only to Part C of the [insert name of administrative entity] Covenants, Loan Agreement and Deed of Trust and does not subordinate or have any effect upon or application to the remaining terms and provisions of the [insert name of administrative entity] Covenants, Loan Agreement and Deed of Trust, more specifically, Part A – “Covenants and Agreements” and Part B – “Termination of Agreement; Loan Forgiveness.”

2. Survival of Residential Tenant Leases. This Subordination is granted upon the express condition that, in the event of a foreclosure of the Lender Deed of Trust prior to the termination of the [insert name of administrative entity] Covenants, Loan Agreement and Deed of Trust, all tenant leases executed by Grantor, whether recorded or unrecorded, shall remain in full force and effect and be binding upon the purchaser at the foreclosure sale for the remaining term thereof.

3. Lender Consent. By signing this Agreement, the Lender indicates its consent to the terms and provisions of Parts A and B of the [insert name of administrative entity] Covenants, Loan Agreement and Deed of Trust and its consent to the terms of Paragraph 2 above.

4. Effectiveness. This instrument shall not be binding and effective until execution by both the [insert name of administrative entity] and the Lender.

Other than filling in the blanks for the recording data on page 1 of this instrument, any alterations to the original form of this instrument must be approved by the [insert name of administrative entity].

Executed as of the _____ day of ___________________________, 20XX.

[INSERT NAME OF ADMINISTRATIVE ENTITY]

By: ________________________________

Name:

Title:

[NAME OF LENDER] (Lender)

By: _______________________________

Name: _______________________________

Title: _______________________________

STATE OF [INSERT NAME OF STATE]

COUNTY OF [INSERT NAME OF COUNTY]

Personally appeared before me, the undersigned authority in and for the State and County aforesaid, on this _____ day of ___________________, 2011, within my jurisdiction, the within named [insert name], who acknowledged that he is [insert position title] of the [insert name of administrative entity], an agency of the State of [insert name of State], and that for and on behalf of said agency and as its act and deed, he executed the above and foregoing instrument after first having been duly authorized by said agency so to do.

___________________________________

Notary Public

My Commission Expires: ____________________

STATE OF ________________

COUNTY OF ______________

Personally appeared before me, the undersigned authority in and for the State and County aforesaid, on this _____ day of ____________________, 20XX, within my jurisdiction, the within named _________________________________, who acknowledged that he/she is _________________ of ______________________________________________, a __________________________, and that for and on behalf of said ____________________ and as its act and deed, he/she executed the above and foregoing instrument after first having been duly authorized by said ____________________ so to do.

___________________________________

Notary Public

My Commission Expires: ____________________

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For More Information

This resource is part of the Disaster Recovery Small Rental Rehab Program Design and Implementation Toolkit. View all of the Disaster Recovery Toolkits here: .

For additional information about disaster recovery programs, please see your HUD representative.

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