Course 1 Borrower Organizational Structures and Identifying Principals and Controlling Participants Flashcards
What are the ownership structures permitted by HUD?
General Partnership -
Limited Partnership
Limited Liability Corporation
Corporation (C & S)
Trust
Non-Profit Entities
Condominium
Co-operatives
Joint Venture
What is a General Partnership?
A general partner must have two or more general partners. All partners share in business gains, and each partner is held personally liable. The partnership agreement automatically terminates when any general partner dies.
What is a Limited Partnership?
A limited partnership (LP) must have at least one general partner and one or more (unlimited number) limited partners. All partners participate by pooling funds and can choose whether to be active (general partner) or passive (limited partners).
What is a Limited Liability Company (LLC)?
A limited liability company (LLC) is a legal form of business company offering limited liability to its owners. It is composed of members, with one or more managing members and one or more investor members. Ownership is based on the member’s pro rata share of the capital contribution and managing members as well as investor members are protected from liability.
What is a C Corporation?
A Sub-Chapter C corporations are required to pay income taxes on their profits. There is no limit to the number of shareholders. A disadvantage is that Sub-Chapter C corporations are subject to double taxation. The Sub-Chapter C corporation itself is taxed on its income and then shareholders are taxed on dividends (which is the excess after tax earnings).
What is a S Corporation?
A Sub-Chapter S corporation, is a type of corporation in which the firm’s income is passed through to stockholders in proportion to their investment and taxed at personal income tax rates. Sub-Chapter S corporations can only have one type of stock and are limited to 100 stockholders. This type of corporation provides the same limited liability but avoids double taxation.
What is a Trust?
In a trust structure, the title to real estate is held by a trustee for the benefit of a beneficiary and has one or more trustees. There are several types of trusts: irrevocable, revocable, and business. HUD does allow trusts and mortgage credit is conducted on the trustee or trustees. When a borrower is a trust, the duration of the trust must be equal to or longer than the term of the note.
What is a Condominium?
A condominium is an absolute ownership of a unit in a multi-unit building based on a legal description of the airspace the unit actually occupies, along with a specified share of the undivided interest in the common areas within the development.
What is a Co-Operative?
Each owner in a stock co-operative project is a shareholder in the corporation that holds title to real estate.
What is a Joint Venture?
A joint venture is a business agreement where two parties come together and form a business arrangement. The joint venture must be any other public or private single asset borrowing entity, any combination of acceptable ownership forms can be used to establish a joint venture for purpose of jointly sharing the risks.
How should the organizational chart be set up and what information should be contained in it?
a. Show all tiers of ownership structure
b. Show owner/mortgagor
c. Identify any pass-through entities
d. Identify all participants considered to be active principals or controlling participants
e. Identify passive participants
f. Include percentages of ownership and role in the entity (e.g. limited partner, general partner, managing member)
g. Identify the Section 50 signer
h. List at least 1 natural person, not just entities
i. Each specified capacity must be shown on a separate organizational chart (borrower, operator, management agent)
What type of individual or entity will not require a 2530?
- Wholly owned entities
- Shell entities
- Tax credit investors
- Passive participants who do not have any day-today control
- Minor officers of a corporation
- Members of a Board of Directors of a non-profit or for-profit corporations Board of Directors who do not exercise control over the corporation in another capacity
- Members, partners, stakeholders, and owners of entities with less than 25% interest in an entity are excluded, unless exercising control through another capacity
- Publicly held companies – the CEO, controlling shareholder and any other individual identified as having day-to-day any relevant project manager – must file but the publicly held company shall otherwise be treated as an individual without need for other individual shareholders to file certifications in their individual capacity or identify their social security or tax ID numbers.
- Mortgagees
- Public Housing Agencies
