4561.1

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CHAPTER 3. PROPERTY AND MORTGAGOR ELIGIBILITY

3-1. PROPERTY AND DEVELOPMENT REQUIREMENTS

A. Proposals must be for either of the following:

1\) New construction. Construction may not start before initial

endorsement for insurance of advances or firm commitment for

insurance upon completion except as permitted in paragraph

12-7. The start of construction is defined in paragraph

7-31 A.

2\) Substantial rehabilitation. Property must require

substantial rehabilitation as defined in this paragraph. It

qualifies under 221(d) coinsurance if:

a\) The cost of repairs, replacements and improvements

exceeds the greater of:

1\. 15 percent of the property\'s value after completion

of all repairs, replacements and improvements, or

2\. \$6,500 per dwelling unit (adjusted by the applicable

high-cost factor),

OR

b\) More than one major building component is being replaced.

These include: roof structures; ceiling, wall or floor

structures; foundations; plumbing systems; heating and

air conditioning systems or electrical systems.

Start of rehabilitation is the first time a worker appears

on the job and starts rehabilitation work, if the work is

continuous and without appreciable delays.

B. Project size. Projects must consist of five or more dwelling

units, which may be detached, semi-detached, row houses or

multifamily structures.

C. Project site. The project must be on one site. However, the

site may consist of two or more noncontiguous parcels of land

when the lender finds that the parcels:

1\) Physically comprise a readily rentable real estate entity;

and

2\) Are within an area small enough to allow convenient and

efficient management.

D. Real estate requirements. Projects must be on real estate held

or to be held:

1\) In fee simple;

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3-1 6/85

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4561.1

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(Property requirements - con\'t.)

(3-1) 2) Under a renewable lease for not less than 99 years;

3\) Under a lease running at least 75 years from the date the

mortgage is executed; or

4\) Under lease executed by a government agency, or other lessor

approved by HUD, for up to the maximum term the agency or

lessor may enter into, but not less than 50 years from the

date the mortgage is executed.

E. Liens

1\) The property must be free and clear of all liens other than

the coinsured mortgage, except as noted in paragraph 2, below.

2\) The lender, with written HUD Headquarters approval, may

permit an inferior lien made or held by a Federal, State or

local government agency or instrumentality. (See Chapter 10.)

F. Property standards

1\) New construction projects must comply with local requirements

and HUD Minimum Property Standards (MPS).

2\) Rehabilitation projects must comply with local requirements if

they are comparable to one of the three nationally recognized

model codes.

3\) Contact the HUD field office with jurisdiction for what

requirements apply.

G. Zoning. Projects, including improvements, must comply with all

applicable zoning or deed restrictions.

H. Projects for the elderly or physically handicapped. May have

central dining and other congregate facilities (e.g., community

dining rooms, workshops), but each dwelling unit must have a full

bath and minimum kitchen facilities. (See paragraph 17-6 C.)

I. Retirement Service Centers (ReSCs). ReSCs are a variation on

housing for the elderly that permits added amenities and services

that may also be coinsured under Section 221(d)(4). (See Chapter

17 for special procedures and requirements for ReSCs.)

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6/85 3-2

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4561.1

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(Property requirements - con\'t.)

(3-1) J. Commercial areas. Projects must be designed primarily for

residential use but may include commercial and community

facilities to serve the occupants. In general, the net

rentable commercial area may not exceed 5 percent of the total

net rentable area.

1\) If the commercial tenants meet financial standards in

paragraph 9-6, the net rentable commercial area may be up to

20 percent of the total net rentable area.

2\) HUD Headquarters (office of Insured Multifamily Development)

must review any project with more than ten percent net

rentable commercial area. See paragraph 9-6 for what to

submit.

K. Portfolio cases. Mortgages already held by an approved lender

or related entity may be coinsured only if:

1\) The project requires substantial rehabilitation;

2\) The loan is current and has not been in default,

modification, or forbearance at any time during the two years

before the submission of the application to the lender;

3\) The entire loan transaction is reviewed and approved by HUD

before any commitment is issued; and

4\) Refinancing of portfolio loans makes up no more than 1/4 of

the total number of loans the lender presents for endorsement

for coinsurance during any 12-month period. Mortgages

insured by HUD under its full insurance programs and those in

which the lender\'s sole involvement is servicing are not

subject to this limit.

NOTE: Where a Housing Finance Agency is the lender, loans held in

the portfolio of another public agency under the same State

jurisdiction are considered portfolio loans.

L. Displacement. HUD\'s policy is to minimize displacement of

tenants in its programs. In the 221(d) coinsurance program, the

lender is responsible for this policy. Therefore, if substantial

rehabilitation will cause involuntary displacement of tenants,

the lender must:

1\) Require the mortgagor to provide, with its application, a

plan to minimize the effects of displacement.

2\) Determine that the plan is adequate and the mortgagor can

carry it out financially and physically.

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4561.1

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3-2. AREA ELIGIBILITY

A. General. Lenders must consider all aspects of general livability

and rentability during analysis of the location (e.g., freedom

from adverse environmental conditions, accessibility to community

facilities). Project location must:

1\) Be acceptable for the type of housing proposed and the market

to be served.

2\) Meet the requirements of 24 CFR Part 51, HUD Environmental

Criteria and Standards, for noise abatement, explosive and

flammable standards, clear zones and accident potential

zones.

B. Flood hazard areas. The lender cannot coinsure in areas

identified by the Federal Emergency Management Agency (FEMA) as

having special flood hazards unless:

1\) The community in which the project is located is

participating in the National Flood Insurance Program and

its regulations (see 44 CFR Parts 59-79); or

2\) It has been less than a year since FEMA\'s designation, and

flood insurance on the structure can be obtained in

compliance with Section 102(a) of the Flood Disaster

Protection Act of 1973 (Public Law 93-234, 42 U.S.C. 4001

et seq.); and

3\) HUD has complied with Executive Order 11988, Floodplain

Management, and Executive Order 11990, Wetlands Protection.

Contact the HUD field office to see whether a proposed site is

in a flood hazard area.

C. Historic site. HUD must ensure compliance with Section 106 of

National Historic Preservation Act during environmental review.

(See paragraph 6-8 for details on environmental review.) To

speed up this process, contact the State Historic Preservation

Officer to see if a project is subject to historic requirements.

D. Coastal barriers. The lender cannot coinsure any project in the

Coastal Barriers Resources System established by the Coastal

Barriers Resources Act (16 U.S.C. 3501). Contact the HUD field

office to make sure that the project is not within the Coastal

Barriers Resources System. HUD will review this during the

environmental review. (See paragraph 6-8.)

E. Military impacted areas. If the HUD field office review of

housing need pursuant to paragraph 6-12 finds that the project is

in a military impacted area (where military, atomic energy or

space installations substantially affect the housing market), the

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4561.1

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(3-2) Section 238(c) procedures apply. Contact HUD Headquarters,

Office of Insured Multifamily Housing Development, for how to

proceed with case-by-case approval of these projects.

3-3. ELIGIBLE MORTGAGORS

A. General

1\) All coinsured loans with an identity of interest between

lender and mortgagor (i.e., where the lender, its subsidiary,

parent, or principals have or will have an ownership

interest) require HUD review before issuance of a commitment.

2\) All mortgagors must be regulated by the lender through a

regulatory agreement. This agreement establishes the

mortgagor\'s obligations in project operations and the

lender\'s and HUD\'s rights if it is violated. (See Appendix

36.)

B. Eligible Types

1\) Nonprofit. An entity organized for reasons other than

financial gain and which the lender finds is not controlled

or directed by persons or firms seeking financial gain from

it. Its operation must be regulated under Federal or State

law.

2\) Builder-seller. An entity organized to:

a\) Build or rehabilitate a project and which, by written

agreement with a nonprofit mortgagor, will sell it (at

final endorsement) to that mortgagor for no more than the

lender-approved certified cost;

b\) Operate the project (subject to regulation by the lender)

according to HUD requirements until sold to the nonprofit

mortgagor; and

c\) Operate the project, if it is not sold within two years

to a nonprofit mortgagor, as a limited distribution

mortgagor. (See paragraph C, below.)

3\) Limited distribution. An entity restricted by Federal or

State law as to rate of return and other aspects of its

operation.

4\) Cooperative. A nonprofit cooperative ownership housing

corporation that restricts permanent occupancy to members of

the corporation and requires membership eligibility and

transfer of membership in a manner approved by HUD.

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4561.1

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(3-3) 5) Investor-sponsor. An entity organized the same way as a

builder-seller mortgagor (paragraph B, above) and subject to

the same restrictions, except that the project will be sold

to a cooperative rather than a nonprofit mortgagor.

6\) General. Any mortgagor approved by the lender that does not

meet any of the definitions in paragraphs A through E.

Profit-motivated mortgagors are general mortgagors.

7\) Public mortgagors. Not eligible under 221(d) coinsurance.

3-4. CONSTRUCTION, HIRING AND WAGES

A. Prevailing wages. The 221(d) coinsurance program requires:

1\) Payment of no less than the wages prevailing in the locality,

as predetermined by the Secretary of Labor pursuant to the

Davis-Bacon Act (40 U.S.C. Section 276a-276a-5), to all

laborers and mechanics employed in the development of any

project, and

2\) Compliance with all other related rules and regulations under

Davis-Bacon (See paragraphs 6-13, 12-2, and 13-7 and Handbook

1344.1, Federal Labor Standards Compliance in Housing and

Community Development Programs) and the Copeland Act

(40 U.S.C. Section 276c).

NOTE: Section 212(a)(1) of the National Housing Act contains a limited

exception to payment of prevailing wages for certain volunteer

labor in cooperative projects. Contact HUD Headquarters for

case-by-case approval.

B. Equal employment opportunity. You must comply with Executive

Order 11246 and 41 CFR Part 60 regarding equal employment on

Federally-assisted construction contract. They:

1\) Prohibit discrimination because of race, color, religion,

sex or national origin.

2\) Require affirmative action to ensure fair treatment on:

employment, upgrading, demotion or transfer; recruitment or

recruitment advertising; layoff or termination; rates of pay

or other forms of compensation; and selection for training

and apprenticeship.

3-5. OCCUPANCY

A. Lender\'s responsibility: Must ensure that mortgagors operate

projects according to HUD standards. See Handbook 4566.2 for

servicing requirements for 221(d) coinsured projects.

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4561.1

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(3-5) B. Selection of occupants. All families and individuals are

eligible for occupancy subject to normal tenant selection (except

in cooperatives, which restrict occupancy to corporation members

and sublessees approved by the cooperative). There are no income

restrictions unless the project is subsidized by HUD or the

mortgage is financed through tax-exempt bonds, The mortgagor

must:

1\) Not discriminate against any family because of the sex of the

household head or because there are children in the family,

unless the project was designed specifically for occupancy

by elderly people.

2\) Comply with Title VIII of the Civil Rights Act of 1968, as

amended, and its regulations prohibiting discrimination

because of race, color, religion, sex, or national origin.

The mortgagor must administer the program to affirmatively

further fair housing and comply with similar State and local

fair housing laws and regulations.

3\) Comply with Executive Order 11063 and associated regulations

preventing discrimination because of race, color, religion

(creed), sex or national origin in housing and related

facilities assisted by Federal funds.

4\) Not execute any leases for less than 30 days or for transient

rentals, or provide occupants with customary hotel services

such as room service, bellhops, or daily maid service.

5\) Give tenant selection priority to families or single persons

displaced by urban renewal, other government action, or by a

major disaster. The owner must require displacees to have a

signed Form FHA-3476, Certificate of Eligibility (Appendix

64), as evidence of displacee status. An owner is not

required to hold units vacant waiting for an application from

a displacee.

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3-7 6/85