July 1, 1996 PRESERVATION LETTER NO. 6 MEMORANDUM FOR: Directors of Housing Multifamily Housing Directors Multifamily Production Chiefs Multifamily Asset Management Chiefs Preservation Coordinators /s/ FROM: Nicolas P. Retsinas, Assistant Secretary for Housing - Federal Housing Commissioner, H SUBJECT: Implementation of Housing Opportunity Program Extension Act of 1996, the Department of Veterans Affairs, Department of Housing and Urban Development and Independent Agencies Appropriations Act, 1996 On April 26, 1996, the President signed the Department of Veterans Affairs, Department of Housing and Urban Development and Independent Agencies Appropriations Act, 1996. The Appropriations Act provides $624 million plus authority to use interest reduction payment recaptures resulting from mortgage prepayments or terminations, for preservation activities for Fiscal Year (FY) 1996. Program design requirements for the FY 1996 preservation program were initially contained in the Housing Opportunity Program Extension Act of 1996, which was signed on March 28, 1996. Now that full funding for the program has been provided, we must move swiftly to implement the program and provide the maximum time possible to tenants, owners, purchasers and HUD to accomplish the processing necessary to complete program activities before the end of the FY. We will be issuing guidance via a series of preservation letters and questions and answers (Q's & A's). The attached Q's & A's, which include the Q's & A's from Preservation Letter Nos. 2, 4, and 5, will provide guidance to you as we continue implementation of the FY 1996 program. Please continue to fax your questions to the Preservation Branch at (202) 708-1300. Responses will be included in future preservation letters. If this line is busy, you may use (202) 708-3104. You should share this information with program participants (i.e., owners, housing consultants, tenant organizations, nonprofit housing organizations, and mortgagees, etc.). Any questions relating to the Preservation program should be addressed to Kerry Mulholland of the Preservation staff at (202) 708-2300, and questions relating to Public Housing certificates or vouchers should be addressed to Gerald Benoit at (202 708-0477. Attachment PRESERVATION LETTER NO. 6 Preservation Acronym Lexicon - Designates a new Question and Answer * - Designates a Revision to an existing Question and Answer AMB - ASSET MANAGEMENT BRANCH. Area within the HUD Field Office responsible for maintaining information on the physical, financial and other relevant information on the preservation project. ELIHPA - EMERGENCY LOW INCOME HOUSING PRESERVATION ACT. Title II of the Housing and Community Development Act of 1987. Designed to prevent the loss of affordable housing units. EPE - EXTENSION PRESERVATION EQUITY. Owner's equity from Form HUD 9607, adjusted for principal repayment and reasonable value fluctuations for condition since the issuance of the form. Calculated as Extension Pres. Value (Highest and Best Use) EXTENSION ACT - Housing Opportunity Program Extension Act of 1996. FH&EO - Fair Housing and Equal Opportunity. The area in HUD responsible for determining whether there are any findings of noncompliance with the Fair Housing Act, Title VI of the Civil Rights Act of 1964, Exec. Order 11063, Sec. 504 of the Rehabilitation Act of 1974. FMR - FAIR MARKET RENT. Calculated rental rate determined by the Secretary for use in facilitating Section 8 rental payments and ceilings. LIHTC - LOW INCOME HOUSING TAX CREDITS. Form of assistance used by some deals to attract investors into an affordable housing deal. Generally discouraged in Preservation deals. LOCCS - LINE OF CREDIT CONTROL SYSTEM (See VRS). Automated accounting system used by HUD to distribute on-going grant fund disbursements, i.e., rehabilitation funds, oversight costs, and approved consultant fees. MCE - MORTGAGE CREDIT EXAMINER. This HUD Staff person is responsible for reporting on the project's financial requirements as well as the credit capacity of the mortgagor, its principals and the general contractor if any. Additionally, the MCE sets the bonding requirement and the mortgage amount. NOI - NOTICE OF INTENT FORM HUD-9608. Sent by owner to HUD and other required entities to let them know the owner(s) are interested in participating in the preservation process under either Title II or Title VI. PRESERVATION LETTER NO. 6 OCAF - OPERATING COST ADJUSTMENT FACTOR. Factor applied only to operating expense items to insure adequate coverage for inflationary conditions adjusted for vacancy, management fees, and, in case of priority purchaser, oversight costs. OPH - Office of Public Housing located in the State or Area HUD Office. PC - PRESERVATION COORDINATOR. Staff person(s) in each processing Office designated as the point of contact for all preservation related processing and information for a given office. PCNA - PRESERVATION CAPITAL NEEDS ASSESSMENT. Report which was made during the pre-appraisal processing stage to identify the condition of the property, and estimate the cost associated with the needed repairs. PIH - Office of Public and Indian Housing located in Headquarters. PHA - The local Public Housing Authority or the State Housing Authority POA - PLAN OF ACTION. Documentation submitted by Purchaser and Owner that details how the affordable restrictions will be maintained in the project, as well as how grant funds will be allocated. PPR - PRESERVATION PROJECT RENT. The Preservation Project Rent has two components, the GRP (Gross Rent Potential) which is all expected rental income from units and other operations, plus all approved tenant utility allowances. RIS - RESIDENT INITIATIVES SPECIALIST. Staff person in select Offices who has the responsibility of maintaining relationships with nonprofit entities throughout the field office's jurisdiction. TPA - TRANSFER OF PHYSICAL ASSETS (PACKAGE). The documentation needed to be submitted to HUD to allow for a change in ownership under the Low Income Housing Preservation and Resident Homeownership Act. TPE - TRANSFER PRESERVATION EQUITY. Owner equity from Form HUD 9607 adjusted for principal repayment since issuance and changes in value due to condition since issuance of the 9607. Calculated by taking Transfer Preservation Equity value less outstanding balance of federally assisted mortgage(s) for the project. PRESERVATION LETTER NO. 6 TPV - TRANSFER PRESERVATION VALUE. Value established and reported on FORM HUD-9607, which represents the Fair Market Value based on its highest and best use. VRS - VOICE RESPONSE SYSTEM (See LOCCS). The voice activated automated system used by HUD for requesting and disbursing approved and allocated grant funds. NOTE: Termination of mortgage insurance is requested by the mortgagee to HUD, at the request of the owner. Prepayment and termination of mortgage insurance is used interchangeably in the statute. Whenever either of these terms is used, it shall mean both. IMPLEMENTATION OF HOUSING OPPORTUNITY PROGRAM EXTENSION ACT OF 1996 PRESERVATION QUESTIONS AND ANSWERS I. TENANT PROTECTIONS * Q1. What are tenants' rights when an owner prepays/ terminates mortgage insurance? A1. a. Owner cannot raise rents for 60 days from date of prepayment. b. An unassisted low- or very low-income family residing in the project may be eligible for a Preservation Section 8 certificate or voucher. (See Q2 and A2 below.) c. A tenant living in a Section 8 project-based assisted unit under an existing Housing Assistance Payments (HAP) contract may continue to reside in the project until the contract expires. The tenants may receive a Section 8 certificate or voucher when the HAP contract expires, subject to the availability of funds, and the tenant's eligibility. d. Tenants in low-vacancy areas and special needs tenants are addressed in Q's and A's 3, 4, and 5 below. e. Owners' responsibilities relative to relocation expenses are addressed in Q14 and A14 below. f. Owners must provide tenants and HUD with 1 year's written notification of termination or expiration of Section 8 project-based assistance. Prepayment of the mortgage or termination of the mortgage insurance contract does not release the owner from the statutory duty. See Section 8(c) of the U. S. Housing Act of 1937 (42 U.S.C. Section 1437f) . * Q2. How do unassisted low- and very low-income tenants qualify for Preservation Section 8 certificates or vouchers? A2. The Balanced Budget Down Payment Act, II states: a. Notwithstanding any other provision of law, subject to the availability of appropriated funds, each unassisted low-income family residing in the housing on the date of prepayment or voluntary termination whose rent, as a result of an increase occurring no later than 1 year after the date of the prepayment, exceeds 30 percent of adjusted income, shall be offered tenant-based assistance in accordance with Section 8 . . . under which the family shall pay no less for rent than it paid on such date . . . . Any family receiving tenant- based assistance . . . may elect: 1. to remain in the unit of housing and if the rent exceeds the Fair Market Rent (FMR) or payment standard, as applicable, the rent shall be deemed to be the applicable standard, so long as the administering PHA finds that the rent is reasonable . . . or 2. to move from the housing and the rent will be subject to the FMR or payment standard, as applicable, under existing program rules and procedures. b. There are three events that must occur before Section 8 tenant-based assistance can be provided: 1. Tenant must qualify; 2. The owner of the preservation eligible project must either prepay its mortgage or terminate the mortgage insurance contract; and 3. The owner must raise rents on the unassisted units in the project at some point during a 1-year period after prepayment or termination of the mortgage insurance contract, and the rent of the low-income or very low-income family which was residing in the project on the date of prepayment or voluntary termination (and that is to be provided Section 8 tenant-based assistance) exceeds 30 percent of the family's adjusted income. However, no family shall pay less for rent then it paid on the date of prepayment or termination of the mortgage insurance. Q3. What is a low-vacancy area? A3. A low-vacancy area is defined as a Metropolitan Statistical Area (as defined by Office of Management and Budget) with a rental vacancy rate of 3 percent or less. If there are questions whether the current vacancy rate is 3 percent or less, the Preservation Coordinator should request a determination from the Economic and Market Analysis Section as to the current rental vacancy rate. * Q4. Who are special needs tenants? A4. Special needs tenants include those elderly persons [62 years of age or older], elderly families, or families that include disabled persons. Special needs tenants also means large families of five or more persons requiring units with three or more bedrooms. Special needs tenants may be either moderate-income or low- or very low-income. * Q5. What are the rights of tenants in a low-vacancy area and/or special needs tenants? A5. Section 223(c) of LIHPRHA requires that each owner that prepays/terminates mortgage insurance on eligible low- income housing in a low-vacancy area or eligible low- income housing that contains special needs families shall allow the families occupying units on the date of submission of the initial notice of intent to remain in the housing for a 3-year period at rent levels existing at the time of prepayment [except for increases necessary for increased operating costs]. Section 223(c) applies to the following classes of tenants provided they were residing in the project on the date the owner submitted the first Notice of Intent. a. Moderate-income and market rate special needs tenants. b. Moderate-income and market rate tenants in low- vacancy areas. c. Unassisted low- and very low-income tenants whose rents are not raised during the first year following prepayment of the mortgage or termination of the mortgage insurance contract and who live in a low-vacancy area. d. Unassisted low- and very low-income tenants whose rents are not raised during the first year following prepayment of the mortgage or termination of the mortgage insurance contract and who are special needs tenants. Q6. Section 223(c) protects certain tenants residing in the project on the date the owner submitted the first NOI. What happens where an owner prepays without ever filing an NOI? A6. Where an owner never filed an NOI, use the mortgage prepayment date or the insurance termination date. * Q7. Since Section 223 is only found in LIHPRHA, does it also apply to Title II projects? A7. No. Section 223 is not applicable to Title II projects. Q8. What happens if the owner chooses to convert his/her rental project to condominium? A8. If an owner chooses to convert his/her project to a condo, he/she may meet the requirements of Section 223(c) by providing such assistance necessary for the tenant to rent a decent, safe, and sanitary unit in another project for the same period and at a rental cost to the tenant not in excess of the rental amount the tenant would have been required to pay in the housing of the owner, except that the tenant must freely agree to waive the right to occupy the unit in the owner's housing. Q9. Will HUD provide the Public Housing Authority/State Agency (PHA) enough funds for Preservation Section 8 certificates or vouchers, to cover eligible unassisted families as their leases expire? A9. Yes. HUD's number one priority in the Preservation program is to ensure that tenants are protected when an owner prepays the mortgage or terminates the mortgage insurance contract, and, within 1 year following prepayment or termination, raises the rent. To date, based on current needs' estimates, the Office of Housing has provided $10 million of "Preservation dollars" to the Office of Public Housing for distribution to PHA for Preservation Section 8 certificates or vouchers for unassisted low- and very low-income families residing in the project when the prepayment or termination occurred. Additional funding will be provided as needed for tenant protections subject to availability of funding. Q10. How will the issuance of Preservation Section 8 rental vouchers or certificates be handled? A10. The Preservation Coordinator (PC) and the Office of Public Housing (OPH) in the local HUD State/Area Office will coordinate funding vouchers or certificates. See Section IV Funding of this document. Q11. If a family already has a voucher or certificate and moves, does the voucher or certificate go with family or does PHA recapture and use money for other certificates or vouchers? A11. A family retains the voucher or certificate and complies with the regular program rules. Q12. If an owner prepays its mortgage on a project with project-based Section 8 assistance and, thereafter, fails to properly maintain Section 8 units, will there be a process for securing Housing Section 8 certificates or vouchers for the tenants? A12. Yes. HUD employs the contract administrator to administer the HAP contract. The contract administrator performs HQS inspections. HUD monitors the contract administrator's performance. The contract administrator will perform compliance (monitoring) responsibilities of the owner and make recommendations to HUD concerning enforcement of the HAP contract. Before the contract administrator makes its recommendation to HUD, the owner would be put on notice, he/she would be required to produce a corrective plan and be monitored by the contract administrator accordingly. If he/she fails and/or does not comply, Asset Management may terminate a Section 8 HAP contract and have the undisbursed budget authority transferred to the rental certificate or voucher program. Q13. If an owner prepays or terminates mortgage insurance contract, is he/she required to accept Section 8 certificates/vouchers, etc., for assisted tenants? A13. Yes, but only for Title VI projects, except as provided in Q & A#8. Pursuant to Section 223(d) of LIHPRHA, an owner who prepays the mortgage/terminates the mortgage insurance contract on eligible low-income housing and maintains the housing for residential rental occupancy may not refuse to rent, refuse to negotiate for the rental of, or otherwise make unavailable or deny the rent of a dwelling unit in such property to any person, or discriminate against any person in the terms, conditions, or privileges of rental of a dwelling (or in the provision of services or facilities) because the person receives assistance under Section 8. Q14. What will be the payment standard/FMR for previously unassisted families that wish to stay in the project? A14. If the family chooses to stay in the project, the Preservation Section 8 certificate/voucher payment standard is the actual gross rent for the unit resulting from the rent increase, provided the rent for the unit is determined reasonable by the Housing Authority. If the rent for the unit is not reasonable, as determined by the Housing Authority, the family may either move and receive the Section 8 tenant-based assistance or elect to stay in the unit, receive the tenant based assistance and pay the difference between the normal payment standard or certificate FMR/voucher exception rent limit and the actual gross rent for the unit. If the family chooses to move from the housing, the Preservation Section 8 Certificate or Voucher payment will revert to the PHA's normal payment standard or certificate FMR/voucher exception rent limit. * Q15. Will relocation expenses be provided for tenants? A15. The owner of a preservation eligible project who prepays or terminates the mortgage insurance contract resulting in displacement is required by 24 CFR 248.165(d) to pay 50 percent of the actual, reasonable moving expenses of each market rate, moderate-, low- and very low-income family which is relocated. The owner is only required to pay for moving expenses to a unit in the area where the project from which the displaced family is located. Q16. Will LMSA contracts be terminated upon prepayment or allowed to go to the end of their current terms? A16. HUD will not terminate existing LMSA contracts. The tenant contribution for a Section 8 assisted unit within a project that prepays or terminates the mortgage insurance contract will not be affected. When the LMSA contract expires, the tenants residing in the assisted units may receive a Section 8 certificate or voucher, subject to the availability of funds and their eligibility. The Department's policy on Section 8 contract renewals is found in Asset Management's Notice H-96-7. II. PREPAYMENTS * Q1. Who is eligible to prepay? A1. The Extension Act and the FY 1996 Appropriations Act, reinstated the rights of all Preservation eligible owners to prepay their mortgages or terminate the mortgage insurance, if they are otherwise eligible to prepay the mortgage by the terms of the mortgage and the regulations under which the mortgage was insured (i.e., a limited dividend mortgagor at the 20th year). Note: A mortgagor between the 18th and 20th year is not eligible to prepay until the 20th anniversary from final endorsement. In addition, an owner with legally binding financial assistance contracts, e.g., flexible subsidy, etc., in effect which would render the property ineligible for Preservation incentives also renders the property ineligible to prepay. At the time the owner requested and accepted certain funds from the Department, he/she signed a binding contract which contained a lock-in for the remaining term of the mortgage. Q2. Will prepaid Preservation eligible projects be eligible for mortgage insurance under Sections 223(f) and 221(d) substantial rehabilitation loans under the National Housing Act? A2. Yes. Depending on the condition of the property, the owner's mortgagee may apply for mortgage insurance under either the Section 221(d) substantial rehabilitation program or the Section 223(f) purchase or refinancing program. * Q3. Must an owner request HUD approval prior to prepayment or termination? A3. No. However, restoration of an owner's right to prepay does not eliminate the need for HUD notification of the owner's intent or the need for HUD review. As part of its normal prepayment/mortgage termination procedure, HUD must assure that it will be made whole in the event that the mortgage is in default or HUD-held. Further, under the Extension Act and the FY 1996 Appropriations Act, the Department is required to offer protections to tenants who may be displaced due to prepayments or mortgage insurance terminations. In order to comply with HUD's statutory mandate, the Department needs the full cooperation of the owners as early as possible in the process and will request that owners provide HUD with tenant protection information requested in A9 below within 30 days of identifying tenants for displacement. HUD will use this notification period, in cooperation with the owners, to ensure that actions relative to tenant protections, are implemented. In addition, if there is a Section 8 project-based assistance contract that will expire in one year, an owner must provide tenants and HUD with 1 year's written notification of termination or expiration of Section 8 project-based assistance. Prepayment of the mortgage or termination of the mortgage insurance contract does not release the owner from the statutory duty. (See Section 8(c)(9) of the U. S. Housing Act of 1937 (42 U.S.C. Section 1437f.) Q4. A voucher/certificate given in connection with the Preservation program is for a 1-year period. What should the owner tell his/her tenants will happen at the end of the 12-month period? Will tenants receive certificates or vouchers? A4. Tenants will be offered certificates and vouchers, subject to the availability of renewal funding. * Q5. What is the process by which a Preservation eligible owner notifies affected parties of its intention to prepay or seek termination of mortgage insurance? A5. The owner should submit the various components of a prepayment notification simultaneously to the mortgagee, State or local government agencies, and tenants. a. Provide the mortgagee with a certification that there are no legally binding contracts in effect which would render the property Preservation ineligible for prepayment. The certification will contain the following warning: HUD will prosecute false claims and statements. Convictions may result in criminal and/or civil penalties. (18 U.S.C. 1001, 1010, and 1012; and 31 U.S.C. 3729, and 3802) b. The owner also provides HUD with tenant protection information within 30 days of identifying tenants for displacement. The State or local government notification should be submitted to the Chief Executive Officer of the same agency that received the Notice of Intent (NOI). c. To assure tenant protections, the Field Office must have all the tenant information required of an owner intending to prepay, including a certification that all tenants have been properly notified before granting prepayment approval. d. The mortgagee will submit the official Form HUD- 9807, Request for Termination of Multifamily Mortgage Insurance to the Mortgage Insurance Accounting Staff as required by current instructions. * Q6. Did the Extension Act or the FY 1996 Appropriations Act change the time frames (6 months, 9 months or 15 months after Plan of Action (POA) approval) for prepayment contained in Section 224(a) of LIHPRHA and, if so, what are the changes? A6. Yes. The time frames are eliminated. Prepayment of the mortgage for any eligible project can take place with the requisite notice as detailed in response, Section III, A1 below. In addition, the owner must certify that he/she will not raise rents for 60 days after prepayment. This is an important requirement because it will allow eligible families to apply to the PHA for tenant-based rental assistance so that the rental assistance can be available when any resulting rent increase becomes effective or the tenant can find other suitable housing. * Q7. Can an owner prepay if he/she is in the processing pipeline, processed and in the funding queue, or approved and closed on the loan/grant? A7. Yes. The Extension Act and the FY 1996 Appropriations Act restored the owner's prepayment right on all Preservation eligible low-income housing. (Section II Q1 above). However, for approved and closed projects, while an owner may prepay the mortgage, the project shall continue to be governed by the Use Agreement resulting from acceptance of preservation incentives. If HUD is no longer able to provide the original incentives approved in the POA or a revised package of incentives, the owner may request release from Use Agreement from the local HUD State/Area Office. * Q8. What are the steps to process a prepayment or termination of mortgage insurance? A8. A contract of mortgage insurance may be terminated either by prepayment in full of the insured mortgage or by acceptance of a request for voluntary termination of the mortgage insurance contract made jointly by the mortgagor and mortgagee. The owner is requested to provide tenant protection information to the local HUD AMB within 30 days of identifying tenants for displacement. a. The mortgagor notifies the mortgagee, consistent with the terms and conditions of the mortgage, that the mortgagor wishes to prepay the mortgage in full or desires the mortgagee to seek voluntary termination of the insurance. b. The owner gives the PC in the HUD State/Area Office: 1. A certification that tenant notification has occurred using Appendix 10-1 of HUD Handbook 4350.6. The certification must indicate that the owner posted a copy of the notice in each building and gave each tenant a copy of the notice. NOTE: Appendix 10-1 is being revised and will be distributed in the very near future. 2. Tenant information required by 24 CFR 248.165(b). See Section III. 3. A certification that all of the information submitted to AMB relating to tenants' status was accurate and correct. c. The PC, working with the RIS will: 1. Check for accuracy and completeness of the list submitted by the owner which identifies the tenants expected to need assistance. 2. Request the OPH to contact the PHA to let them know about the particular project and find out if the PHA is willing to administer Preservation Section 8 certificates or vouchers for tenants. 3. Assure that the owner notified each tenant by a letter in the form discussed in b.1. above which described to tenants their rights and protection. d. The Office of Housing is working with the PIH to assure the availability of Preservation Section 8 certificates or vouchers in a timely manner. Q9. Will HUD issue a letter to a mortgagee that is refusing to accept an owner's prepayment without first receiving HUD's written permission? A9. If the mortgagee requests a letter, HUD State/Area Office will send a letter to the mortgagee advising that the owner of a Preservation eligible project has a right to prepay the mortgage or terminate the mortgage insurance contract. You may use the following in response to any prepayment/termination request: "This is to inform you that the owners of (Insert Project Name), FHA Project No. , Mortgagee's Loan No. (if available) have a Preservation eligible project. (Insert mortgagee name) can proceed to accept the prepayment in accordance with the notification requirements in the Mortgage and Note." NOTE: The HUD State/Area Office should issue this type letter to the mortgagee until such time as new Mortgagee Letter is issued. A copy of this letter should be sent to Ed Warzel, MIAS, Room 6249, Headquarters Building. * Q10. The Extension Act and the FY 1996 Appropriations Act state that the Secretary may determine priorities for distributing available funds including giving priority funding to tenants displaced due to mortgage prepayment. It is silent as to priority funding to tenants displaced due to voluntary termination of the mortgage insurance contract. Does this class of tenants receive priority? A10. The legislation discusses prepayment and mortgage termination interchangeably when tenant protections are discussed. Therefore, the authorizing language permits the Secretary to determine priorities for distributing available funds, including giving priority funding to tenants displaced by mortgage prepayment or by termination of the mortgage insurance contract. * Q11. The Extension Act and the FY 1996 Appropriations Act provide that an owner of eligible low-income housing may prepay the mortgage or request voluntary termination of the mortgage insurance contract, so long as the owner agrees not to raise rents for 60 days after prepayment. Does this mean that in the case of termination of the mortgage insurance contract, the owner could immediately raise rents? A11. No. The legislation discusses prepayment and mortgage termination interchangeably when tenant protections are discussed. Therefore, the owner must agree not to raise rents for 60 days after termination of the mortgage insurance contract. * Q12. Is an owner who prepays the mortgage or terminates the mortgage insurance contract required to accept tenants with Section 8 assistance? A12. Yes, if the project is Title VI, but not if the project is Title II. Any owner who prepays the mortgage or terminates the mortgage insurance contract on eligible low-income housing and maintains the project for residential rental occupancy may not refuse to rent, refuse to negotiate for the rental of, or otherwise make unavailable or deny the rental of a dwelling unit in such project to any person, or discriminate against any person in the terms, conditions, or privileges or rental of a unit, or in the provision of services or facilities in connection therewith, because the person receives assistance under the Section 8 Certificate or Voucher Program. Q13. In the past, we have approved POA's contingent upon processing and approval of the TPA. Can we continue to do this? A13. Yes. You may continue this procedure so long as there is final approval of TPA when the Regulatory Agreement is modified, the Use Agreement is executed, and actual closing takes place. III. TENANT INFORMATION REQUIRED OF AN OWNER WISHING TO PREPAY OR TERMINATE THE MORTGAGE INSURANCE CONTRACT * Q1. What tenant protection information is the owner required to submit to HUD? A1. In accordance with 24 CFR 248.165(b) the owner must provide the State/Area HUD Office with the following information: a. Project Name and Number. b. Complete tenant profile. Follow outstanding instructions found in Paragraph 10-3.A.4 of HUD Handbook 4350.6 except that subparagraph e. should refer to low-income tenants as well as very low. c. Average monthly adjusted income or average monthly total tenant payment of families living in the development by family size (use Form HUD-50059 for unassisted units). d. Copies of current Form HUD-50059 for families receiving Section 8 assistance and for unassisted families. Also, certifications from residents stating if there have been any changes in income since the last annual recertification. e. Expiration date of each Lease at the project. f. Rent Information -- does owner intend to increase the rents? If known, what is the timing of the increase and the amount of such increase? g. Tenant information: -- Name and address of each tenant, the number of residents for which assistance is being requested. -- Current family size. -- The unit/bedroom size the tenant is currently dwelling in; the number of resident families that are low- and very low-income and needing assistance by bedroom size. -- Average monthly total tenant payment by bedroom size. -- Identify each low- and very low-income tenant and each special needs tenant not receiving Section 8. -- Identify in low-vacancy areas, moderate income tenants. -- Individual income verification consent forms, to verify relevant information in determining tenant's eligibility and level of benefits. For a list of the forms, refer to Handbook 4350.3, Chg. 26. -- Expiration date of each apartment lease. EXCEPTION: The owner of a project that is currently 100 percent Section 8 assisted does not have to comply with the reporting requirements above. Q2. Is the staff required to obtain a written certification of income change from all families? A2. If the project is currently 100 percent Section 8, no family information is required. Obtain written certification of income change only if the changes occurred since the last annual recertification. Otherwise, use the current Form of HUD-50059 that is on file. IV. FUNDING OF PRESERVATION SECTION 8 CERTIFICATES OR VOUCHERS Q1. What is the process for getting funds to the PHA from PIH? A1. Headquarters' Office of Housing has transferred to PIH $10 million to draw upon. We will transfer additional funds on an as needed basis. Q2. How will the Preservation Section 8 certificate or voucher funds be earmarked for the Preservation Program once the Office of Public and Indian Housing (PIH) receives them? A2. Headquarters' PIH will allocate to the appropriate HUD State/Area Office sufficient funds to cover an estimated subsidy for the unassisted families in the prepaid project. The Preservation monitoring function is handled as follows: o PIH will provide a "partial allotment" for an agreed-upon percentage of the total number of potential units for which assistance could be needed. o At any time during the year, when the initial advance is liquidated, PIH will provide additional budget authority as needed. Q3. What are the funding procedures? A3. Once all prepayment information is received, reviewed and approved by the HUD State/Area Office of Housing, the following events must occur. a. Headquarters Office of Housing transferred $10M to PIH for Preservation Section 8 rental certificates or vouchers. Housing Headquarters will notify PIH Headquarters of need. PIH will suballocate to Office of Public Housing in the field. b. The State/Area OPH will enter into an "open" Annual Contributions Contract (ACC) with the PHA as soon as Housing has notice of prepayment. This ACC would be for "up to" the number of unassisted low- and very low-income families in the project who potentially could receive assistance if their rent increases within one (1) year after prepayment or termination of the mortgage insurance contract. A. THE STATE/AREA OFFICE OF HOUSING NOTIFICATION TO OFFICE OF PUBLIC HOUSING Step 1. The State/Area Preservation Coordinator notifies the Public Housing Office Director that a project is prepaying and provides OPH with the following information: a. Project Name, Number and address b. Number of rental vouchers or certificates required by bedroom size (number of unassisted residents and residents eligible to receive Preservation Section 8 assistance) c. Average monthly total tenant payment (contribution) of the families living in the development, by bedroom size {use Form HUD-50059}. d. Average monthly adjusted income of the families living in the development by bedroom size. Use Form HUD 50058. e. Expiration date of the lease for each low- and very low-income unassisted family in the property. f. The rent to be collected by the owner after the rent increase by unit size. B. COORDINATION AMONG THE STATE/AREA OFFICES OF HOUSING AND PUBLIC HOUSING AND THE PUBLIC HOUSING AUTHORITY/STATE AGENCY OPH will proceed with the following steps: Step 2. Determine the appropriate PHA to administer Preservation Section 8 vouchers or certificates. The OPH Director makes final selection. The PHA should be currently operating a Section 8 rental voucher/ certificate program without major problems. After selecting the PHA to administer the vouchers or certificates, the State/Area OPH immediately: a. Notifies the owner and PHA that funds are available, and notifies the PHA to determine the bedroom mix for Preservation Section 8 certificates or vouchers given the PHA's Section 8 subsidy standards, and using the information provided on unassisted families. b. Submits the following to the Preservation Coordinator: 1) two separate prepayment funding reservation work sheets for unassisted low- and very-low income tenants. One work sheet should be submitted for the total number of unassisted households who plan to remain in the project. Another work sheet is required for unassisted households who plan to relocate. 2) The name of the PHA administering the Preservation Section 8 Certificates or Vouchers. c. Receives an application package, Form HUD-52515 for Preservation Rental Certificates or Vouchers from the PHA. d. Processes the certificate or voucher application package up to the steps of preparing the application approval letter. C. HUD STATE/AREA OFFICE OF HOUSING/OFFICE OF PUBLIC HOUSING FUND REQUEST TO HEADQUARTERS HOUSING Step 3. The Preservation Coordinator, in consultation with OPH, completes and submits a request memorandum for fund assignment to Headquarters, Office of Multifamily Housing Development, Existing Products and Preservation Division, Attention: Kerry J. Mulholland, Room 6128. Attach a prepayment fund reservation work sheet for the rental voucher and certificate program, and the identity of the PHA administering the assistance. D. HEADQUARTERS MULTIFAMILY DEVELOPMENT REQUEST TO PIH Step 4. The Existing Products and Preservation Division will send the fund assignment request for Preservation Section 8 rental certificates or vouchers to Gerald J. Benoit, Director, Operations Division, PHRO. Operations Division will provide the actual cost of the project specific subassignment, as well as the Section 8 contract numbers. Step 5. PIH ASSIGNMENT AND RESERVATION OF FUNDS 1. The PIH Budget Division will prepare a Form HUD-185, Funds Assignment, assigning the funds to the State or Area Office. The assignment will be entered into the Program Accounting System (PAS) and will pass to HUDCAPS through an interface. Two working days after entry in PAS, the fund assignment will appear in HUDCAPS on the Assigned Spending Control Table. 2. When the fund assignment appears on the Assigned Spending Control Table in HUDCAPS, the State or Area Office must reserve the funds. Follow instructions in the HUDCAPS User Guide for creation and approval of a reservation document. 3. Once the reservation document has been approved in HUDCAPS, the State or Area Office prepares the Annual Contributions Contract (ACC), Funding Exhibits, and notification letter to the Housing Authority. All these documents are then sent to the Housing Authority. The Housing Authority signs the ACC and returns it to the State/Area OPH for signature. 4. Upon receipt of the signed ACC from the housing authority, the State/Area Office OPH Director signs the ACC, and generates a contract (CO) document in HUDCAPS. When appropriate, the CO document may be for less than the full amount of the reservation. However, the initial amount contracted shall be no greater than 25 percent of the amount reserved. Q4. If a PHA is aware that a project is going to prepay, can it begin the Preservation Section 8 rental certificate/vouchers application process with the State/Area OPH, in advance of written prepayment notification to HUD? A4. Yes, if the State/Area OPH has been keeping the PHA abreast of information about the project. Once the owner submits a written notice to prepay or to terminate mortgage insurance, the application process should begin. See A3. Step B of this section. Q5. What is the term of the Preservation Section 8 rental certificates or vouchers? A5. The initial term of the Preservation Section 8 rental certificate or voucher is 1 year. After the initial year funding term, the tenant-based assistance will be renewed, subject to the availability of funds. Q6. Can a tenant with existing tenant-based assistance (certificate for voucher) trade in its existing certificate or voucher for "Preservation Section 8 certificate or voucher" since the permitted rent levels are different? If not, will rent on the existing voucher or certificate be amended? A6. The Preservation Section 8 certificate or voucher is only available to low- and very low-income tenants who are unassisted at the time of prepayment or mortgage termination. Currently assisted tenants will continue to be assisted under the applicable program rules. Q7. Since Sections 882.212 and 887.355 require the PHA to reexamine the family's income every 12 months, will that 12-month clock start at the time the PHA certifies the family? A7. The clock will start at the time the PHA certifies the family. PHAs must do recertification at time of admission to tenant-based program. The Form HUD-50059 from the owner will facilitate PHA recertification. Q8. Will the PHA get the same/similar administrative fee for these units as for any others and will they get the preliminary fee? A8. Yes. PHA will earn the same ongoing fee (based on the 2-BR FMR) and preliminary fee of $275 per unit and a hard-to-house fee of $45 per unit. Q9. Will these units be counted toward the PHA's Family Self-Sufficiency minimum? A9. Yes. V. TIME LINE AND TEMPORARY MORATORIUM * Q1. What is the time line for processing under the Fiscal Year 1996 Preservation Program? A1. 1. By April 15, 1996. Where an owner wants to sell but had not timely filed a second NOI prior to October 1, 1995, he/she must have done so by this date. 2. On or before August 15, 1996. Available preservation funds will be distributed as follows: a. Tenant protections, i.e., vouchers and certificates, where needed when an owner prepays or terminates mortgage insurance contract. b. Any sale to a priority purchaser with an approved POA. This includes: 1) sale to a priority purchaser that was in the funding queue on April 26, 1996; 2) sales to priority purchasers in the pipeline; and 3) conversions to sales to priority purchasers. 3. Between August 16, 1996 and September 15, 1996 (inclusive). a. If the Department determines that there are insufficient funds available to meet all demands for funding, funds will be distributed as follows: 1) Tenant protections, (i.e., vouchers and certificates). 2) In order of receipt of their approved POA in Headquarters, projects falling into any of the categories listed below: a) Sales to priority purchasers, b) Projects with approved POA that are subject to a repayment or settlement agreement that was executed between the owner and the Secretary before September 1, 1995. c) Projects for which submissions were delayed as a result of their location in areas that were designated as a Federal disaster area in a Presidential Disaster declaration. d) Projects whose processing was, in fact, or in practical effect, suspended, deferred, or interrupted for a period of 9 months or more because of differing interpretations, by the Secretary and an owner concerning the time of the ability of an uninsured Section 236 property to prepay, or by the Secretary and a State or local rent regulatory agency, concerning the effect of a presumptively applicable State or local rent control law or regulation on the determination of preservation value under Section 213 of LIHPRHA, as amended, if the owner of such project filed NOI to extend the low-income affordability restrictions of the housing, or transfer to a qualified purchaser who would extend such restrictions, on or before November 1, 1993. b. The Department may impose a temporary moratorium on applications for preservation incentives by potential recipients. Based on our current projection of funding availability, as of August 16, 1996, the Department will likely stop accepting new initial NOI. 4. Between September 16, 1996 and September 30, 1996, (inclusive).* If the Department determines that there are insufficient funds available to meet all demands for funding: a. Funds will be set aside for tenant protections, (i.e., vouchers and certificates), and thereafter, b. In order of receipt in Headquarters, any project with an approved POA. This would include the funding of extension projects based on their position in the funding queue, as well as sales to other than priority purchasers. However, at this time, we do not anticipate funding any extension or nonpriority purchasers. 5. On October 1, 1996, the Department will likely suspend further processing of preservation applications which do not have approved POA. * As stated, reassessments of the funds available will, at a minimum, be made at these times and such reassessments may result in a change to the funding order cited. In any event, however, funding of tenant protections will remain the top priority. * Q2. Does HUD have to wait until August 15, 1996, to impose a temporary moratorium on potential applications? A2. Yes. The Extension Act and the FY 1996 Appropriations Act provide that HUD cannot impose a moratorium on potential applications until August 15, 1996. Q3. What is meant by "may impose a temporary moratorium on applications by potential recipients of such funding?" Does it mean that we will not accept new applications or that we can suspend processing applications we currently have? A3. It means that we can refuse to accept any new NOI under either LIHPRHA or ELIHPA to extend the low-income affordability restrictions of the housing or to transfer the housing to a qualified purchaser. HUD must continue to process pipeline projects until October 1, 1996. * Q4. May State and Area Offices still issue conditionally approved POAs? A4. Interim Notice H95-2-I expired on December 31, 1995 and with it expired Offices' ability to issue conditionally approved POAs. Therefore, Field Offices must issue FULL approvals on any POA and include all requisite components such as Section 241(f) loan processing, TPA processing, etc. The only acceptable condition in the approval is that the closing of the transaction is subject to the availability of funding. Remember, the funding priorities still hold, so take care to issue the full approvals for projects in categories that can be funded using conditional commitment language provided for Section 241(f) commitments. VI. PRIORITY PURCHASERS * Q1. What is a priority purchaser? A1. A priority purchaser is any entity that is not a related party to the owner and that is either: A. A resident council intending to purchase the project under Resident Homeownership Program which has met the requirement for tenant support representing 75 percent of the occupied units in the project and representing at least 50 percent of all the units in the project; B. A resident council intending to purchase the project and retain it as rental housing, which has the support of a majority of the tenants; C. A community-based nonprofit organization which has the support of a majority of the tenants; or D. Any nonprofit organization or State or local agency that agrees to maintain low-income affordability restrictions for the remaining useful life of the housing. A nonprofit organization or State or local agency that is affiliated with a for-profit entity for the purposes of purchasing a project under subpart B of 24 CFR 248 shall not be considered a priority purchaser. Q2. Will HUD allow the formation of a Resident Council for the purposes of establishing a cooperative limited equity homeownership program to purchase a project? A2. Yes. The Extender Act nor the FY 1996 Appropriations Act did not prohibit the ability of the Resident Council from establishing a cooperative limited equity homeownership program. However, it will have to be established by October 1, 1996. Q3. Who is eligible to purchase the property in the first 6 months? A3. The 6-month super priority purchaser marketing period no longer exists. Any nonprofit organization or State or local agency that agrees to maintain low-income affordability restrictions for the remaining useful life of the housing may purchase the project. NOTE: Preservation Letter No. 1 provided that provided, in part, a waiver of 24 CFR 248.157(c) which unintentionally placed tenant-endorsed sales at risk. That letter was issued on April 12, 1996. Preservation Letter No. 3 revised Letter No.1 to provide that an owner may sell his/her project to a qualified priority purchaser, provided such sale has the support of a majority of the tenants. Such support must be evidenced before the POA will be approved. An owner who accepted a bona fide offer, as defined in 24 CFR 248.101 from a qualified priority purchaser between April 12, 1996 and May 2, 1996, is governed by the waiver in Preservation Letter No. 1 and may proceed with the submission of the plan of action to the local HUD office. Where the bona fide offer was accepted between April 12 and May 2, the owner and purchaser must certify that the bona fide offer was accepted between April 12 and May 2, 1996 (inclusive). This certification will include the following Warning: HUD will prosecute false claims and statements. Conviction may result in criminal and/or civil penalties. (18 USC 1001, 1010, and 1012; and 31 USC 3729 and 3802). Q4. Can a priority purchaser close without HUD's having approved the general contractor for repair or substantial rehabilitation work? A4. A POA can be approved for a priority purchaser without an acceptable general contractor. Further, you can close a Capital Grant involving repair/substantial rehabilitation and insure a Section 241(f) loan involving repairs. However, no funds to cover repair/substantial rehabilitation will be disbursed until such time as a general contractor that is acceptable to Housing Production is hired by the priority purchaser. For a Section 241(f) loan involving substantial rehabilitation, Housing Production must approve the general contractor and the construction contract before initial endorsement of the loan. NOTE: The priority purchaser runs the risk that repair/substantial rehabilitation costs may escalate when the general contractor is hired after the project is funded. Q5. What are project oversight costs? A5. Project oversight costs fall into three categories. 1. Educational Oversight Costs: These oversight costs are used for priority purchasers to gain the experience necessary to own and operate low-income multifamily housing. Article VIII of the Capital Grant Agreement states that the Grantee may use any excess Grant Funds to pay for annual oversight costs. 2. Property Management Fee: Asset management agent duties include protecting the physical security of the project, preserving the financial soundness of project mortgagors where financial conditions relate to the project operations, and assuring that the project's residents have affordable, well-maintained housing. This fee is obtained from the project's budget each year. 3. Asset Management Project Oversight Costs: Section 307(b) of the 1992 Housing and Community Development Act added Oversight Costs as an acceptable Preservation project expense. These are costs that allow the nonprofit owner of the project to be paid for overseeing management of the asset and to pay for ownership type items not directly related to the project, e.g., ownership financial statements, operational and directional well-being, etc. These costs are separate from the property management fees associated with the project itself. Q6. Will asset management oversight fee be allowed for priority purchasers? A6. Yes, but the amount has not been determined. Also, eligible items have not been established, but will be forthcoming in future guidance. The Office of Asset Management has engaged a contractor to study the issue. Q7. To be eligible for incentives, the preservation equity must equal the lesser of $5,000 per unit or $500,000 per project or the equivalent of eight times the most recently published FMR for the area in which the project is located. How will HUD assure compliance. A7. 1. The PC will reissue Form HUD-9607, Calculation of Information to be Returned to Owner. The PC adjusts the Preservation Equity for: a. Principal payments made on the insured first mortgage after the form was issued; and b. Additional HUD approved debt incurred after the 9607 was issued, if any, to be assumed by the purchaser; and c. Cost of completed required repairs as approved by HUD. 2. In addition, the PC determines that the project falls into one of the following categories: a. $5,000 per unit, b. $500,000 per project; or c. Eight times the local existing FMR for each unit. If not, the 9607 will not be issued. Instead, the owner will be notified that it is not eligible for incentives. VII. CONVERSION FROM AN EXTENSION TO A SALE TRANSACTION Q1. How do you establish the transfer preservation equity on Title II projects wishing to convert? A1. To establish the transfer preservation equity, give the owner the option of: a. Using the owner's equity derived from the owner's appraisal previously accepted by HUD. You may adjust the owner's equity for: 1. Principal payments made on the insured mortgage after the date of the appraisal; and 2. Additional HUD approved debt incurred after the date of the appraisal, if any, to be assumed by the purchaser; and 3. Cost of completed repairs as approved by HUD. b. Having the owner and HUD obtain Title VI appraisals and following outstanding Title VI instructions. Q2. Can a project that completed the Title II process and signed a use agreement file a second NOI to sell under Title VI? A2. No. The project has already received incentives under ELIHPA and is bound by a Use Agreement. Already "preserved" projects may not receive additional Preservation funds. Q3. Will PCNA upgrades be permitted for nonprofit purchasers? A3. Yes, a priority purchaser may propose improvements to improve the economic life of the project and its livability for the tenants. Proposals to improve a property are required to contain a List of Proposed Improvements and estimated cost with the POA application. See Notice H95-14, Production Branch Instructions to Process Section 241(f) Loan Applications Pursuant to Title VI of the Low-Income Housing Preservation and Resident Homeownership Act of 1990, POA Stage. These instructions also apply to Title II projects. * Q4. If an extension transaction in the queue converts to a sale, does it keep its original place in the queue and get funded in that order? A4. When an owner of an extension transaction with an approved POA converts to a sales transaction, the project is removed from the funding queue. He/She will be funded in the order that the approved Plan of Action to transfer to a Priority Purchase is received in Headquarters. If, at some later date, the owner requests to switch back to an extension transaction, you may permit this switch after you review the original POA including the Section 241(f) loan commitment to assure the adequacy of the Section 8 incentives originally requested. Once you complete the review, you must FAX a new funding request to Kerry J. Mulholland, Branch Chief A, Existing Products and Preservation, in Headquarters. The FAX number is (202) 708-1300. The project will be placed in the funding queue based on the date the new funding request is received. VIII. THE CAPITAL GRANT PROGRAM Q1. Is the replacement reserve still included in the Capital Grant? A1. Yes. The initial deposit to the replacement reserve shortfall can be included in the Capital Grant. Q2. Do we have to request credit reports on all board members of Nonprofit purchasers? A2. No. Mortgage Credit will order credit reports only on the operating officers of a nonprofit sponsor/ mortgagor, i.e., typically the President, Vice President, Secretary and Treasurer. HUD orders the credit reports in the Capital Grant program because there is no mortgagee. NOTE: The Section 241(f) loan program, the mortgagee supplies the required Credit Reports Q3. Are there any instructions to help owners and priority purchasers in submitting a POA for a sale with a capital grant vs. 241(f) loan? A3. Instructions will be sent in a separate Preservation Letter. We are preparing a Prepayment/Termination Check Lists that should assist in following the prepayment process. IX. FUNDING PRIORITY PURCHASER SALE PROJECTS. Nonconversion sales projects with approved POAs may now submit the necessary forms for Capital Grants or revised funding requests for the Section 241(f) program. The Section 8 needed to support the Section 241(f) loan for a priority purchaser, will be capped at 100 percent of the FMR. The shortfall between loan proceeds and levels needed to complete the transactions will be made up by a "Carry Grant". There will no longer be a separate equity or gap grant, they are now both part of the Carry Grant. Title II projects involving a sale to a priority purchaser may use the Capital Grant Program. Conversion sale projects must use the Capital Grant Program. Q1. Can projects that are conversions from extension to sale, use a Section 241(f) loan or a Capital Grant to receive funds? A1. Projects that are conversions from extension to sale are only allowed to receive a Capital Grant. The determination that conversions to sales are not allowed to utilize a Section 241(f) loan is made as a matter of policy. This method of funding reduces the exposure to the Mortgage Insurance Fund because there is no guarantee of future project-based Section 8 subsidies, which would be needed to amortize the Section 241(f) loan. Q2. Will we still have Section 241(f) loans? A2. While a Section 241(f) loan will still be an option for funding some Preservation projects, a Capital Grant is the preferred method of funding sales to priority purchasers because it is quicker and easier to process and does not expose the Mortgage Insurance Fund to potential losses if the Section 8 assistance is no longer available. Q3. What are the similarities between a Section 241(f) loan and a Capital Grant? A3. In both a Section 241(f) loan and a Capital Grant: a. The owner receives his/her transfer preservation equity, and transaction costs to which he/she is entitled. These amounts are no different if a Section 241(f) loan or a Capital Grant is used. b. The purchaser receives the necessary funds to complete the Repairs or Substantial Rehabilitation, Repair/Substantial Rehab Contingency, Deposit to Reserve for Replacement Account (RRA), Neighborhood Networks including "for-profit owners", and the allowable Transaction Costs. X. APPRAISALS Q1. What marks the beginning of the 30-month appraisal period? A1. HUD's practice is to start the 30-month clock with the issuance of the 9607. However, 24 CFR 248.111(k) states that an appraisal cannot be more than 30 months old, unless the failure of the Commissioner to approve the POA within the 30-month period was due to circumstances beyond the control of the owner. If the owner feels the delay has hurt his/her financial position, he/she may pursue the options listed in Q2 and A2 below. Q2. Will HUD require/permit reappraisal of preservation projects where the appraisal is or will be more than 30 months old before the POA approval is issued? A2. Yes. The owner has several options: a. HUD and the owner can order new appraisals; b. HUD and the owner may update the existing appraisals; or c. HUD and the owner can agree to go to a third binding appraisal. In the above cases, the Preservation Capital Needs Assessment (PCNA) must be updated to reflect changes in project's condition. Q3. Will PCNA updates be permitted for profit motivated owners? A3. Yes, but only if the appraisal is redone. XI. FORM HUD-9607, CALCULATION OF INFORMATION TO BE RETURNED TO OWNER Q1. Does a State/Area Office just revise and complete the Transfer Preservation Equity (TPE) portion of the form? A1. Yes. You complete Section IV of Form HUD-9607. It should reflect an adjustment based on the instructions in Section III.B.1. of Preservation Letter No. 1. Q2. In adding the cost of additional required repairs as approved by HUD to the TPE, does the repair cost include Davis Bacon wage rates? A2. The additional cost of repairs is not added to the TPE. However, when you compute the cost of additional repairs, they must reflect Davis Bacon wage rates. The TPE is adjusted upward to reflect the cost of completed required repairs as approved by HUD. The upward adjustment would reflect Davis Bacon wage rates. Q3. Does the State/Area Office adjust or change the FMRs in relation to the previous completed Form HUD-9607? Does the State/Area Office use the current existing FMRs for this FY or the ones based on the original Form HUD-9607? A3. In a conversion from an extension transaction to a sale transaction, the priority purchaser must accept a Capital Grant. The Capital Grant program does not provide any new rental assistance. This is a rent neutral program. In a pipeline sales transaction, if the priority purchaser wants a Section 241(f) loan, the loan will be no more than the amount supportable by 100 percent of the existing FMRs to support the loan. Q4. Does the State/Area Office adjust or change the operating expenses in relation to the previous completed Form HUD-9607? Does the State/Area Office update the operating expenses based on the Section 241(f) processing? A4. You should use current operating expenses. We need to assure that the project does not fail once it is sold to a priority nonprofit purchaser. In a pipeline sales transaction, if the priority purchaser wants a Section 241(f) loan, you should update the operating expenses since the project will receive up to 100 percent of the existing FMRs to support the operating expenses and the Section 241(f) loan. Q5. Does the State/Area Office adjust or change the interest rate in relation to the previous completed Form HUD-9607? Does the State/Area Office use the interest rate based on the original Form HUD-9607 or change it based on the Section 241(f) processing? A5. If the priority purchaser wants a Section 241(f) loan, you need to use the interest rate reflected in Form HUD-92013, Application for Multifamily Housing Project. Q6. Does the State/Area Office adjust or change the rehabilitation loan in relation to the previous completed Form HUD-9607? Does the State/Area Office use the loan amount computed in the original Form HUD- 9607 which was bases on the Capital Needs Assessment or the amount based on the Section 241(f) processing which includes the shortfall for the Reserve for Replacement (RR) as well as the PCNA? A6. If the priority purchaser wants a Section 241(f) loan, you need to compute the new Section 241(f) loan taking into consideration the new interest rate, operating expenses etc. Q7. Does the State/Area Office adjust or change the utility allowances in relation to the previous completed Form HUD-9607? Does the State/Area Office use the current and approved allowances for the project or the ones used in the original Form HUD-9607? A7. If the priority purchaser wants a Section 241(f) loan, use the current and approved utility allowances. Q8. Does the State/Area Office adjust or change the Reserve for Replacement account in relation to the previous completed Form HUD-9607? Does the State/Area Office use the current annual amount if it has changed or the amount used in the original Form HUD-9607? A8. You should look at the possibility of operating efficiencies that may provide a source of funds to pay for an increased monthly deposit to the Reserve for Replacement account in conversion projects. In a pipeline sales transaction, if the priority purchaser wants a Section 241(f) loan, you may, if warranted, increase the monthly deposit to the Reserve for Replacement account since the project will receive Section 8 assistance. Q9. The Preservation Letter No. 1 indicates under Section III.B.2. that eligibility for the TPE is based on the lesser of three criteria. Criterion "c" is eight times the local existing FMRs for each unit. Does this mean that a State/Area Office uses the current existing FMRs? A9. Yes. XII. RESERVES FOR REPLACEMENT & RESIDUAL RECEIPTS * Q1. Who owns the Residual Receipts and Reserve for Replacement Accounts? A1. The accounts are established in accordance with the program under which the mortgage securing the project is insured. When governed by the Regulatory Agreement, upon the sale of the property under the Preservation program, the funds in the accounts belong to the owner/seller. The existence of Section 8 in these projects could, however, change the disposition of the Reserve for Replacement and Residual Receipts Accounts. Depending on the specific Section 8 program involved and the date on which the owner entered into the Section 8 contract for the project, the accounts are governed by either the terms of the project's Regulatory Agreement or the Section 8 HAP contract. Generally, for Section 8 New Construction and Substantial Rehabilitation projects that entered into Section 8 agreements from 1979 and thereafter, these accounts will be governed by the Section 8 regulations and HAP contract. a. With respect to the Reserve for Replacement account, for those projects subject to the Loan Management Set Aside Section 8 Existing HAP contract requirements, neither the regulations nor the contract specify the disposition of the account upon termination of the contract. Therefore, under the Preservation Program, with respect to the Reserve for Replacement account, HUD may permit the owner to retain the account upon sale of the project. b. With respect to the Residual Receipts Account, the Section 8 New Construction and Substantial Rehabilitation regulations and the Section 8 HAP contract specifically provide for the control and disposition of the funds by HUD. The regulations and the HAP contract provide that after payment of all project expenses and permitted distributions to the owner, the remaining project funds must be deposited in a Residual Receipts Account. This account is under the control of HUD and may be used to reduce housing assistance payments or for other project purposes. Upon termination of the contract, any funds remaining in the Residual Receipts Account must be remitted to HUD. Therefore, in accordance with the terms of the contract, HUD, and not the owner, is entitled to maintain control of funds in the Residual Receipts Account and is entitled to any remaining funds in the Residual Receipts Account upon termination of the HAP contract. Also, upon sale of a preservation eligible project receiving this type of Section 8 assistance, the funds in the Residual Receipts Account remain with the project. * Q2. In a sales transaction, can the owner keep the Reserve for Replacements Account? A2. With respect to the Reserve for Replacements Account, for those projects subject to the Loan Management Set Aside Section 8 Existing HAP contract requirements, neither the regulations nor the contract specify the disposition of the account upon termination of the contract. Therefore, under the Preservation Program, with respect to the Reserve for Replacements account, HUD may permit the owner to retain the account upon sale of the project. Q3. Can Residual Receipts and Reserve for Replacements Accounts be used to prepay the mortgage, using a netting process? A3. Yes. The accounts may be used to effectuate a prepayment, but only if it results in a prepayment in full. The reserves cannot be used to effectuate a partial prepayment. This response is subject to the limitations discussed in A1 above. XIII. SECTION 236 EXCESS RENTAL INCOME * Q1. May owners and priority purchasers of Preservation eligible Section 236 projects keep the Section 236 Excess Rental Income? A1. Yes. The POA may permit the owner or a priority purchaser to retain the excess rental income. Replace the paragraph in the Section 236 Use Agreement entitled "Calculation and Remittance of Excess Income" with the following: "Retention of Excess Rental Income. Paragraph 4(i) of the Regulatory Agreement should be revised to read as follows: 'The Owner may retain all rental charges collected that exceed the aggregate basic rental charges for all occupied units provided the Owner uses the excess rental income for only the following eligible uses: (a) Project operating income shortfalls, including repair costs; (b) Rental subsidy for very low-income tenants that do not receive rental assistance; (c) Pay owner's transaction costs (as defined by HUD); or (d) Priority purchaser education oversight fees (as defined by HUD). The owner shall document in the owner's audited annual financial statement in a separate schedule the amounts of excess income collected and the purposes for which it was used. If the owner uses the excess income for other than one of the eligible uses, this fact shall be disclosed by the auditor in the Compliance portion of the audit." NOTE: The Office of Asset Management will he formalizing in notice form the instructions on how the owner must account for the excess funds received and spent. XIV. STATE AGENCY NON-INSURED SECTION 236 PROJECTS State or local agency determines eligibility for prepayment and loss of any affordable units. If unassisted income burdened units result from the prepayment, tenant protection must be provided in the same manner as insured projects. You must coordinate with any State agency entities in your jurisdiction to ensure that they are aware that a prepayment may now take place, and that the owner of the project must coordinate impacted tenant information with your Office. The Extension Act and the FY 1996 Appropriations Act add a new category of eligible low-income housing where a project owner may apply for incentives. Properties that were originally low-income housing as that term is defined in Section 229 of LIHPRHA, retain eligibility if the mortgage is held by a State Agency as a result of a sale by the Secretary without insurance. If an Owner of such project prepays the mortgage, the eligible tenants will receive assistance in accordance with Section I of this Letter. XV. SHALLOW RENTAL SUBSIDY Q1. Is the 90 percent of PSR provision still in effect? A1. No, the provision is not still in effect. This was appropriations language specific to projects done in FY 1995. Some of the projects done in FY 1996 under the Continuing Resolution had this provision. If you approve a POA on or after March 26, 1996, then the language DOES NOT APPLY. If POA is funded after March 26, 1996, Shallow Rental Subsidy does not apply. NOTE: OGC will be providing revised model Use Agreements. XVI. EXISTING SECTION 8 CONTRACTS AFTER PREPAYMENT OF UNDERLYING INSURED MORTGAGE Q1. What is the impact of the noncitizen rule? A1. The issue is being studied very carefully by Asset Management and the Office of General Counsel. You will receive more information at a later date. XVII. NEIGHBORHOOD NETWORKS Q1. Can the cost of installing a Neighborhood Network be included in a POA for funding under the Capital Grant Program or the Section 241(f) Loan Program? A4. Yes. Owners may include Neighborhood Networks in their POAs. The cost of the network may be included in the Capital Grant or Section 241(f) Loan Program. Owners and priority purchasers are encouraged to include Neighborhood Networks in their POAs. TABLE OF CONTENTS FOR PRESERVATION LETTER NO. 6 Paragraph Page I. TENANT PROTECTIONS. . . . . . . . . . . . . . . . . . . . . . . . . 1 II. PREPAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8 III. TENANT INFORMATION REQUIRED OF AN OWNER WISHING TO PREPAY OR TERMINATE THE MORTGAGE INSURANCE CONTRACT . . . . . . . . 15 IV. FUNDING OF PRESERVATION SECTION 8 CERTIFICATES OR VOUCHERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 V. TIME LINE AND TEMPORARY MORATORIUM. . . . . . . . . . . . . . . . . 23 VI. PRIORITY PURCHASERS . . . . . . . . . . . . . . . . . . . . . . . . 27 VII. CONVERSION FROM AN EXTENSION TO A SALE TRANSACTION. . . . . . . . . 31 VIII. THE CAPITAL GRANT PROGRAM. . . . . . . . . . . . . . . . . . . . . 33 IX. FUNDING PRIORITY PURCHASER SALE PROJECTS. . . . . . . . . . . . . . 34 X. APPRAISALS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 XI. FORM HUD-9607, CALCULATION OF INFORMATION TO BE RETURNED TO OWNER. . . . . . . . . . . . . . . . . . . . . . . . . 37 XII. RESERVES FOR REPLACEMENT & RESIDUAL RECEIPTS. . . . . . . . . . . . 40 XIII. SECTION 236 EXCESS RENTAL INCOME . . . . . . . . . . . . . . . . . 42 XIV. STATE AGENCY NON-INSURED SECTION 236 PROJECTS . . . . . . . . . . . 43 XV. SHALLOW RENTAL SUBSIDY. . . . . . . . . . . . . . . . . . . . . . . 44 XVI. EXISTING SECTION 8 CONTRACTS AFTER PREPAYMENT OF UNDERLYING INSURED MORTGAGE . . . . . . . . . . . . . . . . . . . . 45 XVII. NEIGHBORHOOD NETWORKS. . . . . . . . . . . . . . . . . . . . . . . 46