Sec. 05.04.09.11. Limited Return on Equity

A. As a condition of any group home loan, the borrower is required to meet the conditions of §B, C, or D of this regulation.

B. Equity Participation.

(1) Except as provided in §B(2) of this regulation, the borrower shall remit to the Department, an amount of money at least equal to 25 percent of the difference between:

(a) The greater of:

(i) The gross sales proceeds from a resale of the group home, if any; or

(ii) The appraised value of the group home; and

(b) The sum of:

(i) The current principal balance of the loan;

(ii) The borrower's initial equity contribution;

(iii) Payments of principal made by the borrower on the loan; and

(iv) The documented cost of capital expenditures which directly benefited the group home.

(2) If the Department provides less than 1/2 of the total financing for the project, the percentage to be applied under the provisions of §B(1) of this regulation shall be the percentage of the total financing provided by the Department.

(3) Except as provided in §B(4) and (5) of this regulation, the borrower is obligated to remit the equity participation at the earliest to occur of:

(a) A default under any of the loan documents;

(b) Prepayment of the outstanding principal balance of the loan;

(c) Loan maturity; or

(d) Sale or other transfer of the group home or transfer without the Department’s consent of a controlling interest in the borrower.

(4) Equity Proceeds.

(a) The Department, in its discretion, may agree to defer receiving its share of equity proceeds in the following situations:

(i) The borrower is maintaining the project as a group home after the loan has been prepaid or matured; or

(ii) The borrower has sold the project to a buyer that has agreed to continue the project as a group home, assume the program loan and the equity participation obligation, and comply with all applicable program requirements.

(b) If the Department defers its receipt of equity proceeds, the borrower or the subsequent buyer, as applicable, shall remit the deferred amount of the equity proceeds upon the occurrence of any of the following events:

(i) The current owner fails to operate the project as group home in accordance with the program requirements;

(ii) The sale or other transfer of the group home or a transfer, without the Department's consent, of a controlling interest in the owner of the group home; or

(iii) In the case of an assumed loan, any of the events listed in §B(3) of this regulation.

(5) The Department, in its discretion, may agree to defer receiving its share of equity proceeds for a project that the borrower is selling under the following conditions:

(a) The purpose of the deferral is to facilitate the purchase of a new group home property that the Department will finance;

(b) The equity payment may be deferred one time only;

(c) Either the borrower shall apply:

(i) All of its equity in the group home that is sold to the purchase of a new group home; or

(ii) The same percentage of its equity share to the new group home as the percentage of the Department's equity share that is deferred and applied to the purchase of the new group home;

(d) If the existing group home is sold before the new purchase is made, then the equity to be rolled over into the purchase of a new group home shall be held in escrow by a third party acceptable to the Program director until the new property is purchased;

(e) The borrower may withdraw from escrow, with the written consent of the Program director, an amount needed for a down payment or other preclosing costs approved by the Program director, up to the amount of the borrower's share of equity in the group home that has been sold;

(f) If the funds held in escrow are not applied to the new purchase within 6 months from the sale of the existing group home, then the equity shall be paid to the Department and the borrower, in accordance with their respective shares, after the 6-month period has elapsed;

(g) An equity participation agreement or deed of trust shall be recorded against the new property to secure the Department's deferred equity contribution; and

(h) The value of the property to be purchased shall be greater than or equal to the deferred equity contribution plus any liens superior to the equity contribution.

(6) The Department may, in its discretion, require the borrower to remit all or a portion of the equity participation upon:

(a) Prepayment of a portion of the loan; or

(b) Subsequent financing secured by the group home.

C. Deferred Interest.

(1) The Department may require the borrower to pay deferred interest at an interest rate which is up to 4 percent over the interest rate at which the loan amortizes.

(2) The deferred and accrued interest is payable at the time of sale, transfer, or conveyance of the project, maturity of the loan, or failure to maintain the group home in accordance with the requirements of the loan documents.

(3) The deferred interest shall accrue annually on the anniversary date of the loan based on simple interest on the outstanding principal balance of the loan.

(4) If accrued and deferred interest exceeds the profit from the sale of the group home, the Department may forgive that portion of accrued and deferred interest which exceeds the sale profit.

D. Limited Annual Return. If the Department requires the borrower to enter into an agreement that limits the profit and rate of return on investment, a sponsor may realize an annual return not to exceed 5 percent of its initial equity investment. Initial equity investment is the difference between the replacement cost, as approved by the Department, and the amount of the mortgage loan.