Marks Paneth Comments on HUD's Proposed Changes to §200.216

By William H. Jennings  |  October 8, 2015  |  Download PDF

Retrospective Review - Improving the Previous Participation Reviews of Prospective Multifamily Housing and Healthcare Programs Participants 
(Docket No. FR-5850-P-01)

Marks Paneth LLP (“Marks Paneth”) respectfully submits the following comments in response to the proposed rule improving the previous participation reviews process. Marks Paneth provides accounting, tax, and advisory services to real estate investors nationwide.

In these comments, we are addressing the proposed §200.216 (Controlling Participants).

§200.216 (Controlling Participants)

The proposed rule will introduce a new concept of “Controlling Participants” to replace “Principal” in the existing rule. Under the proposed rule, Department of Housing and Urban (“HUD”) will only seek information from “Controlling Participants” for previous participation review. “Controlling Participants” include individuals or entities who can exercise control of the project’s operation and finance. §200.216(b) further defines “control” meaning ownership greater than or equal to 25%, or individuals who have the ability to bind the entity in the “Triggering Event” that requires review of previous participation under §200.218.

Marks Paneth, while cognizant of the time-saving measures that HUD is attempting to implement as a result of this proposed change, is skeptical regarding the proposed rule about narrowing down the individuals or entities that are subject to previous participation review. We believe the proposed §200.216 will increase the risk of allowing unqualified individuals or entities to participate in HUD projects, hence opening up the opportunity for abuse of HUD Multifamily and Healthcare Programs.

The current rule requires almost all individuals or entities who participate or own interest(s) in a HUD project to be subject to a stringent review and vetting process, prior to admission into the HUD programs. This includes any affiliates (legal counsel, engineers, and architects) of a principal, as well as related parties of the principals. Under HUD’s new proposed ruling, these individuals and entities may no longer be subject to previous participation review. However, omission from the screening process does not mitigate their indirect influence on the project.

Our concern is that individuals or entities excluded from previous participation review under the proposed rule may have significant influence on the project’s finances and operations. Ownership of project can be purposely structured to shield certain disqualified individuals from the scope of previous participation review under the new process.  For example, any executive, director or stakeholder with greater than 10% of ownership of any entity deemed a principal under the current rule, are subject to previous participation review.  However, this population of “participants” in and under the proposed rule are not part of the scope of the review process.

In conclusion, we recognize the proposed rule will streamline the process and provide more transparency of the process of previous participation review. On the other hand, HUD has never been immune to the circumvention of its loopholes, and the reduction of information collected from participants may increase the risk of fraud and abuse related to HUD programs. 

About William H. Jennings

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William H. Jennings, CPA, is a Partner in the Real Estate Group at Marks Paneth LLP. Mr. Jennings served on the Marks Paneth Executive Committee, which sets policy and strategy for the firm, from its inception until 2019. He is Past Partner-in-Charge of the Real Estate Group and Past Partner-in-Charge of the firm’s Boca Raton, Florida office. With more than 35 years of experience in public accounting and a keen focus on the real estate... READ MORE +

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