March 12, 1997 MEMORANDUM FOR: Directors of Housing Directors of Public Housing Multifamily Housing Directors Multifamily Production Chiefs Multifamily Asset Management Chiefs Preservation Coordinators FROM: Kevin Emanuel Marchman, Acting Assistant Secretary for Public and Indian Housing, P Nicolas P. Retsinas, Assistant Secretary for Housing - Federal Housing Commissioner, H SUBJECT: Instructions for use by the Multifamily Housing Division and the Office of Public Housing involving Prepayment of Preservation Eligible FHA Insured Mortgages in Fiscal Year (FY) 1997 This memorandum provides instructions to be followed by HUD State and Area Office staff for processing requests for Preservation Section 8 tenant-based assistance in connection with the prepayment of a mortgage or voluntary termination of the mortgage insurance contract. These instructions apply to Preservation eligible low-income projects under Title II Emergency Low-Income Housing Preservation Act of 1987 (ELIHPA) and Title VI Low-Income Housing Preservation and Resident Homeownership Act of 1990 (LIHPRHA). Additional guidance is found in Housing's FY 1996 Preservation Letters Nos. 1 through 10a, and 97-1. Where there is a conflict, this preservation letter will supersede. BACKGROUND: The Housing Opportunity Program Extension Act of FY 1996 (Act) and the FY 1996 Appropriations Act reinstated an owner's right to prepay the mortgage or voluntarily terminate the mortgage insurance contract on the property. The Act provided that, subject to the availability of funds, an unassisted low- income family residing in a Preservation eligible low-income housing project on the date of the owner's prepayment or voluntary termination of the mortgage, must be offered Section 8 tenant-based assistance. Use of this assistance is to prevent displacement of families residing in Preservation eligible projects and to protect families from an increased rent burden as a result of an owner's prepayment or termination of mortgage insurance. The FY 1997 Appropriations Act also provided Section 8 assistance to prevent displacement, and expanded the scope of eligibility to include all low-income families, and moderate- income families who are elderly or disabled or families who are residing in a low-vacancy area (3 percent or less vacancies). All recipients must reside in the housing on the date of prepayment. The guidance provided in this memorandum applies to prepayments made by owners during FY 1997. ELIGIBILITY REQUIREMENTS: Families are eligible for preservation tenant-based assistance if: (1) they are residing in a Preservation eligible low-income housing project on the date of prepayment of the mortgage or voluntary termination of the mortgage insurance; and (2) after a rent increase within one year of the effective date of prepayment of the mortgage or termination of the mortgage insurance, the total tenant rental payment (including tenant paid utilities if applicable) exceeds 30 percent of the adjusted income. Subject to the availability of appropriated funds, HUD is to provide Preservation Section 8 tenant-based assistance to eligible: 1. unassisted low-income or very low-income families; or 2. an unassisted moderate-income elderly or disabled person; or 3. an unassisted moderate-income family residing in a low- vacancy area; or 4. families receiving Section 8 tenant-based assistance which will expire in FY 1997, and for which the owner has given notice to not renew the lease; 5. families receiving LMSA Section 8 assistance which will expire in FY 1997, and for which the owner has properly opted out. Very low-income families have an income from 0 to 50 percent of area median income; a low-income family is from 51 to 80 percent of area median income; and a moderate income family is between 81 and 95 percent of area median income. Preservation tenant-based assistance will be in the form of rental vouchers or rental certificates. ADMINISTRATION: Preservation Tenant Based Assistance is determined by the difference between the new rent charged once an owner has prepaid less the greater of 30% of adjusted income, or what the tenant payment was prior to prepayment. The Public Housing Agency (PHA) must determine that the new rent is reasonable for the project in its specific market area. If the PHA determines that the new rent is too high, then the rental amount that they deem appropriate determines the level of preservation tenant based assistance. Preservation tenant-based assistance for all eligible families shall be administered in accordance with the following procedures. The following eligible families may receive either a Preservation Certificate or Voucher: A. Unassisted low and very low-income families residing in the project who are or will be paying more than 30 percent of their adjusted income toward rent and utilities. Families who before prepayment were paying more than 30 percent will continue to pay the same rent whether they stay in the preservation eligible property or move. Unassisted low-income families must be certified as eligible by the PHA in order to qualify to receive tenant-based assistance. B. Unassisted moderate-income families who are either elderly, handicapped or who live in a low vacancy area (3 percent or less vacancy rate) and choose to stay in the property, can receive preservation tenant-based assistance. Unassisted moderate income families must be certified as eligible by the PHA in order to qualify to receive preservation tenant based assistance. If the family moves, their maximum rental payment will be determined by the normal PHA payment standard. C. Assisted low-income families receiving project-based or tenant based assistance, if such assistance terminates during FY 1997. i. An owner may terminate tenancy without cause at the end of the initial lease term or at the end of a successive definite term. If an owner exercised the right to terminate the tenancy at the end of a certificate or voucher lease term in FY 1997, a family who chooses to stay in the unit would then receive Preservation tenant-based assistance (assuming the prepayment was in FY 1997 and that other requirements mentioned above are met), subject to the availability of appropriated funds. ii. Any family with project-based assistance (LMSA) will continue to receive this assistance until the LMSA contract expires. 1. Families may receive Preservation tenant- based assistance, subject to availability of appropriated funds, for one year if: a. the LMSA contract expires in FY 1997; b. the owner gave the one-year opt-out notice; and c. the owner raises the rents resulting in the families paying in excess of 30 percent of their adjusted income towards rent. 2. If the owner does not give the one-year opt-out notice; Notice 96-89 indicates that an owner has two choices: (a) entering into a new, one-year project-based contract; or (b) permitting the residents assisted by the expiring contract to remain in their units for the one-year notice period, without increasing the residents portion of their rent under the expiring contract. REQUIREMENTS: I. For families receiving Preservation Vouchers, the following requirements apply: A. Families who will be assisted by Preservation vouchers and elect to remain in the property, the increased rent becomes the applicable payment standard assuming the PHA determines that the new rent charged by the owner is reasonable based on comparable unassisted units. The housing assistance payment will equal the new gross rent for the unit minus the greatest of: 1. 30 percent of the adjusted family income; or 2. 10 percent of the family monthly income (gross monthly income); or 3. the gross rent the family was paying on the date of the prepayment or voluntary termination; or 4. such other minimum rent established by the PHA, authorized by law. B. For families who elect to move from the property, the regular PHA payment standard applies. II. For families receiving Preservation Certificates, the following requirements apply: A. For families who will be assisted by Preservation certificates and elect to remain in the property, the increased rent may exceed the published FMR. Assuming the PHA determines that the new rent charged by the owner is reasonable based on comparable unassisted units, that rent will be used in lieu of the published FMR. The total tenant payment for the family is the greater of: 1. 30 percent of family monthly adjusted income; or 2. 10 percent of family monthly income (gross monthly income); or 3. welfare rent in as-paid states; or 4. the gross rent the family was paying on the date of prepayment or voluntary termination; or 5. such other minimum rent established by the PHA, authorized by law. B. For families who elect to move from the property, assistance is subject to the FMR. III. For families in non-insured state financed properties: A. If an owner prepays on a Preservation eligible non- insured state financed property, only eligible families residing in the Section 236 units on the date of prepayment will receive Preservation tenant-based assistance. IV. Over-housed families: A. For all families who are eligible for Preservation tenant based assistance and found to be over-housed at the time of recertification: 1. If a resident is over-housed and there is an appropriate size unit available in the project, the resident must move to the appropriate sized unit. The resident's rent contribution, by statute, will be no less than what the resident would have paid had the resident been in the appropriately sized unit before prepayment. The subsidy will be calculated based on the appropriate unit size. 2. If a resident is over-housed and there is no appropriate size unit available in the project, the family must be issued a voucher or certificate and given 60 days (with extensions of up to an additional 60 days if appropriate) to find a suitable size unit in the rental market. If the PHA determines that the over-housed resident has made a serious effort to locate a suitable size unit (including requiring a tenant to submit a list of units visited) but has been unsuccessful, and the PHA is unaware of any potential eligible units of the appropriate size to refer the family, the PHA may execute the HAP contract for the family's current unit, provided the proposed rent is reasonable. The payment standard will be based on the actual size of the (over-housed) unit and will be paid for with funds available for Preservation tenant-based assistance. The PHA must advise the tenant that subsidy based on the oversized unit will be paid for only one year. 3. After one year, the over-housed tenants will be given a regular rental voucher or certificate based on the PHA's subsidy standard and will be required to move in order to receive further Section 8 certificate assistance or if the family has a voucher, pay the additional cost of the oversized unit. V. HAP CONTRACT EFFECTIVE DATE: For all families provided preservation tenant-based assistance, the PHA may not make payments to the owner until after execution of the HAP contract. The HAP contract can be effective no earlier than the date the PHA determines the unit met HQS. FUNDING PROCEDURES: State/Area Offices of Housing and Public Housing are to follow the processing steps in Attachment 1, to determine the Preservation tenant-based assistance needs for the impacted family types listed above. The Multifamily Housing Division will submit fund assignment requests for the rental vouchers or certificates (Attachment 2) to the Office of Public Housing. Headquarters Multifamily Existing Products/Preservation Division (HMDE1) will provide the Headquarters, Office of Public and Indian Housing with funds for the Preservation rental vouchers or certificates. These resources will be made available to State/Area Offices of Public Housing to enter into an Annual Contributions Contracts (ACC) with local Public Housing Agencies (PHAs) who will administer the rental vouchers or certificates. The initial ACC term of the Preservation tenant-based assistance is one year. The provisions of this memorandum revise some of the provisions contained in Housing's Preservation Letter No. 6 and PIH Notice 96-61. Where there is a conflict with previous instructions, the provisions of this memorandum should be used. The following documents are attached to assist in maintaining consistent procedures among all State/Area Offices: ATTACHMENT 1 - Processing Procedures for the Multifamily Housing Division and the Office of Public Housing ATTACHMENT 2 - Format Memorandum From the Multifamily Housing Division to the Office of Public Housing ATTACHMENT 3 - PIH Fund Reservation Worksheet: Calculating the Budget Authority for Prepayment Funding Increments Attachments ATTACHMENT 1 Processing Procedures for the Multifamily Housing Division and the Office of Public Housing While the State or Area Office is receiving, reviewing and approving prepayment information, the following events must occur as early as possible. 1. Send via cc:Mail the property name, number and the intended date of prepayment to Wendy N. Carter, FHCPOST3 and Tammy R. Thomas, FHCPOST3, or fax to 202.708.1300 or mail to the Office of Multifamily Housing Development, Office of Existing Products and Preservation Division (HMDE1). 2. Headquarters Preservation staff shall be responsible for providing a notification letter to each impacted family explaining their protection and responsibilities. A. SUMMARY OF FUND ALLOCATIONS: Within Headquarters, the Preservation Branch (HMDE1) will arrange transfer of funds to the Headquarters Office of Public and Indian Housing (PIH) for Preservation rental vouchers and certificates. 1. The State or Area Office Multifamily Housing Division Director will input project specific tenant profile data into the Preservation Prepayment Database System. 2. HMDE1 will forward the calculated cost of annual assistance to Headquarters PIH Operations Division. The Operations Division will provide the fund assignment information to the Headquarters PIH Budget Division. 3. PIH Budget Division will prepare Form HUD-185, Fund Assignment, to assign funds to the appropriate State or Area Office. B. STATE OR AREA OFFICE PROCEDURES: Step 1. The State or Area Office Multifamily Preservation Coordinator (PC) notifies the Office of Public Housing (OPH) Director that the mortgage on a property was prepaid and provides OPH with the following information (by category) for unassisted residents, residents receiving project-based assistance under the LMSA program, and residents receiving rental voucher and rental certificate assistance and number of over-housed families (See Attachment 2 Memorandum and Chart): a. Project name, number, and property address. b. Average monthly gross rent (including the personal benefit expense or utility allowance) currently paid by impacted families of property, by bedroom size. Use Form HUD-50059, Owner's Certification of Compliance with HUD's Tenant Eligibility and Rent Procedures. c. Average monthly adjusted income of impacted families of the property, by bedroom size. Use Form HUD-50059. d. Thirty percent of the average monthly adjusted income of impacted families of the property, by bedroom size. e. New rents charged by owner after rent increase, by bedroom size. f. Number of Preservation rental vouchers or certificates required for impacted families, by bedroom size. g. Lease expiration date of each impacted family of property. h. Resident-paid utilities and services by type (e.g., electric) and use (e.g.,cooking and heating). Step 2. The OPH will select the PHA to administer the Preservation tenant-based assistance. The OPH Director makes the final PHA selection after consulting with the PHA. The selected PHA (State, regional, or local) should be currently administering a Section 8 rental voucher or certificate program without major problems. If there is no PHA available to administer the rental voucher or certificate programs, the OPH staff should contact Headquarters Gerald J. Benoit, Director, Operations Division, PIH. The PHA will inform OPH of which type of assistance (i.e. rental vouchers or certificates) they wish to administer to the impacted families. OPH will ask the PHA if there are any families from the PHA's regular rental voucher or certificate program leasing units in the property. If so, the PHA will be requested to provide the information in Step 1 for these families. Step 3. After the selected PHA agrees to administer the Preservation rental vouchers or certificates, the OPH immediately: a. Requests the PHA to determine the bedroom mix for rental vouchers and certificates separately for unassisted residents, residents receiving project-based assistance under the LMSA program, residents receiving rental voucher and rental certificate assistance. Use the PHA's Section 8 subsidy standards and the information on the Form HUD-50059 provided by HUD for impacted families. b. Submits the following to the Preservation Coordinator: <<>> A prepayment funding reservation work sheet for impacted families. For the purpose of allocating funds, the OPH will assume that all eligible families will choose to stay in the project, and over-housed families will remain in their unit. A separate worksheet must be prepared for unassisted residents, residents receiving project-based assistance under the LMSA program, residents receiving rental voucher assistance, and residents receiving rental certificate assistance. <<>> The name of the PHA, and which type of Section 8 assistance to be used (i.e. vouchers or certificates). <<>> The PHA utility allowance for resident furnished utilities by bedroom size. c. Requests the PHA to make a determination as to whether or not the owner's requested rent meets the rent reasonableness limitation. PHA must have supporting documentation on file. d. Requests that the PHA submit an application package, Form HUD-52515, Application for Section 8 Housing Assistance Payment, for Preservation rental vouchers or certificates. e. Requests local government comments. Section 213 of the Housing and Community Development Act of 1974 requires that HUD independently determine if there is a need for the housing assistance as requested in applications and solicit, and consider comments relevant to this determination from the chief executive officer of the unit of general local government. The HUD Office will obtain Section 213 comments from the unit of general local government in accordance with 24 CFR part 791, subpart C, Applications for Housing Assistance in Areas Without Housing Assistance Plans. Comments submitted by the unit of general local government must be considered before an application can be approved. For purposes of expediting the application process, the PHA should be advised to encourage the chief executive officer of the unit of general local government to submit a letter with the PHA application commenting on the PHA application in accordance with Section 213. Because HUD cannot approve an application until the 30-day comment period is closed, Section 213 letter should not only comment on the application, but also state that HUD may consider the letter to be the final comments and that no additional comments will be forthcoming from the unit of general local government. While the chief executive officer of the unit of general local government comments on the need for assistance, HUD statutes mandates that we provide Preservation Section 8 assistance. f. Processes the rental voucher or certificate application package up to the point of preparing the application approval letter. Step 4. After the Preservation Coordinator and OPH have gathered resident information, the PC enters data into the Preservation Prepayment System. This system is intended to provide data for all impacted residents of prepayment properties. The report the PC generates becomes the fund assignment request to be sent to the Office of Public Housing. If your office has not installed this system on your computer, contact Wendy Carter at (202) 708-2300 extension 2546. Public Housing staff should refer to Attachment 3 PIH Fund Reservation Worksheet to calculate budget authority for various (e.g., unassisted, LMSA) prepayment funding increments. Headquarters will forward to the OPH an automated Lotus worksheet for this purpose. Once the annual assistance is calculated, OPH notifies the PC of the actual annual assistance amount need for each project funding increment. The PC will send this amount as the fund assignment request via cc:\Mail or fax to Existing Products/Preservation Division. D. HEADQUARTERS PROCESSING PROCEDURES: 1. Existing Products/Preservation Division will send fund assignment requests for Preservation vouchers and certificates to Gerald J. Benoit, Director, Operations Division. Operations Division will provide Existing Products/Preservation Division a copy of the Preservation/Prepayment Increment Funding Worksheet for the Rental Voucher or Certificate Program showing actual amount assigned for specific project funding increment. 2. The PIH Budget Division will prepare Form HUD-185, Funds Assignment, assigning the funds to the appropriate State or Area Office, with jurisdiction over the property. The assignment will be entered in 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 (SASP) Table. E. OPH RESERVATION OF FUNDS AND EXECUTION OF ANNUAL CONTRIBUTIONS CONTRACT (ACC): 1. When the fund assignment appears on the SASP Table in HUDCAPS, the State or Area OPH must reserve the funds. Follow instructions in the HUDCAPS User Guide for creation and approval of a reservation document. 2. After the reservation document has been approved in HUDCAPS, the State or Area OPH prepares the ACC, Funding Exhibit, and notification letter to the PHA. These documents are then sent to the PHA. The PHA, in turn prepares a revised budget based on the actual number of units and budget authority reserved, prepares a revised requisition for the balance of the PHA fiscal year, signs the ACC, and returns it to the State or Area OPH for signature. 3. Congressional clearance is not required because the rental vouchers or certificates are replacing project- based Section 8 assistance or rent subsidies. 4. Upon receipt of the signed ACC from the PHA, the State or Area Office OPH Director signs the ACC, and generates a contract (CO) document in HUDCAPS. F. SPECIAL OPEN ENDED ACC PROCEDURES: In some instances the Headquarters Office of PIH, after consultation with the Office of Housing, may only assign funds to the State or Area Office for a portion of the eligible impacted families. For example, if there are insufficient funds for use during the current Federal fiscal year the full assignment of assistance may be delayed because families whose unassisted or assisted leases don't expire until the next fiscal year, do not need the assistance until their leases are ready to expire. If appropriate, the Headquarters Office of PIH will instruct the State or Area Office to execute an "open-ended" ACC with the PHA to facilitate execution of subsequent ACCs to add additional rental vouchers or certificates as they are needed. If these special ACC procedures apply, the Headquarters Office of PIH will provide the State or Area Office the following: <<>> A statement identifying the maximum number of rental vouchers or certificates and the maximum budget authority that could be made available for the eligible impacted families living in the preservation eligible project. <<>> A partial assignment of budget authority for families in immediate need of tenant-based assistance, and the number of rental vouchers or certificates the budget authority will support. After the State or Area Preservation Coordinator has the property tenant profile together for OPH, the PC will determine the amount of assistance needed based on the timing of lease expiration for each impacted family type or LMSA contract expiration. The State or Area Office OPH will modify the standard form of ACC by adding the following language after Section 2(c)(2) of the ACC for the rental voucher or certificate program [(Form HUD 52520 (11/93)]: " (3) To add a funding increment for tenant-based assistance to unassisted low-income, moderate income elderly, disabled and families in a low vacancy area, families receiving Section 8 tenant-based assistance and families receiving project-based LMSA assistance, residing in eligible low-income housing, and to subsequently provide additional contract or budget authority for such purposes. For this purpose, "eligible low-income housing" means properties that are eligible for assistance under the Low Income Housing Preservation and Resident Homeownership Act of 1990 (LIHPRHA) or the Emergency Low-Income Housing Preservation Act of 1987 (ELIHPA)". Under these special procedures HUD will enter into an "open- ended" ACC with the PHA. Once the PHA and HUD have executed an ACC with this special language, HUD can thereafter add a new tenant-based funding increment as needed, by giving unilateral written notice that amends the ACC to add funding for additional Preservation rental vouchers or certificates. This advance execution procedure avoids the need to wait for PHA and HUD execution of the ACC, so HUD can provide the funding quickly when needed. Although the initial funding increment is only for partial funding, the cover letter will indicate that HUD may provide additional funding for impacted families of a preservation eligible project who potentially could receive tenant-based assistance if their rent increases within one year after prepayment or termination of the mortgage insurance contract. This system will work as follows: <<>> Headquarters will assign a "partial amount" of budget authority (for example 25 percent) of the maximum number of potential rental vouchers or certificates for which assistance is needed for the PHA. <<>> The State or Area Office will reserve the budget authority assigned by PIH for rental voucher or certificate assistance for families in immediate need of tenant-based assistance. <<>> The State or Area Office and the PHA will execute an ACC for the initial funding increment (showing the initial budget authority on funding exhibit A (certificates) or B (rental vouchers). The ACC must be modified to include the special language identified above. <<>> When the initial rental vouchers or certificates provided to the PHA are under a housing assistance payments contract, the OPH will request additional budget authority from PIH in Headquarters. OPH, in turn, will reserve the additional budget authority, prepare a new funding exhibit adding the second installment of budget authority, and send a copy of the funding exhibit to the PHA. Execution of a new ACC is not required. <<>> It is expected that at the end of the ACC term, for the preservation funding, prepayment rental vouchers/certificates will be renewed subject to the availability of appropriations per the conditions set forth in the ACC. If the PHA has any funds for Preservation vouchers/ certificates remaining after all impacted families have received assistance, HUD may recapture the excess funds or use these funds to extend the tenant-based assistance. Since these funds, by law, can only be used for Preservation eligible impacted families, the funds may not be used for families on the PHA waiting list. ATTACHMENT 2 Format Memorandum From the Multifamily Housing Division to the Office of Public Housing MEMORANDUM FOR: , Director, Office of Public Housing, PH FROM: , Director, Office of Multifamily Housing Development, HMD SUBJECT: Prepayment or Voluntary Termination of Mortgage Insurance on Project Name: Project Address: Project Number: The above named property is a Preservation eligible property, and we are requesting Preservation tenant-based assistance for eligible residents in the property. The owner has or intends to prepay or voluntarily terminate the mortgage insurance contract. Please use the attached 2 CHART, which identifies whether the residents are unassisted or are receiving assistance under LMSA or the rental voucher or certificate programs, and estimates how much preservation tenant-based assistance they will require. If you require any assistance please contact Mr./Ms. , Preservation Coordinator at . ATTACHMENT 3 FUND RESERVATION WORKSHEET CALCULATING THE BA FOR PREPAYMENT FUNDING INCREMENTS Line 1: Fair Market Rents (FMRs) Enter the published FMRs. Line 2: Gross Rent Determine gross rent by bedroom size by adding the PHAs utility allowance for tenant-furnished utilities to the owner's new rent amount. Enter the results by bedroom size on line 2 of the fund reservation worksheet. Line 3: Average Total Tenant Payment (ATTP) Determine the ATTP by bedroom size: Step 1: Determine which is greater, the current tenant payment (including the utility allowance) or 30% of monthly adjusted income. Step 2: Add the higher of the two income amounts determined in step 1, line 3, for each family by bedroom size and divide it by the number of families for each bedroom size. Example: (Assume all 2-bedroom units) Current Tenant 30% of monthly Payment Adjusted Income Family A: $360 $178 Family B: 410 451 Family C: 387 403 Solution: (360 + 451 + 403) / 3 = $405 (ATTP) for a 2-bedroom unit. Line 4: First Year HAP The worksheet formula will automatically calculate the first year HAP. It takes the greater of the FMR or the gross rent minus the ATTP times 12 months. Line 5: On-going Administrative Fee . The automated fund reservation worksheet will automatically calculate the on-going administrative fee once the program size, and on-going administrative fee factors are entered for "A" and "B" consistent with PIH notice 96-81 (HA). Line 6: Hard-To-House Fee . A hard-to-house fee of $9 is added, based on the assumption that 20 percent of the units will qualify for the hard-to-house fee. Line 7: Total Administrative Fee . The worksheet formula will automatically add both the on-going administrative fee and the hard-to-house fee. Line 8: Unit Distribution When preparing a fund reservation worksheet for unassisted households or families receiving assistance under the LMSA program living in the prepayment project, the actual number of units by bedroom size is determined using the housing authority's Section 8 subsidy standards. Line 9: Contract Authority (CA) The worksheet formula automatically calculates: -- the first year HAP; plus -- the total administrative fee; and -- multiplies the product by the number of units. Line 10: Budget Authority (BA) Since the contract term is only one year, Budget Authority is equal to the Contract Authority. NOTE: Please note, requests for rental vouchers and certificates should be accompanied by a fund reservation worksheet. ATTACHMENT 4 Attachment 4 is a Lotus 1-2-3 File