FHA Deal Accelerators – 4 Tips for Crafting an “Aerodynamic” Waiver Request (HUD-2)

As lenders and borrowers active in the Department of Housing and Urban Development’s (HUD) multifamily and healthcare facility programs know, not every deal will fit perfectly within the boundaries of HUD’s rules and guidelines. Fortunately, HUD will entertain a request to deviate from the MAP Guide, 232 Handbook and other sources of authority, so long as the request is packaged as a “HUD-2,” the official waiver form.

Among the hundreds of standardized HUD documents, many of which go on for dozens of pages, the HUD-2 is a succinct one-pager, half of which HUD completes. But don’t let the document’s brevity cause you to drop your guard. As part of the HUD assembly line that processed waiver requests, I saw plenty of hastily written HUD-2s get returned to the sender, adding costly (and avoidable) hours to the closing process.

HUD-2s are like paper airplanes. Take the time to design them properly and make the right creases, and your documents will float effortlessly through the HUD approval process. By contrast, a careless design or errant fold will cause a waiver request to fall to earth prematurely, sending you back to the drawing board. Having witnessed my fair share of do-overs, I can offer these tips for crafting an aerodynamic HUD-2:

1. Be precise about what you’d like waived

You and HUD’s closing coordinator may be on the same page regarding the type of relief you need, but other HUD employees less familiar with your deal need to sign the HUD-2. In particular, a HUD attorney reviews every waiver request, and he or she may not instantly grasp what the parties are trying to accomplish. In my former job as HUD counsel, there were plenty of instances where I asked for a revision to the HUD-2 because I simply didn’t understand which specific requirement the lender or borrower wanted HUD to waive. It’s best to precisely describe the provision you are seeking to waive. Compare and contrast the following:

Not Great

Waiver Item (directive number, date, page, paragraph, etc.) — MAP Guide, Section 8.7 — 75% surplus cash rule for secondary financing

Much Better

Waiver Item (directive number, date, page, paragraph, etc.) — MAP Guide, Section 8.7.F(3)(g): With regard to secured public secondary financing, “no more than 75% of the surplus cash may be pledged to the repayment of the subordinate loan(s).”

2. Offer a project-specific justification

The HUD-2 is not the ideal vehicle for offering a critique on the general policies underlying HUD’s requirements. After all, the HUD employees in the field who review waiver requests are charged with implementing policy, not making it. If they decide to waive a requirement, it will not be because they don’t like the underlying policy, but because there is something atypical about the project that makes applying the general policy problematic. So always load up the waiver request with the details that make the project unique and show cause for HUD to relax its standards.

A project-specific rationale also makes the request more appealing to HUD by helping the agency avoid setting a precedent. Imagine a developer requests a waiver of a certain provision for a project in Boston. The Boston office may be inclined to grant the waiver but doesn’t want to open the floodgates for future waivers. It works to your advantage if you anticipate HUD’s fear of setting a precedent and give them reasons to waive that relate strictly to the project under consideration.

3. Point out the previously approved examples

One section of the HUD waiver form allows references to prior examples of similar waivers. HUD completes this section after checking its internal database of waivers for those that are factually comparable. Here’s my inside scoop on the database: its search function makes it challenging for HUD employees to find what they’re looking for. If you have examples of previously approved waivers applicable to your deal, make HUD’s life a bit easier by referencing them in the “Relief Sought” section of the request. Better yet, include a copy of the previously approved waiver. HUD will get more comfortable with your request if they know that granting it won’t put them in uncharted territory.

4. Show HUD how the waiver affects the agency

I recall a conference call from years ago where a lender spoke to a team of HUD employees for 20 minutes straight about why he and his client (the borrower) needed a waiver and how it would benefit them. How the waiver might impact HUD never factored into the narrative. Similarly, many HUD-2s are drafted in a lender-centric fashion, leaving the impression that the requester 1) hasn’t really considered HUD’s perspective, and 2) feels that they should receive a waiver as a matter of course, so long as there is no legal barrier.

The reality is that HUD has significant discretion when it comes to waivers. A waiver request is more likely to succeed if you address a simple question: “What’s in this for HUD?” The answer should relate to HUD’s mission (“this waiver would advance HUD’s mission by creating 200 units of affordable workforce housing in close proximity to public transportation”) or show that the waiver would cause no harm to HUD.

Many HUD employees instinctively adopt a defensive stance when reviewing HUD-2s, wary of “giving away the farm.” You can proactively assuage those concerns by justifying your waiver request in terms that show you appreciate HUD’s stake in the matter.

Putting it all together

The following formula for drafting waiver requests consolidates the guidance above:

While [identify the exact provision in the HUD guidance] normally serves to [describe the underlying policy], applying the rule to [insert project name] would [describe the harm that would occur without a waiver, highlighting the unique aspects of the deal that make applying the rule problematic]. Furthermore, [explain how HUD’s interests are either protected or advanced by the waiver]. Finally, please see attached a previous example from the [insert relevant HUD Office] where this provision was waived.

Every waiver analysis presents its own set of factors to consider. My formula may not work in every scenario, but it provides a suitable starting point for crafting an aerodynamic HUD-2 that sails to the director’s desk without a hitch.

The FHA Deal Accelerator series offers tips for closing FHA deals efficiently.