4435.01 REV-1

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CHAPTER 1

CONSTRUCTION STAGE FOR PROJECTS WITH INSURED ADVANCES

1-1. GENERAL. The construction contract identifies the period

within which construction must start after initial closing

(typically 10 days), however, the construction stage starts

with endorsement of the instrument to insure advances or

approval for an early start.

A. Start of Initial Construction is the date when contract

work commences and is diligently pursued without

appreciable delay between activities. It includes site

clearance and other preparatory site work. The start

of initial construction satisfies:

1\. Contract provisions for the start of construction,

and

2\. Davis-Bacon wage rate requirements for the start of

construction. See Handbook 1344.1 REV-1 for

detailed information.

B. Start of Permanent Construction establishes the date

upon which HUD earns its inspection fee. See Handbook

4410.1 REV-2 for detailed information.

C. Early Start of Construction may be authorized in

accordance with provisions in Handbook 4430.1 REV-1,

paragraph 1-8. Where it occurs:

1\. Require a preconstruction conference before the

start of initial construction.

2\. Require monitoring of the work and approval of

change orders in accordance with provisions of this

chapter.

3\. Do not authorize any insured advances until

recording of the endorsed instrument at initial

closing.

D. First Events Of The Construction Stage are typically

the preconstruction conference, paragraph 1-2 below,

and approval of the first insured advance at initial

closing. See paragraphs 1-15 through 1-17 below.

1-2. PRECONSTRUCTION CONFERENCE is required for every project

and must precede the initial start of construction,

including early start of construction projects. Consider

holding it concurrently with initial endorsement where

feasible, since the major participants are present.

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4435.01 REV-1

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(1-2) A. Required Attendees:

1\. Representative(s) of the mortgagor and mortgagee,

2\. Mortgagor\'s supervisory architect,

3\. Contractor,

4\. Major subcontractor(s),

5\. HUD construction representative (staff, in all

cases, plus contract personnel, where applicable),

6\. HUD mortgage credit analyst, and

7\. HUD labor standards specialist.

NOTE: Maintain the attendance list for the Washington

Docket.

B. Supplementary Conditions of the Contract for

Construction, Form HUD-2554. Address Davis-Bacon Wage

Rates, Federal labor standards and equal employment

provisions, including:

1\. Contractual obligations of the contractor and

subcontractors, including contractor\'s

certification on each request for advances of

compliance with Davis-Bacon wage rates. Where

there is a second mortgage backing a governmental

entity loan, advise that Davis-Bacon wage rates

also apply.

2\. Statement of sanctions imposed for not complying

with the supplemental conditions.

3\. Requirement that Form HUD-2554 must be made part of

the subcontracts for all tiers.

4\. Give extra copies of Form HUD-2554 and applicable

Davis-Bacon wage determinations to the contractor

for any absent subcontractors.

5\. Emphasize the importance of Federal wage payments,

prompt payroll submissions and record keeping.

Instruct that Form WH-1321, Wage Notice to All

Employees, must be conspicuously posted on the job

site.

6\. Indicate who on the Field Office staff will review

for labor standards compliance.

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4435.01 REV-1

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(1-2) 7. Give copies of the Equal Opportunity poster to the

contractor and each subcontractor to post

conspicuously at the construction site.

C. Contract Administration.

1\. Explain general contract administration, including

responsibilities of the mortgagee, mortgagor,

mortgagor\'s architect, contractor, HUD

representative, and Field Office approvals.

2\. Explain the procedures for: change orders and

architect\'s supplemental instructions, handling

latent site or rehabilitation building conditions,

requesting construction document clarifications and

handling job problems, shop drawings and sample

approvals, noncompliant work and its correction,

requesting periodic payments and release of

escrows, substantial completion of the work or

portion thereof, permissions to occupy including

management plans and rent rolls, job meetings,

maintenance of test logs, the architect\'s log, and

the HUD representative\'s on-site facilities.

3\. Stress that HUD considers work changes completed in

anticipation of a future change order as

noncompliant, and that HUD will deny insured

advances for it or other work dependent upon it.

4\. Explain the contractor\'s and mortgagor\'s required

preparation for periodic advances, including the

procedure for field approval and submission for

Field Office approval. Point out the provisions

for submitting surveys, title reports, and other

documentation in support of construction advances;

and explain the requirements for the contractor\'s

retainage and its release.

5\. Explain the procedures attendant to requesting

payment for materials stored on-site, and, where

applicable, for components stored offsite.

6\. Explain the procedures for requesting payment for

completed offsite work, the required retainage and

its release.

7\. Address provisions for terminating the construction

contract and architect\'s contract, and mortgagee\'s

responsibilities during the construction stage and

in the event of default.

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4435.01 REV-1

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(1-2) D. Cost Certification.

1\. Explain cost certification requirements for the

mortgagor, general contractor and, if applicable,

subcontractors, equipment lessors and suppliers.

Where there is a second mortgage backing a

governmental loan, advise that cost certification

also applies to the second mortgage.

2\. Explain the time limits for submitting cost

certification and that late submission is the basis

for adverse action under 24 CFR Part 200.230.

3\. Stress that identities of interest that develop or

become known after initial closing must be reported

to HUD within 5 working days of having such

knowledge. That HUD must give prior approval for

all identity of interest subcontractors, the

penalties where this is not done, certifiable costs

regarding self-owned equipment and the prohibition

against paper conduits.

4\. Clarify the 50/75 percent rule.

1-3. CONSTRUCTION MONITORING is critical for immediately

identifying problems and taking prompt corrective action

during the period for which defaults are the highest.

A. Assignments. Require the Chief Architect to assign a

staff or contract HUD representative to each project

upon approving an early start, where applicable, or 1

week before initial closing where there is no early

start.

1\. Use contract personnel where projects are remote or

would otherwise unreasonably burden staff

resources. Use technical disciplines contracts in

accordance with outstanding instructions.

2\. Assure that project assignments by the Chief

Architect to individual HUD representatives are

across program lines and in geographical groupings

or natural travel circuits to maximize on-site time

to travel time ratios.

B. HUD Representative\'s Duties. Require the assigned HUD

representative to visit the site twice a month or more

frequently where warranted by problems or impending

default. The HUD representative must conduct

monitoring in accordance with provisions of Handbook

4460.1 REV-1, and report project findings on the HUD

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4435.01 REV-1

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(1-3) Representative\'s Trip Report, Form HUD-5379, in

accordance with Handbook 4480.1. Reporting is required

on the following:

1\. Contractor\'s organization, operations and

supervision.

2\. Architect\'s supervision and services.

3\. Special circumstances, occupancy, delays, claims,

disputes, etc. The HUD representative must

specifically identify when the slow start or

progress of offsite work may delay occupancy of

completed units.

4\. Noncompliances in the work.

5\. Payments to the contractor, and by the contractor

to subcontractors, material suppliers, etc.; and

Labor and Equal Employment Opportunity (EEO)

provisions, including the number of Davis-Bacon

wage interviews conducted and reported on Form

HUD-11.

6\. Percentage of project completion and scheduled

completion. Percentage of completion for each

additive change order and percentage of completion

for offsite work.

7\. Start of initial and permanent construction.

8\. Serious construction problems must be specifically

reported by the HUD representative. See paragraph

C.3. below.

C. Chief Architect\'s Duties are detailed in Handbook

4460.1 REV-1, paragraph 3-3, and include: assignment

of inspectors, office review inspectors\' reports,

office review change orders, field supervise

inspectors\' performance by making at least two field

review inspections for each project, and training

inspectors in monthly sessions.

1\. Authorize the Chief Architect to deputize a member

of the architectural staff to perform certain

functions, as warranted. However, hold the Chief

Architect responsible for keeping informed on the

general progress of all project work, problems, and

the general quality of inspections and inspector

performance. Where a deputy performs review

inspections, the Chief must personally conduct at

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1-5 6/93

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4435.01 REV-1

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(1-3) least one review inspection per project. Where

inspectors must be sent long distances to project

sites, the supervisor may ride with the inspector

on the inspection circuit to conserve travel funds,

or make a scheduled inspection for the assigned

inspector.

2\. Establish procedures through which the Chief

Architect may secure required engineering

assistance for the inspection function, e.g.,

through use of Field Office engineers not under the

Chief Architect\'s control, Regional engineers,

contract engineers, etc.

3\. Require the Chief Architect to report to you:

a\. Serious construction problems as they occur,

prepare a referral memorandum to Headquarters,

and provide status reports as appropriate. See

paragraph 4-3. for instructions on reporting

serious construction problems to the office of

Insured Multifamily Housing Development, HMI.

b\. Critical deficiencies in a supervisory

architect\'s performance, and to provide you

with a file supporting the findings. Paragraph

6-2.B. lists critical deficiencies in the

supervisory architect\'s performance.

1\) The file should include copies of

applicable HUD Representative\'s Trip

Reports, Form HUD-5379, Supervisory Review

Reports, Form HUD-5379, correspondence and

minutes or summaries of meetings.

2\) Where appropriate, require the Chief

Architect to prepare a letter to the

project owner calling for replacement of

the supervisory architect. See Chapter 6

and Appendix 4, Specimen Letter - Request

Termination of The Owner-Architect

Agreement, for guidance.

c\. Slow or nonpayment from the mortgagor to the

contractor or from the contractor to

subcontractors, material suppliers, etc. (see

paragraph B.5. above). Take action in

accordance with paragraph 1-16.D., where

appropriate.

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4435.01 REV-1

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(1-3) d. Any condition reported by the HUD

representative or otherwise known, that the

Chief Architect cannot reconcile within 30

days, or otherwise requires your assistance to

resolve.

D. Oversight Review. Visit each project site once during

construction to the extent possible. The visits are to

assess the performance of subordinate supervisors and

staff, compare project design and construction with

conventional projects in the area and to keep current

with changes in your jurisdiction. Also visit

completed HUD projects enroute to or near the site to

review project performance with project management and

tenants against design expectations. Require the

assigned HUD representative and/or Chief Architect or

deputy to accompany you on your project review.

1\. Require the accompanying A&E staff member to

identify:

a\. The HUD representative\'s assignment documents,

and any updating for approved changes and

modifications for the as-built set of drawings.

b\. Shop drawings, cuts, and samples and the

timeliness of the contractor\'s submissions and

supervisory architect\'s approvals.

c\. Test logs, including: grading compaction test

logs, pile logs, concrete test logs, slab or

panel reinforcement post tension logs, etc., as

they may apply to the project.

d\. Supervisory architect\'s log, including minutes

of regularly scheduled project meetings.

2\. Compare and, if clarification is required, request

correlation by the accompanying A&E staff member

between:

a\. Approved change orders and the Architect\'s

Supplemental Instructions, AIA Doc G 710, and

the updated drawings for the as-built set.

b\. Accepted cuts and samples, and requirements of

the drawings and specifications.

c\. Accepted test results, and requirements of the

drawings and specifications.

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4435.01 REV-1

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(1-3) d. Resolution of issues, problems and

noncompliances identified in the architect\'s

log, and/or HUD representative\'s reports.

3\. Require the accompanying A&E staff member to

correlate various elements of the installed work,

including materials, components, and equipment with

requirements of the contract drawings,

specifications and approved change orders.

4\. Require the accompanying A&E staff member to

correlate completed work and materials stored

on-site with that approved on the last pay draw.

Where components are stored offsite, visit the

storage facility and compare the inventory against

approved documents.

5\. Observe the work, reporting, and resolution of

identified issues in general; query the project

superintendent and other project representatives on

job progress and unresolved problems; and check for

proper posting of Davis-Bacon wage rates and Equal

Employment Opportunity (EEO) posters.

6\. Compare on-site observations with the last HUD

Representative\'s Trip Report, Form HUD-5379, and

complete a supervisory review in accordance with

instructions in Handbook 4480.1 for Form HUD-5379.

As an alternative, you may have the accompanying

Chief Architect (or deputy) complete this report as

one of the required supervisory reviews.

7\. Use the Chief Architect\'s supervisory reviews and

your on-site review reports to assess the Chief

Architect\'s performance and to identify staff

training needs.

1-4. LABOR AND FAIR HOUSING AND EQUAL OPPORTUNITY (FHEO)

LIAISON.

A. Davis-Bacon Wage Rates. Forward the original copy of

all Davis-Bacon Wage Interviews, Form HUD-11, completed

by the HUD representative to the Labor Officer/Wage

Compliance Specialist. Require the Architectural

Branch to keep a copy of each completed Form HUD-11 in

the Construction Record Binder.

B. Labor Violations. Advise the Labor Officer of

continuing minor infractions that cannot be resolved or

of any identified or suspected major violations.

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4435.01 REV-1

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(1-4) C. FHEO Violations. Advise the Director of FHEO of

continuing minor violations that cannot be resolved or

of any identified or suspected major violations.

1-5. CONTRACTOR\'S MONTHLY REQUISITION must be made on Form

HUD-92448, completed in accordance with Handbook 4480.1. The

Contractor\'s Prevailing Wage Certificate on the form\'s

reverse side must be signed for all but the first

requisition at initial closing, except that it must be

signed where the requisition at initial closing includes

payment for work completed under an early start.

A. Eligible Items For Inclusion on Form HUD-92448.

1\. Acceptably completed on-site work, i.e., in full

compliance with contract documents.

2\. Materials acceptably stored on-site itemized by

quantity and cost.

3\. Components acceptably stored offsite, where

provisions are made at initial closing in

accordance with Handbook 4430.1 REV-1, paragraph

1-14.I., and the requirements of paragraph 1-6 below

are met.

B. Ineligible Items For Inclusion on Form HUD-92448.

1\. Noncompliant work and work supported or dependent

upon noncompliant work. Work changes completed in

anticipation of future change order approvals are

noncompliant work.

2\. Additive change orders. See paragraph 1-8 for the

contractor\'s requisition of payment, and release of

funds to the mortgagor for acceptably completed

additive change orders.

3\. Offsite work. See paragraph 1-7 for the

contractor\'s requisition of payment, and release of

funds to the mortgagor for acceptably completed

offsite work.

C. Modification of Contractor\'s Requested Amount.

1\. Line item modifications/approval may only be made

by the on-site HUD representative in accordance

with Handbook 4480.1.

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4435.01 REV-1

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(1-5) a. The HUD representative determines by job site

observation that the requisition is reasonable

and that sufficient funds remain to pay for

incomplete work and any unacceptable work upon

its correction.

b\. Where there is disagreement with the

requisition, the HUD representative:

1\) Enters trade item modifications in column

C, Form HUD-92448, Contractor\'s

Requisition, and

2\) Explains the modification in the

HUD-Representative\'s Trip Report, Form

HUD-5379.

2\. Modification of the HUD representative\'s conclusions

may only be made by an authorized official

who has made an on-site review of the issue(s).

3\. Completion of Form HUD-92448, Items (1) through

(13), are made by Mortgage Credit in accordance

with Handbook 4480.1.

D. Supporting Documentation.

1\. Require receipts, bills of lading for on-site

deliveries, billings for on-site work, evidence of

on-site payrolls, etc., to help staff reconcile

differences with contractor claims. where

necessary, request a quantity survey by the

supervisory architect or other independent party.

2\. A survey may be required with each contractor\'s

requisition for improvements not previously shown

on a survey, as provided by the Construction

Contract and the Building Loan Agreement.

a\. Require a survey where the siting of structures

or setting of finished floor elevations in

relation to contract document requirements are

questioned. Since approximately 50 percent of

construction complaints arise from faulty site

drainage and damage to foundations, wet

basements, etc., because of faulty site

drainage; and since site drainage typically

cannot be corrected where finished floor

elevations for ground floors are set too low,

give this concern high priority.

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4435.01 REV-1

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(1-5) b. Require a survey where there is a question

concerning the location of materials stored

on-site. The project may have great difficulty

establishing and exercising rights to materials

that are stored partially or entirely outside

project boundaries.

3\. Require a survey for the next to last advance in

every instance. See paragraph 1-19.C.

1-6. COMPONENTS STORED OFFSITE.

A. Eligible Building Components. Only \"building

components\" qualify for insurance of advances when

stored offsite.

1\. An eligible \"building component\" is a manufactured

or preassembled building element which, by reason

of bulk, size or weight, vulnerability to weather

conditions or lack of space at the site, is

impractical to store at the site.

2\. Precast concrete floor, wall, and roof panels;

assembled bath and/or kitchen core units; and fully

fabricated structural steel beams and columns

qualify as eligible \"building components.\"

3\. Items, e.g., kitchen appliances, carpeting, wood

roof trusses, etc., are not eligible \"building

components.\"

B. Basic Requirements for insured advances.

1\. The mortgagee must have agreed to the necessary

provisions at initial closing. See Handbook 4430.1

REV-1, paragraph 1-14.I., for detailed information.

2\. The Construction Contract must include the rider

\"Amendment To The Construction Contract For Payment

For Components Stored Offsite.\" See Handbook

4430.1 REV-1, Appendix 9.

3\. Payments are limited to the invoice value of the

components listed on the HUD approved appendix to

the Contractor\'s and/or Mortgagor\'s Cost Breakdown,

Form HUD-2328, Appendix A to the Contract.

4\. The contractor and its surety bear full

responsibility for fraudulent claims for payment

and fraudulent disposition of such payments.

Safeguards are to protect against premature

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4435.01 REV-1

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(1-6) payments, against materials that do not meet

contract requirements and against losses not

covered by insurance.

5\. The construction contract must be secured by a 100

percent performance and payment bond.

6\. Components must be stored at a location approved by

the mortgagee and the local HUD office.

7\. Only \"building components\" qualify for insurance of

advances when stored offsite. See paragraph A.

above.

C. General Contractors\' Responsibilities.

1\. All direct and indirect costs associated with the

storage and transportation of components stored

offsite.

2\. Obtaining a risk of loss insurance policy which

covers the components. Evidence of this insurance

must be submitted to HUD prior to the approval of

any advance for components stored offsite.

3\. Assurance that there is a valid security agreement

that is a first lien on the components.

D. Mortgagee\'s Responsibilities.

1\. File Uniform Commercial Code (UCC)-1, financing

statements with the proper office in the proper

jurisdiction.

2\. Make whatever additional filings are necessary to

maintain a first lien on the components until they

are incorporated into the building(s).

3\. Release the financing statement filings as

appropriate.

4\. Unconditionally certify by letter to HUD that the

security instrument(s) is (are) a \"first lien\" on

the components covered by the instrument(s). The

mortgagee\'s certification must be supported by an

opinion from the mortgagee\'s counsel.

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6/93 1-12

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4435.01 REV-1

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(1-6) 5. In the event of default under the mortgage, either

assign its security interest to HUD or acquire

title through foreclosure to the components

intended for use or incorporation into the

building(s) and convey title to HUD.

E. Contractor\'s Requisition. All requests for payment for

components stored offsite must be submitted on Form

HUD-92448, Contractor\'s Requisition, accompanied by the

following:

1\. A statement from the owner\'s architect certifying

that:

a\. He/she has visited the storage site and

inspected the components for which payment has

been requested.

b\. The components are in good condition and they

comply with the contract requirements.

c\. The components are properly stored and

protected.

d\. The components are segregated, in an easily

identified manner from other materials stored

at the same site and are marked for

identification.

2\. A bill of sale accompanied by an itemized invoice

transferring title of the components to the

mortgagor.

3\. A copy of the security agreement provided to the

mortgagee by the mortgagor.

4\. A copy of the financing statement or statements

filed by the mortgagee in accordance with the

uniform Commercial Code.

5\. A warranty from the mortgagee that the security

instruments represent a first lien on the building

components.

6\. An opinion from the mortgagee\'s attorney that

he/she has reviewed the security agreement and

associated documents relative to the components for

which advances are sought and that the security

agreement creates a valid security interest in the

collateral and that when the financing statement or

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1-13 6/93

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4435.01 REV-1

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(1-6) statements is (are) duly filed, the secured party

will have a first lien.

F. Review of Contractor\'s Requisition.

1\. The HUD representative must request an inventory of

the \"stored components\" and a breakdown of the line

item of which the stored components are a part

before approving payment for the components stored

offsite. The breakdown must state:

a\. Cost of Components (invoice value).

b\. Cost of transportation from the offsite storage

location to the construction site.

c\. Cost of Installation.

d\. Costs of any other items included in the line

item.

2\. The breakdown is to insure a remaining undisbursed

balance sufficient to cover the costs of

transportation and installation, and any other

items included in the line item.

3\. Do not approve payment for components stored

offsite where a contractor\'s performance is marked

by serious deviations from the contract documents,

or if payment will cause excessive additional

interest costs.

4\. Do not approve any insured advances for components

stored offsite where the contractor does not have a

100 percent performance and payment bond.

5\. Do not approve insured advances for components

stored offsite in an amount exceeding 50 percent of

the contract amount.

6\. The minimum advance is \$10,000.

7\. Limit advances for components stored offsite to the

cost of components (invoice value) less the usual

10 percent holdback.

1-7. OFFSITE CONSTRUCTION is separate from the project

\"Contract\" work. Where offsite work is completed by the

owner, rather than by a municipality or utility company, a

separate construction contract is required, even if

completed by the project contractor. Offsite work must

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6/93 1-14

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4435.01 REV-1

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(1-7) also be funded from sources outside the mortgage, except

that an escrow for its completion may be funded from

available excess mortgage proceeds.

A. Completion Monitoring. Require the HUD representative

to report on Form HUD-5379 for each contract, where

more than one contract is involved:

1\. The percentage of acceptably completed offsite

work, whether the work is completed by the

controlling municipal authority, public utility, or

by the mortgagor, and

2\. Slow start or progress of offsite construction that

may delay occupancy of any dwelling units or

facilities that may otherwise become available.

B. Slow Completion. Where timely completion of offsite

facilities appears to be a problem, require the

mortgagor to furnish completion projections for:

1\. The initial units or facilities intended for

occupancy, and

2\. The offsite facilities upon which their occupancy

depends.

C. Contractor\'s Requisition is by letter to the owner. Do

not use the Contractor\'s Requisition, Form HUD-92448,

to reflect the value of acceptably completed offsite

work, even if completed by the project contractor. See

paragraph 1-2l.A. for the mortgagor\'s application for

escrowed funds, where completion of offsite

construction is ensured by use of an escrow.

D. Construction Changes for offsite work must be requested

by letter using Form HUD-92437, Request For

Construction Changes, as a guide, however, do not use

Form HUD-92437 for offsite change orders.

1-8. CONSTRUCTION CONTRACT CHANGES (change orders) to the scope

of contract work, contract price or contract time must be

requested by the mortgagor through the mortgagee on Form

HUD-92437, Request For Construction Changes. Form

HUD-92437 must be completed and supported in accordance with

instructions on the form and reviewed by staff in

accordance with Handbook 4480.1. Each discipline must also

adhere to specific change order instructions in their

respective technical handbooks.

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1-15 6/93

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4435.01 REV-1

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(1-8) A. Approve Change Orders only when they are necessary, are

a betterment, or an equivalent.

1\. Require the Architectural Branch to:

a\. Review all requested changes for technical

acceptability.

b\. Enter the plus or minus contract price change,

as applicable.

c\. Identify on the face change orders that qualify

for payment from the contingency reserve, where

applicable, e.g. substantial rehabilitation

projects.

d\. Identify on the face change orders that arise

because of error, omission or negligence on the

part of the architect, contractor or owner.

e\. Refer to the Valuation Branch any changes that

may effect marketability, value, income, or

maintenance or operating cost.

2\. Require the Valuation Branch to review all

requested changes that may effect marketability,

value, income, or maintenance or operating cost;

and to identify and explain any estimated increase

or decrease in net project income on the reverse of

Form HUD-92437. See paragraphs F., G. and H. below

restricting mortgage increases and requiring

mortgage decreases.

3\. Require the Mortgage Credit Branch to complete all

requested changes according to Handbooks 4480.1,

and 4470.1 REV-2.

4\. Do not approve any change orders submitted after

the Final HUD Representative\'s Trip Report, except

where:

a\. The change order pertains to \"Items of Delayed

Completion,\" or

b\. Written approval is given by the Office of

Insured Multifamily Housing Development, HMI.

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6/93 1-16

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4435.01 REV-1

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(1-8) B. Necessary Changes are those that arise from:

1\. Latent conditions (unseen site conditions for new

construction and unseen building conditions for

substantial rehabilitation projects) that differ

from that defined by the construction contract

documents.

2\. Changes in the applicable codes, ordinances or

other workings of the law after initial closing

(for insured advances projects) or firm commitment

(for insurance upon completion projects).

3\. The architect\'s errors or omissions, including:

a\. Failure to comply with applicable codes and

ordinances, and

b\. Failure to provide for conditions that may

adversely affect occupant life safety or

health, the project\'s physical integrity, or

pose potential project liability.

4\. Damage to completed construction:

a\. Caused by a natural disaster declared by

Federal or State government, to the extent such

damage was not covered by casualty insurance,

and

b\. Under the owner\'s responsibility, i.e.,

contractor already paid for having acceptably

completed that portion of the work, regardless

of the cause of damage.

C. Betterment Changes are those that are economically

justified. They must either increase net income,

reduce long-term project maintenance and/or operating

expenses, or otherwise enhance the mortgage security.

D. Equivalent Changes are those proposed because:

1\. The specified item is not readily available and the

substitution provides equivalent or better utility

and performance for every significant

consideration, including marketability, durability,

and maintenance and operating costs, or

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1-17 6/93

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4435.01 REV-1

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(1-8) 2. The proposed substitution reduces the contract

price, therefore the mortgage, but provides

equivalent or better utility and performance for

every significant consideration, including

marketability, durability, and maintenance and

operating costs.

E. Surety Approval must be secured in writing before

approving any change or aggregate of changes that

increase the construction contract price 10 percent or

more. There is no consent requirement where the

project\'s assurance of completion is by a cash escrow

or letter of credit.

F. Additive Change Orders. Do not give any explicit or

implied assurance that an increase in the insured

mortgage amount will be granted when approving

construction changes. An increase in the mortgage,

including that for additive change orders, may only be

granted as provided in paragraphs 1-29 and 1-30.

1\. Require the mortgagor, except for \"necessary\"

change orders on substantial rehabilitation

projects, to escrow funding with the mortgagee for

any additive change order where HUD first estimates

that the aggregated change orders equal or exceed a

\$5,000 increase in the construction contract price,

and for all subsequent additive change orders.

a\. Excess mortgage proceeds, if available, may be

used to fund the escrow for \"necessary\" and

\"betterment\" change orders. However, any

excess mortgage proceeds used to fund the

escrow for contractor estimated costs in excess

of HUD estimated costs, or HUD estimated costs

in excess of contractor estimated cost, may not

be disbursed until final closing.

b\. Permit mortgagee to accept a third party letter

of credit instead of a cash deposit, subject to

the mortgagee agreeing to provide the cash

equivalent, where the letter of credit is not

immediately met.

c\. Recognize the cost of third party paid change

orders at cost certification, where there are

available mortgage savings.

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6/93 1-18

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4435.01 REV-1

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(1-8) 2. Approve payment from the established contingency

reserve in an amount not to exceed the HUD cost

estimate for \"necessary\" additive change orders on

substantial rehabilitation projects. \"Betterment\"

change orders are not eligible for payment from the

contingency reserve.

a\. Require an escrow for any amount that the

contractor\'s cost estimate exceeds the HUD

estimate.

b\. Authorize use of excess mortgage proceeds, if

available, to satisfy the escrow requirement,

subject to the disbursement limitations in

paragraph 1.a. above.

3\. Require the following procedures for mortgagor\'s

application of funds for completed additive change

orders:

a\. Form HUD-92464, Request for Approval of Advance

of Escrow Funds, where an escrow is used. See

paragraph 1-21.

b\. Form HUD-92403, Application for Insurance of

Advance of Mortgage Proceeds where a rehabilitation

project\'s contingency funds or excess

mortgage proceeds are used. See paragraph 1-22.B.

for additional requirements where excess

mortgage proceeds are disbursed.

G. Deductive Change Orders. Where the HUD estimated

decrease in Contract price for any aggregation of

change orders:

1\. Remains less than 2-1/2 percent of the Contract

price, reduce the Contractor\'s \"Final\" Requisition,

Form HUD-92448, by the appropriate amount.

2\. Equals or exceeds 2-1/2 percent of the Contract

price and for all subsequent deductive change

orders regardless of the amount:

a\. Reflect the decrease in the Contractor\'s

Requisition, Form HUD-92448, Item (7).

b\. Reduce the original mortgage amount at cost

certification, where required. See Handbook

4470.1 REV-2, paragraph 11-12.A. for

instructions on mortgage reduction.

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1-19 6/93

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4435.01 REV-1

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(1-8) H. Changes That Adversely Affect Income are a basis for

change order rejection, except where it is a necessary

change order. Where the situation is unavoidable:

1\. Meet with the Chiefs of Valuation and Architecture

and if needed with the mortgagor, supervisory

architect and contractor to devise a mutually

acceptable remedy that minimizes any adverse

project impact.

2\. Require the Chief of Valuation to forward a Trial

Form HUD-92264 and Trial Form HUD-92264A reflecting

the new data for Mortgage Credit redetermination of

the maximum insurable mortgage.

3\. Require Mortgage Credit to check Item 3.b. on the

face of Form HUD-92437, as a condition of change

order approval.

a\. Item 3.b. states, \"That in order to reflect the

net decrease in cost or reduction in mortgage

based on net income or number of family units,

resulting from acceptable present and previous

construction changes, the amount of \$ \_\_\_\_\_\_\_\_\_\_

shall be deducted from the amount entered on

the line entitled \'Sum of Cost Breakdown Items

Plus Inventories of Materials,\' Form HUD-92448.

This amount may be modified by later changes.\"

b\. The amount of reduction entered must be the

greater of:

1\) The difference between the preceding

maximum mortgage and the maximum mortgage

redetermined as consequence of the change

order.

2\) The net decrease in costs resulting from

acceptable construction changes.

I. Extension of Contract Time.

1\. Approve an extension only where:

a\. The delay was beyond the contractor\'s control

(e.g., weather, strikes, differing site

conditions, etc.) and is documented, or

associated with an approved change order,

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6/93 1-20

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4435.01 REV-1

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b\. The extension request was submitted within the

20-day limit provided by the Contract, Article

2, and the General Conditions for delays beyond

the contractor\'s control, and submitted

concurrently with any requested changes in the

work, and

c\. The request is accompanied by surety\'s written

consent. There is no consent requirement where

the project\'s assurance of completion is by a

cash escrow or letter of credit.

2\. Require funding for the increased cost for

overhead, interest, taxes, insurance, MIP, and

contractor\'s general requirements by use of a cash

escrow, or excess mortgage proceeds, or from the

contingency reserve (on a substantial

rehabilitation project).

a\. Require use of Form HUD-92403 for the release

of excess mortgage proceeds or contingency

reserve funds set aside to fund contract time

extensions.

b\. See Handbook 4470.1 REV-2 (4450.1 REV-1 for the

contractor\'s general requirements) for detailed

information on computing the increased cost.

c\. See paragraphs 1-8.F.3.b., 1-21., 1-22, and 1-23.

concerning limitations on the use of excess

mortgage proceeds, mortgagee\'s use of a

promissory note or letter of credit instead of

a cash escrow, and certification of third party

paid change orders.

3\. Enforce liquidated damages in accordance with the

Contract, Article 3, where the delay is within the

contractor\'s control or the request for extension

has not been filed within the prescribed period.

See paragraphs 1-16.C. and 4-5.C., on keeping the

mortgage in balance and Handbook 4470.1 REV-2,

paragraph 8-10, for computing the additional soft

costs resulting from the contractor\'s delay.

J. Distribution.

1\. Require the Mortgage Credit Branch to:

a\. Maintain a Change Order Summary Sheet for all

change orders approved for distribution. See

Handbook 4470.1 REV-2 for detailed information.

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1-21 6/93

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4435.01 REV-1

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(1-8) b. Type or rubber stamp on the back of the first

six copies of the multicopy change order form,

\"When the HUD estimated cost of all accepted

changes results in a decrease in the total

construction cost, the insurable mortgage will

be similarly decreased; but if the net effect

is an increase, the additional costs will be

defrayed by the mortgagor. The acceptance of

any change or changes involving a net increase

does not increase the mortgage amount.\" The

statement is printed on the last copy only, but

must appear on all copies.

c\. Type the conditions of acceptance or reasons

for nonacceptance listed on the approved

processing copy of the change order on the back

of all other copies.

d\. Forward all copies for your signature.

2\. After signature, require the Program Branch to

forward:

a\. The original and three copies to the mortgagee,

b\. The processing copy to Mortgage Credit, and

c\. Two copies to the Architectural Branch, one for

inclusion with the Master Set of drawings and

specifications and one copy for the HUD

representative.

3\. The mortgagee forwards one copy each to the

mortgagor, contractor and supervisory architect,

and retains the original for its files.

1-9. ARCHITECT\'S SUPPLEMENTAL INSTRUCTION, AIA Document G710.

A. Uses of AIA Document G710:

1\. Issue directives to the contractor to bring

construction into compliance with the contract

documents.

2\. Interpret or clarify the contract drawings and

specifications.

3\. Order minor changes in the work, not involving cost

or time e.g., relocating a door or window opening,

etc.

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6/93 1-22

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4435.01 REV-1

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(1-9) 4. Accept specified equivalents, e.g., add

makes/models to the list of specified equipment.

B. Monitor Usage closely, for compliance with paragraph A.

above, and require replacement of the supervisory

architect where the Architect\'s Supplemental

Instructions are chronically or egregiously misused.

See chapter 6 for details on replacement of the

supervisory architect.

C. Distribution. Require that for each AIA Doc G710

issued to the contractor that the architect include one

copy in the architect\'s job log, and forward one copy

each to the mortgagor and mortgagee, and two copies to

the HUD Chief Architect. Require the Chief Architect

to retain one copy with the Master Set of Drawings and

Specifications, and forward one copy to the HUD

representative.

1-10. CHANGES TO OFFSITE CONSTRUCTION must be requested by letter

or other acceptable format. Do not use Form HUD-92437 for

offsite work. Process using procedures for Form HUD-92437

as a general guide for technical review, approval and

distribution.

1-11. PERMISSION TO OCCUPY, Form FHA-2485, must be executed by

HUD before the mortgagor permits occupancy of any dwelling

unit, care facility unit, or other project service facility.

The physical completion and required documentation

are outlined on the form and in paragraphs A. and B. below.

A. Physical Completion. The Work or portion thereof for

which a Permission To Occupy is approved must be

sufficiently completed in accordance with the Contract

Documents so the mortgagor can occupy or utilize the

identified portion of Work for its intended use.

1\. Support facilities must be in place. Examples

include:

a\. Utilities must be connected, and service

facilities, including trash storage and

disposal, must be available,

b\. Pedestrian access and required handicapped

accessibility from public streets and parking

areas, through outside routes and any building

lobbies and common areas, and to listed units

and facilities must be safe, usable and

convenient,

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1-23 6/93

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4435.01 REV-1

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(1-11) c. Vehicular ingress and egress routes and parking

areas must be safe, usable, and convenient,

d\. Nurses stations, congregate kitchen and dining,

therapy, common use areas and similar services

must be available for accepted care units,

e\. All fire life-safety equipment, facilities, and

protected means of egress must be in place, and

f\. Areas made accessible, as a result of using the

units and facilities accepted for occupancy,

must not pose a hazard to occupants or the

public.

2\. Acceptability of each unit and facility for which a

permission to occupy is requested must be

established by review of the property and signature

of the respective certifications on Form FHA-2485

by the contractor, supervisory architect, and HUD

representative.

a\. Minor items that do not preclude occupancy are

permitted, but must be listed as an attachment

to Form FHA-2485. This serves both as a notice

of outstanding work requiring prompt

completion, and helps resolve future debate

regarding incomplete or improperly performed

contract work versus occupant damage for which

the contractor is not responsible.

b\. Hold the contractor fully responsible for any

incomplete or improperly performed contract

work whether or not listed.

B. Submission Documents. The mortgagee must sign Form

FHA-2485 agreeing with the request and stating that

insurance risks have been covered for the project. The

mortgagor must include the following documents with the

completed Form FHA-2485:

1\. A Certificate of Occupancy or equivalent permit

from the governing municipal authority for all

units and facilities listed on the Permission To

Occupy; and any other permits or authorizations

required by law.

2\. Rent Schedule and Information on Rental Project,

Form HUD-92458,

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6/93 1-24

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4435.01 REV-1

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(1-11) 3. Affirmative Fair Housing Marketing Plan, Form

HUD-935.2,

4\. Certificate of Management Agent, Form HUD-9839, and

5\. Management Agent Profile, Form HUD-9832, or

certification that one is already on file with the

particular Field Office.

Note: Items 2. through 5. above must only be

submitted with the first submission of a

Permission To Occupy.

C. Partial Occupancy Approval.

1\. Favorably consider partial occupancy of units as

they become available, where:

a\. Vandalism of and theft from completed units and

the property in general would be minimized, or

b\. Needed project income is provided, or

c\. An earlier rent-up date could be achieved than

would be attained if permissions to occupy were

deferred until completion of all units, or

d\. The mortgage security would otherwise be

enhanced, and

e\. Utility and heating/cooling costs for the

occupied units can be metered separately from

the contractor\'s usage during continuation of

construction, or an acceptable predetermined

arrangement for occupied unit utility and

heating/cooling costs is established.

2\. Approve a series of Permissions To Occupy as units

or facilities become available, where practical,

e.g., for individual buildings on multi-building

projects, or individual floors or wings on larger

buildings. Approve a single permission to occupy

for all units and/or facilities, where dictated by

management considerations, e.g., very small

projects.

1-12. RENT SCHEDULE. Instructions prohibiting additional tenant

charges and for reviewing Form HUD-92458 for subsidized

projects are in Handbook 4350.1, Chapter 7. Coordinate

reviews with the Director, Housing Management Division.

HUD no longer restricts rents for unsubsidized projects.

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1-25 6/93

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4435.01 REV-1

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1-13. COMPLETION OF CONTRACT WORK.

A. Construction Contract Provisions.

1\. Article 2.A. identifies the date for completion of

the contract work, and procedures for extension of

the time.

2\. Article 2.C. provides for imposition of liquidated

damages in the event the contract work is not

completed within the specified time or as extended.

3\. Article 2.D. makes the date the HUD representative

signs the final HUD Representative\'s Trip Report,

provided that the trip report is subsequently

endorsed by the Chief Architect, the date for

determining whether the contractor has met

provisions of Article 2.A.

4\. The final HUD Representative\'s Trip Report may not

be signed until all work required by the

construction contract is fully completed, except

for items of delayed completion. See paragraph C.

below for items of delayed completion.

5\. Require the HUD representative to stress the

Contract provisions at the preconstruction

conference and at job meetings after 80 percent

completion.

6\. Article 1. of the Contract gives it precedence over

all inconsistencies between the Contract and the

General Conditions.

B. Final HUD Representative\'s Trip Report. Require

accomplishment of the following:

1\. Contractor\'s preparation and submission to the

architect and HUD representative of a comprehensive

list (punch list) of work to be completed or

corrected before project review for issuance of the

\"final trip report.\" Require the list 30 days

before the anticipated construction completion

date.

2\. Architect\'s review of the contractor\'s punch list

against observed job conditions, appropriate

modification and distribution of the modified list

to the contractor and HUD representative.

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6/93 1-26

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4435.01 REV-1

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(1-13) 3. Contractor\'s completion of the itemized work, and

any other required work whether or not listed,

before the scheduled site visit for issuance of the

\"final trip report.\"

4\. HUD representative\'s review of the completed

project, preferably accompanied by the contractor,

supervisory architect, and mortgagor. Require an

additional site visit where the work is not acceptably

complete.

5\. HUD representative\'s preparation of the \"final trip

report\" on Form HUD-5379, HUD Representative\'s Trip

Report, where the work is found acceptable.

a\. The report must be completed and dated on the

site visit date to avoid unfairly penalizing

the contractor by imposing extra days of

liquidated damages or denying incentive pay as

may be applicable.

b\. The report must include the following

statements:

1\) \"Construction acceptably completed,\" or

\"Construction acceptably completed subject

to withholding disbursement or escrowing

funds for completion of the listed items

of delayed completion.\"

2\) \"Utility services: (list services

including electricity, gas, water,

sanitary sewer, storm sewer, telephone,

and cable TV as applicable), are complete,

connected, and operable.\" Where

connection is precluded by incomplete

offsite work add to the statement,

\"Connection for (list) is awaiting

installation of offsite lines.\"

c\. The report must list any items of delayed

completion, the estimated cost for completing

the work, and a recommended completion date(s)

for the listed work.

C. Items of Delayed Completion.

1\. Are work items beyond the contractor\'s control to

complete, e.g.:

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1-27 6/93

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4435.01 REV-1

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(1-13) a. Inability to install landscaping during

freezing conditions.

b\. Unavailability of items due to strike or other

temporary outage.

2\. May not preclude the mortgagor from occupying or

utilizing the project and its facilities for the

intended use.

3\. May not exceed two percent of the Contract amount.

4\. Retain 150 percent of the amount estimated by the

HUD representative for completion of items of

delayed completion as undisbursed funds, or if

undone at final closing, as an escrow for

completion of the work.

5\. Must be completed within 12 months of the date of

the final HUD Representative\'s Trip Report.

1-14. GUARANTEE PERIOD. Require that a HUD representative make a

9- and 12-month inspection in accordance with Handbook

4460.1 to identify and report on latent defects, failures,

items of delayed completion and any casualty damage.

A. Inform the Mortgagee, mortgagor and contractor in

writing of identified deficiencies before the

contractor\'s 1 year warranty expires.

1\. Require correction from the contractor for

construction deficiencies, including remedy through

equipment and materials warranties, and

2\. Notification of the insurance underwriter for

extended hazard or casualty damage as appropriate.

B. Seek Remedy through surety or use of retainage, escrow

or letter of credit where available, if the contractor

does not correct construction deficiencies in a timely

fashion.

C. Invite the Director of Housing Management (DHM) to

participate at all levels of guarantee period

activities, and forward a copy of all HUD

representative reports, and correspondence to the DHM,

mortgagee, mortgagor, contractor and surety relating to

guarantee period construction deficiencies.

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6/93 1-28

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4435.01 REV-1 Chg-2

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1-15. FUNDS AVAILABLE FOR APPLICATIONS FOR INSURED ADVANCES are

reflected in the Financial Requirements for Closing, Form

FHA-2283; Building Loan Agreement, Form HUD-92441; Mortgagee\'s

Certificate, Form HUD-2434 (FHA-3320 for cooperatives); and

consist of:

A. Mortgage Proceeds, except that use of any excess mortgage

proceeds is limited. See paragraph 1-23 for additional

information on excess mortgage proceeds.

\*

B. Mortgagor\'s front money cash escrow, where required to make

up the balance between the available mortgage proceeds and the

total required for construction, fees, carrying charges, and

financing. \*

C. Grant/Loan Proceeds from either governmental sources

and/or nongovernmental sources. See paragraph 1-27 for

additional information on grant/loan proceeds.

1-16. FUNDS DISBURSEMENT PRIORITY FOR INSURED ADVANCES.

\*

A. First, disburse all funds from the cash escrow established

by the mortgagor for on-site construction, fees, carrying charges

and financing front money escrow), unless a pro-rata disbursement

arrangement (for tax credit projects only) has been previously

approved by the Hub Director. \*

B. Second, disburse grant/loan proceeds, except where the

initial closing provides for a prorata disbursement arrangement

(governmental sources only). Release of grant/loan proceeds may

not be targeted to the completion of specific on-site

improvements. See paragraph 1-27 for additional instructions.

C. Third, mortgage proceeds. Do not disburse any mortgage

proceeds until all escrow, and grant/loan proceeds, not subject

to a pro-rata disbursement arrangement, have been paid out.

Where the Field Office has approved going to initial closing

before a governmental source grant/loan is in place, do not

disburse any mortgage proceeds until such grant/loan is in place.

At that time proceed in accordance with the provisions of

paragraph 1-15.

\*1-16.1 PRO-RATA DISBURSEMENT OF FRONT MONEY AND MORTGAGE

PROCEEDS ON TAX CREDIT PROJECTS

The mortgagor\'s front money cash escrow in cases involving

low-income housing tax credits (LIHTC) or historic tax credits

need not be fully disbursed before the disbursement of the

mortgage proceeds.

A. The mortgagor\'s front money cash escrow is deposited with

the mortgagee in an amount sufficient to meet requirements at

initial endorsement under outstanding instructions and so

reflected on the Mortgagee\'s Certificate.

B. The mortgagee and the HUD field office set up a disbursement

schedule based on the ratio of mortgagor\'s cash escrow and

mortgage proceeds to be disbursed. The cash escrow and mortgage

proceeds are disbursed concomitantly (on a pro-rata basis).

C. The pro-rata disbursement must be reflected on the

Mortgagee\'s Certificate and the Building Loan Agreement. Form

HUD-92403, Application for Insured Advances of Mortgage Proceeds,

is processed in accordance with outstanding instructions, except

that it must show the approved funding from both the mortgage

proceeds and the mortgagor\'s cash escrow in proportion to the

terms of the pro-rata agreement.

D. Release of the front money cash escrow may not be targeted

to the completion of specific on-site improvements. \*

1-17. MORTGAGOR\'S APPLICATION FOR INSURED ADVANCES for on-site

improvements must be made on Form HUD-92403, Application for

Insurance of Advances of Mortgage Proceeds.

4435.01 REV-1, CHG-2

1-29 06/04

06/04 1-29.1

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1-29 6/93

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4435.01 REV-1

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(1-17)A. General Criteria.

1\. Initiated by the mortgagor through the mortgagee,

reviewed and recommended by Mortgage Credit and

approved by the DHD.

2\. Submitted monthly, unless required more frequently

to avoid a default.

3\. Must be supported by the Contractor\'s Requisition,

Form HUD-92448, for any payments due under the

Construction Contract, and by proper bills and/or

receipts for other mortgageable items. See

paragraph 1-5 for details on Form HUD-92448.

4\. Mortgagee must secure a current extension of the

title policy evidencing clear title before

disbursing the funds.

B. Mortgage Credit Review. Require Mortgage Credit to

review and process Form HUD-92403 in accordance with

Handbooks 4480.1 and 4470.1 REV-2, Chapter 8. Major

mortgage credit responsibilities include:

1\. Reconcile any discrepancies between the mortgagee\'s

cumulative total for all advances, including the

advance under consideration and conclusions reached

in the processing before recommending the advance

for approval.

a\. Enter any required adjustments in Column B and

note, \"No Adjustment Necessary, Except As

Indicated,\" or \"No HUD Adjustment Necessary,\" as

appropriate.

b\. Enter the approved amount in the \"Certificate

of Mortgage Insurance\" on the face of the form,

and where the mortgagee\'s request is reduced

explain the disallowance on the form\'s reverse

side.

2\. Determine monthly that advances are proportionate

to construction progress.

a\. Require the Chief of Mortgage Credit to advise

you where advances for \"soft costs,\" i.e.,

financing and carrying charges, are in excess

of work progress as shown by the most current

Progress Schedule accepted by the Chief

Architect and the percentage of project

completion reflected on Form HUD-92448.

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6/93 1-30

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4435.01 REV-1

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(1-17) b. Take action according to paragraph C. below

where the mortgage is not in balance due to the

fault of the contractor.

3\. Secure approval from the Labor Relations

Officer/Wage and Hour Compliance Specialist for any

advance requesting release of any portion of the

contractor\'s 10 percent holdback.

4\. List the escrow(s) and amount(s) required at final

closing for items of delayed completion, mechanic\'s

or other liens, and/or other purposes in the

\"Explanation of Disallowed Amounts\" space on the

\"Final\" advance.

a\. Show the total required escrow amount in the

space provided in the \"Certificate of Mortgage

Insurance.\"

b\. Withhold the required escrow amount from the

amount approved for mortgage insurance in the

\"Certificate of Mortgage Insurance.\"

C. Keep The Mortgage in Balance. Require the Chief of

Mortgage Credit to prepare (with Field Counsel\'s

assistance) a letter from you to the mortgagee with

copies to the mortgagor, contractor, surety,

supervisory architect, and legal counsels for the

mortgagee, mortgagor and surety, where the mortgage

gets out of balance (see paragraph B.2. above). The

letter must:

1\. Advise of the apparent lack of construction

progress and impending shortage of mortgage

proceeds,

2\. Request that the parties meet with you to identify

the cause(s) of the slow construction progress and

devise mutually acceptable remedies, and

3\. Identify that you will implement the transfer of

funds from the construction budget for the purpose

of defraying \"soft costs\" in the event acceptable

progress is not achieved within a prescribed

period. See paragraph 4-5.C.

4\. Proceed with the instructions in paragraph 4-5-C.,

where satisfactory construction progress has not

been made within the prescribed period.

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1-31 6/93

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4435.01 REV-1

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(1-17)D. Slow or Nonpayment of Obligations to/by Contractor.

1\. Require the Chief of Mortgage Credit/Chief

Architect to prepare (with Field Counsel\'s

assistance) a letter from you to the mortgagee with

copies to the mortgagor, contractor, surety,

supervisory architect, and legal counsels for the

mortgagee, mortgagor and surety, where:

a\. There are nonpayment disputes between the

mortgagor and the contractor or between the

contractor and subcontractors, material

suppliers, etc., or where such payments are not

being made in a timely fashion, and

b\. The slow or nonpayment conditions are deemed to

jeopardize mortgage security.

2\. The letter must:

a\. Advise of the apparent deficient payment

record,

b\. Request that the parties meet with you to

identify the cause(s) of the payment problem

and devise mutually acceptable remedies, and

c\. Identify that you will pursue control of

payments by the mortgagee or title company

through use of two- or three-party checks in

the event the problem is not resolved within a

prescribed period. See paragraph 4-5.B.

3\. Take action in accordance with paragraph 4-5.B.,

where satisfactory resolution of the problem is not

achieved within the prescribed period.

E. Records Maintenance and Distribution.

1\. Require Mortgage Credit to maintain a record of

approved disbursements on Form HUD-92451, Financial

Record of Mortgage Loan Transaction in accordance

with Handbooks 4480.1 and 4470.1 REV-2.

2\. Distribute the executed Form HUD-92403 as follows:

Distribute executed applications, except for the

final advance, as follows: original to the

mortgagee with copies to the Washington Docket,

Field Office Docket, and Mortgage Control File.

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6/93 1-32

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4435.01 REV-1

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(1-17) F. General Categories of Insured Advances are: initial

advance, intermediate advances, next to last advance

and the final advance.

1-18. INITIAL ADVANCE is usually made at initial closing, but may

be made later.

A. Eligible Disbursements are limited to the mortgagor\'s

early expenditures that have been paid or are due and

payable, e.g.:

1\. Financing fees.

2\. Mortgagee\'s fees for:

a\. Initial service charge (origination) not to

exceed two percent of the Mortgage.

b\. Permanent lender commitment fees not to exceed

the lesser of:

1\) The amount paid, or

2\) One and one half (1-1/2) percent of the

Mortgage.

3\. HUD fees for: examination and inspection, and the

first year\'s mortgage insurance premium (MIP).

4\. Architect, engineer, surveyor or testing fees paid

directly by the mortgagor for project design.

Require Form HUD-92403-1, Mortgagor\'s and

Architect\'s Certificate, for all advances for a

prime architect\'s design services, whether

requested at the initial or an interim advance.

See Handbook 4430.1 REV-1, paragraph 1-1l.B., for

detailed information on prime architects.

5\. Organizational expenses to initiate a project and

to organize its planning, financing, hazard and

liability insurance, and construction.

6\. Consultant\'s fees, where used by a nonprofit

mortgagor, for services leading to the initial

closing, consistent with Handbook 4500.1 REV-2,

Allowance for Making Nonprofit Projects Operational

(AMPO) and Use of Housing Consultants. Do not

approve more than 60 percent of the allocated fee

for disbursement at initial closing.

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1-33 6/93

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4435.01 REV-1

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(1-18) 7. Legal expenses to create the mortgagor entity and

review documents related to the initial closing;

but not to create tax shelters, trusts, etc., nor

for expenses related to land acquisition, zoning,

title and recording charges. Retain enough of the

total approved on Form FHA-2283 to have at least 25

percent available to cover legal services for final

closing.

8\. Title and recording relating to initial closing,

including: recording fees, mortgage and stamp

taxes, survey recording fees, title insurance and

title work required for initial closing. Retain

enough of the total approved on Form FHA-2283 to

cover final closing title and recording fees.

9\. Sums allocated to acquisition cost of land (new

construction) or acquisition cost of existing

property (substantial rehabilitation), not to

exceed the HUD estimate of \"as-is\" value of the

unimproved site or \"as-is\" value of the property

before rehabilitation.

10\. Insurance premiums for extended hazard, liability,

and other common risk insurance. All such

insurance and workman\'s compensation for which the

contractor is made responsible under terms of the

Construction Contract, including the General

Conditions and General Requirements of the

Specifications, must be requested on the

Contractor\'s Requisition, and

a\. Must be shown on Form HUD-92403 under

Construction cost per Form HUD-92448, but

b\. May not be additionally shown as mortgagor\'s

\"other fees.\"

11\. Contractor requisition for:

a\. Bond premiums, insurance premiums, building

permit, water tap and sewer connection fees and

similar fees paid before initial closing.

b\. Construction trade items only where:

1\) There\'s an approved early start, or

2\) Components stored offsite are approved and

the requirements for payment are met. See

paragraph 1-6 for detailed information.

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6/93 1-34

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4435.01 REV-1

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(1-18) 12. Other front-end expenditures.

B. Advances at Initial Closing. Require submission of the

mortgagor\'s application for the initial advance 10

working days before initial closing, where it is to be

disbursed at the initial closing. Reconcile any

differences, explain disallowances and give the

mortgagor time for alternative actions required to

facilitate a smooth closing.

1-19. INTERIM ADVANCES occur between the initial advance and the

next to last advance. Eligible disbursements include

mortgagor\'s expenditures that have been paid or are due and

payable, but for which funds have not been disbursed under

a previous advance, e.g.:

A. Acceptably Completed Contract Work and material

acceptably stored on-site, where supported by a

completed Contractor\'s Requisition, Form HUD-92448.

B. Interest Earned for the requested periods.

1\. Mortgagee\'s refunding of any interest to the

mortgagor is a kickback and prohibited.

2\. Treat any such refund as a direct mortgage

reduction.

C. Supervisory Architect\'s Fee based on the monthly work

progress, not to exceed a rate equal to the percentage

of project completion.

D. Other Items listed in paragraph 1-18.A. above, whether

incurred before or after initial closing; and as

additionally incurred during the course of

construction, e.g.:

1\. Taxes accrued after initial closing.

2\. Legal fees for interim activities in creating a

project. Retain at least 25 percent of the total

approved amount until the final draw.

3\. Organizational fees limited to documented costs to

control and manage construction, e.g.: accounting

and controlling disbursement of mortgage proceeds

and working capital; coordinating permissions to

occupy; and liaison with HUD, the mortgagee,

contractor and architect during construction.

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1-35 6/93

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4435.01 REV-1

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(1-19) 4. Consultant\'s fee, where applicable, consistent with

Handbook 4500.1 REV-2, Allowance for Making

Nonprofit Projects Operational (AMPO) and Use of

Housing Consultants.

E. Cost of Equipping and Renting the Project. These

expenditures may only be requisitioned on Form

HUD-92403 where there is a nonprofit sponsor.

1\. The allowance for making a project operational

(AMPO) is funded from mortgage proceeds for the

cost of equipping and renting the project for

nonprofit projects only. See paragraph 1-24.D.

2\. The working capital deposit is required instead of

AMPO for the cost of equipping and renting the

project for profit motivated mortgagors, however,

it is not advanced through use of Form HUD-92403.

The working capital deposit is escrowed with and

controlled by the mortgagee. See paragraph 1-25.

1-20. NEXT TO FINAL ADVANCE is where construction is complete,

except for any approved items of delayed completion.

Eligible disbursements include:

A. Mortgagor\'s Continuing Expenditures for items listed

for initial and interim advances and as may otherwise

be eligible, that have been paid or are due and

payable, but for which funds have not been disbursed

under a previous advance.

B. Contractor\'s 10 Percent Holdback for nonidentity of

interest contractors, subject to the provisions of

paragraph 1-27C.

1-21. FINAL ADVANCE occurs at final closing and must take into

account the funds required to set up escrows for \"items of

delayed completion,\" \"to be paid in cash items,\" and any

other required escrows. See paragraph 1-27 for release of

holdback.

A. Eligible Distributions include:

1\. Audit fees pertaining to mortgagor\'s cost

certification.

2\. Legal fees associated with counsel\'s review of

final closing documents.

3\. Organizational costs involving final closing.

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6/93 1-36

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4435.01 REV-1

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(1-21) 4. Title and recording fees associated with final

closing.

5\. Any remaining balance for items listed for the

initial, interim and next to final advances.

B. Insurance Upon Completion Projects only have one

advance, the final advance at final closing.

C. Conditions for the Final Advance. Require Mortgage

Credit to review the following documents in accordance

with Handbook 4470.1 REV-2 before the final advance:

1\. Mortgagor\'s cost certification and complete Form

FHA-2580, Maximum Insurable Mortgage, for a

redetermination of the mortgage.

2\. Escrow Deposit Agreement, Form FHA-2546, for any

items of delayed completion.

3\. Escrow Agreement for Unpaid Construction Costs,

Form HUD-92476-1, for any unpaid construction

costs.

4\. Request for Final Closing of Credit Instrument,

Form HUD-92023, for insured advance projects and

Form 2455 for Insurance Upon Completion projects.

5\. Submission of the Contractor\'s Requisition, Form

HUD-92448, including endorsement of the

Contractor\'s Prevailing Wage Certificate, for any

Contract sum including any holdback.

6\. Require a 10-working day early submission of the

mortgagor\'s application for final advance, to

explain required escrows to the mortgagor before

the closing date and to facilitate a smooth

closing.

1-22. MORTGAGOR\'S APPLICATION FOR ESCROWED FUNDS.

A. Form HUD-92464, Request for Approval of Advance of

Escrow Funds, must be used where the escrow is to

ensure completion of offsite improvements, additive

change orders, or mortgagor\'s unpaid construction

items.

1\. The mortgagor initiates and forwards Form HUD-92464

through the mortgagee. Require its review by

Mortgage Credit.

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1-37 6/93

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4435.01 REV-1

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(1-22) 2. Require the HUD representative to reflect the

percentage of acceptably completed escrow work on

the HUD Representative\'s Trip Report, Form

HUD-5379, and the Chief Architect to forward a copy

after review to the Chief Mortgage Credit for use

in reviewing Form HUD-92464.

3\. Do not authorize advances in excess of the

documented percentage completed, less previous

payments and a 10 percent retainage.

4\. Where excess mortgage proceeds are used to fund an

escrow for completion of offsite improvements,

additive change orders, or mortgagor\'s unpaid

construction items, follow the procedures in

paragraph 1-22.B. below.

B. Distribution. Return the original copy of Form HUD-92464

to the depositor, and retain one copy each for

the Washington Docket, Field Office Docket, and

Mortgage Credit Control File, after its approval,

approval as modified or disapproval with explanation.

1-23. Distributions From Excess Mortgage Proceeds.

A. Eligible Distributions. Cash Available to the

mortgagor listed on line 42 of Form FHA-2283, Financial

Requirements for Closing may be allocated to the

following items:

1\. The lesser of HUD\'s estimate of the \"as-is\" value

of land or the actual latest arm\'s length purchase

price for new construction projects.

2\. The lesser of HUD\'s estimate of the \"as-is\" value

of property before rehabilitation or the

mortgagor\'s acquisition cost/existing indebtedness

for substantial rehabilitation projects.

3\. The cost of any demolition reflected in the Fair

Market Value of Land with payment approved as

demolition progresses.

4\. Cash escrow to cover offsite construction cost.

Where excess mortgage proceeds are used for this

purpose:

a\. Specify the amount for offsite work in one of

the unused columns of Form HUD-92451, Financial

Record of Mortgage Loan Transaction.

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6/93 1-38

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4435.01 REV-1

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(1-23) b. Requests for release of funds must be made on

Form HUD-92403, Application for Insurance of

Advance of Mortgage Proceeds.

1\) Certifications by the mortgagor, architect

and HUD representative plus the criminal

certification contained on the Form

HUD-92464 must be included with the request.

2\) Disbursements must be in proportion to the

percentage of offsite work completed, less

a 10 percent holdback.

5\. Cash escrow to cover non-realty items, i.e., major

movable equipment, (applicable only to Sections

232, 221(d) SRO and 242.

6\. Construction and/or permanent loan discounts

required to be paid at initial closing.

7\. Cash escrow for the:

a\. Working capital deposit,

b\. Initial operating deposit,

c\. Interest shortfall,

d\. Loan discounts not paid at initial closing.

8\. Approved change orders, if any remaining balance.

9\. When an escrow item is to be funded from excess

mortgage proceeds:

a\. Mortgagor must identify in writing the

escrow(s) to be established with these funds.

b\. Funds for any discounts not required to be paid

at initial closing, must be held until final

closing.

c\. Paragraphs 18(b), (c), (d) and (f) of Form

HUD-2434, Mortgagee\'s Certificate, must be checked

and amended to reflect the amount of any loan

discount in escrow.

d\. Segregate funds in an unused column on Form

HUD-92451, Financial Record of Mortgage Loan

Transaction, to avoid the unnecessary

accumulation of interest.

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1-39 6/93

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4435.01 REV-1

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(1-23) B. Requests For Release of Funds must be made on Form

HUD-92403, Application for Insurance of Advance of Mortgage

Proceeds, and are subject to the disbursement

procedures applicable to the escrow item(s) being

requested.

1\. Where excess mortgage proceeds are used to fund the

escrow for completion of offsite improvements,

additive change orders, or mortgagor\'s unpaid

construction items:

a\. Certifications by the mortgagor, architect and

HUD representative plus the criminal

certification contained on the Form HUD-92464

must be included with the request.

b\. Disbursements must be in proportion to the

percentage of work completed, less a 10 percent

holdback.

2\. Do not allow mortgagor to draw down excess mortgage

proceeds to fund a cash escrow, and later

substitute a letter of credit to satisfy the escrow

requirement as a means of drawing cash out the

project.

C. Restricted Excess Mortgage Proceeds. The difference by

which the HUD estimate exceeds the construction

contract amount are proceeds not to be available to the

mortgagor during construction.

1\. These funds may not be used to satisfy any escrow

requirements and must be held until final closing.

2\. Identify these funds in an unused column of Form

HUD-92451 as restricted funds.

1-24. RELEASE OF LETTERS OF CREDIT. See Handbook 4430.1 REV-1

regarding mortgagee\'s options for use of a letter of

credit. In the event of a claim:

A. Assignment. Do not accept an assignment of the letter

of credit to HUD from the mortgagee.

B. Undrawn Balance. Treat any undrawn balance from a

letter of credit or escrow agreement as cash held by

the mortgagee.

C. Cash Equivalent. Require the mortgagee to provide cash

equal to the undrawn balance, if demand on a letter of

credit is not met.

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6/93 1-40

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4435.01 REV-1

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1-25. ADVANCES FOR CARRYING CHARGES, FINANCING EXPENSES, ETC.,

are provided by The Building Loan Agreement, Form

HUD-92441, paragraph (5).

A. Line Item Amounts on Form HUD-92451, Financial Record

of Mortgage Loan Transaction, should equal the amount

for the corresponding line item on the Project Income

Analysis and Appraisal, Form HUD-92264, or applicable

underwriting form for the Section of Act.

B. Prohibited Advances. Do not release funds in excess of

itemized allocations, except to prevent a default,

where:

1\. HUD agrees to a reallocation; and

2\. There is a corresponding reduction in another line

item.

C. Advance Amounts to the extent the charges have accrued

or been earned, or that the Borrower is otherwise

entitled to payment.

D. Allowance to Make the Project Operational (AMPO) is

used for nonprofit sponsors as approved by the DHD.

See Handbook 4470.1 REV-2, Chapter 8, and Handbook

4500.1 REV-2 for detailed instructions on eligible

expenditures and restrictions.

1\. General categories of eligible expenditures

include:

a\. Additional soft costs, ground rents and special

assessments resulting from construction delay,

b\. Necessary change orders resulting from latent

site conditions and/or construction

requirements imposed by the local authority

after start of construction,

c\. Mortgage insurance premium for the second year,

and property insurance policies and real estate

taxes for the first year after project

completion, and

d\. Costs incidental to project operation, e.g.,

advertisement, furnishing model rental units,

and furnishing/equipping lobbies, management

office and community spaces.

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1-41 6/93

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4435.01 REV-1

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(1-25) 2. General categories of ineligible expenditures

include:

a\. Additional fees/profits for attorneys,

architects and other development team members,

b\. Purchase/lease/operating expense for motor

vehicles, and

c\. Acquisition of equipment not essential to

project operation.

3\. Allocation of AMPO balance at final closing:

a\. Allocate any balance to the reserve for

replacements.

b\. AMPO is for the benefit of the purchasing

nonprofit mortgagor where a builder-seller is

involved (Section 221(d)).

1\) The builder-seller may only receive AMPO

funds for approved eligible expenditures,

after the nonprofit entity receives title

to the completed project.

2\) Apply the full AMPO fund to the reserve

for replacements, where a sale to a

nonprofit entity is not completed.

E. Consultant\'s Fee, For Nonprofit Sponsors. Advance fees

in accordance with the terms of the executed contract.

Follow guidelines in Handbook 4500.1 REV-2, Allowance

for Making Nonprofit Projects operational (AMPO) and

Use of Housing Consultants.

1-26. WORKING CAPITAL DEPOSIT is established with the mortgagee

at initial closing for all but nonprofit mortgagors. See

Handbook 4430.1 REV-1, paragraph 1-26, for details. It may

be funded by cash, letter of credit or excess mortgage

proceeds, if any.

A. Purpose. The deposit is used to:

1\. Defray cost of initial marketing and rent-up. This

includes: sales and advertising, model furnishing,

and equipment and supplies essential to initial

rent-up, etc.

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6/93 1-42

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4435.01 REV-1

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(1-26) 2. Set up accruals for items due during the first

operating year that project income is not expected

to cover, including real estate taxes, permanent

property insurance premiums, mortgage insurance

premium, ground rents and assessments.

3\. Cover shortfalls in interest, taxes, property

insurance premiums, mortgage insurance premiums,

ground rents and assessments during construction

after funds available under the Building Loan

Agreement are exhausted.

4\. May be allocated to the reserves for replacement

for a project with low income housing tax credits,

where acceptable to the mortgagor and HUD.

B. Control And Release Of Escrow. The mortgagee controls

disbursements from the escrow, except where the

mortgagor certifies at firm commitment that any balance

of the escrow will be applied to the reserve for

replacements on a Low Income Housing Tax Credit (LIHTC)

project. In reviewing a mortgagor\'s request for

release of part of the escrow, consider the following:

1\. Mortgagor\'s request for the release of such escrow

funds must be by letter through the mortgagee,

rather than on Form HUD-92403.

2\. None of the escrow can be used to defray any of the

hard costs of construction applicable to the Total

for All Improvements, Section G of Form HUD-92264,

Rental Housing Project Income Analysis and

Appraisal (or other Firm Stage underwriting form

applicable to the Section of Act the project is to

be insured under).

3\. Avoid premature disbursements and unnecessary

expenditures.

4\. See Handbook 4470.1 REV-2, paragraph 18-4.F. for

detailed instructions for HUD control and release

of the escrow where the mortgagor certifies at firm

commitment on an LIHTC project to apply any balance

to the reserve for replacements.

5\. As portions of a project are ready for occupancy, a

partial disbursement may be permitted for

reasonable opening expenses: however, it must be

determined that the escrow is not exhausted before

the entire project is complete.

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1-43 6/93

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4435.01 REV-1

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(1-26) 6. An unsolicited recommendation may be offered by the

Field Office that the deposit be used to cover any

shortfall in interest, taxes, property insurance,

mortgage insurance premiums, ground rent and

assessments.

7\. Fully document all expenditures from the escrow.

C. Cost Certification Of The Working Capital Deposit. The

mortgagor\'s cost certification may include monies spent

from the working capital escrow.

1\. The expended portion must be supported by a

schedule setting forth the vendor\'s name, a

description of items purchased, total invoice price

and the amount paid to date.

2\. These expenditures will not be a basis for, or

included in, processing a mortgage increase.

D. Final Release Of Escrow.

1\. Release any balance of the working capital escrow

to the mortgagor one year after substantial

completion where the project is not in default.

2\. Hold this escrow until any financial problems are

resolved (e.g., has not reached sustaining

occupancy, has poor liquidity or high payables, is

operating at a deficit or is near default).

3\. Authorize the mortgagee to use any balance of the

working capital escrow to cure a default, where a

default occurs before its release. See paragraph

4-K.

1-27. DISBURSEMENT OF GRANT/LOAN PROCEEDS. Grant/loan proceeds

may come either from a governmental source, i.e., Federal,

State, or local government agency or instrumentality, or a

nongovernmental source, e.g., a foundation.

A. General For Governmental/Nongovernmental Source Funds.

The proceeds are used to fund a front money cash escrow

(Part A of the \"Total Requirements for Settlement,\"

Form HUD-92264-A) at initial closing, whether the

funding source is a governmental or nongovernmental

entity. See paragraph B. below for additional options

to a cash escrow available to governmental source

entities only.

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6/93 1-44

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4435.01 REV-1

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(1-27) 1. Disbursement priority of grant/loan proceeds in

relation to mortgage proceeds and other escrows is

discussed in paragraph 1-15.

2\. Disbursement procedures from the cash escrow is

discussed in paragraph 1-21.

3\. Release of grant/loan proceeds may not be targeted

to the completion of specific on-site improvements.

B. Additional Options For Governmental Source Funds.

Where the grant/loan proceeds come from a governmental

source, the mortgagor may use instead of a cash escrow:

1\. An unconditional irrevocable letter of credit

issued by a banking institution (see paragraph 1-23

for release of letters of credit), or

2\. An agreement entered into by HUD, the mortgagee,

the mortgagor and the governmental entity for a

prorata disbursement of the loan/grant proceeds.

Note: Paragraph A.3. above also applies where a

letter of credit or a prorata disbursement

agreement are used.

C. Prorata Agreement For Governmental Source Funds. The

mortgagor may elect prior to initial closing to use a

pro rata disbursement agreement instead of a cash

escrow, where it is accepted by HUD, the mortgagee, the

governmental entity, and mortgagor, and subject to the

following:

1\. The mortgagor must post either a cash escrow or an

unconditional letter of credit equal to or greater

than 10 percent of the grant/loan proceeds. This

is to be used for the governmental entity\'s pro

rata contribution toward the mortgagor\'s monthly

advance request, where the governmental entity does

not advance the funds to the mortgagee in a timely

fashion.

a\. HUD must retain control of the escrow in a

separate agreement,

b\. The mortgagor must reinstate any portion of the

escrow drawn before final closing within 10

days of the draw down, and

c\. The escrow may be released at final closing.

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1-45 6/93

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4435.01 REV-1

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(1-27) 2. HUD has the sole authority to resolve differences

in the inspection process and disbursement of

grant/loan proceeds.

3\. HUD has the right to approve construction advances

after considering any reported noncompliance in the

work by the governmental entity, where the project

is proceeding in compliance with approved plans and

specifications.

4\. The mortgagee must concurrently furnish HUD and the

governmental entity with copies of Form HUD-92448,

Contractor\'s Requisition, and Form HUD-92403,

Application for Insurance of Advances of Mortgage

Proceeds.

5\. The governmental entity must process the advance

request and make its pro rata contribution to the

mortgagee promptly and without adjustment.

a\. Where the governmental entity finds the need

for an adjustment, it must furnish the

information to HUD to be reflected in the next

month\'s advance requisition.

b\. The governmental entity must assume the risk

for any grant/loan proceeds disbursed in excess

of the amount approved by HUD and must

replenish the excess funds within 10 working

days of notification by HUD.

c\. Where the governmental entity fails to advance

grant/loan proceeds to the mortgagee in a

timely fashion, the mortgagee must drawn down

on the escrow/letter of credit identified in

paragraph 1. above.

6\. Form HUD-92403, Application for Insurance of

Advances of Mortgage Proceeds, is processed in

accordance with outstanding instructions, except

that it must show the approved funding from both

the mortgage proceeds and the grant/loan proceeds

in proportion to the terms of the pro rata

agreement.

7\. A copy of the HUD approved request for advances

must be sent to the governmental entity. The

governmental entity must use the information to:

a\. Comply with paragraph 5.b. above, and

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6/93 1-46

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4435.01 REV-1

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(1-27) b. To make any required reductions to the

subsequent request for advances, where its

approval of advances exceed the HUD approved

amount(s).

1-28. RELEASE OF CONTRACTOR\'S 10 PERCENT HOLDBACK. The holdback

provides an incentive for the general contractor and

mortgagor to: promptly complete the project, submit cost

certification and reach final closing.

A. Amount Of Holdback. The Building Loan Agreement

requires the mortgagee to retain at least 10 percent of

the construction proceeds from each advance. The

construction contract also provides for 10 percent

holdback from the contractor\'s monthly payments for

acceptably completed work, acceptably stored materials,

and where applicable, components acceptably stored

offsite.

B. Identity of Interest Contractor. Except as provided in

paragraphs D. and E. below, do not release any part of

the holdback until final closing for a contractor with

an identity of interest.

C. Nonidentity of Interest Contractor. Release the

contractor\'s holdback or remaining balance at the next

to last advance (see paragraph 1-19), where

requisitioned on Form HUD 92403, Application for

Insurance of Advance of Mortgage Proceeds, and subject

to compliance with the following:

1\. Contractor\'s cost certification, where required by

paragraph 5-1.B., has been reviewed and necessary

adjustments made to Form HUD-92451, Financial

Record and Mortgage Loan Transaction,

2\. Contractor has disclosed its final obligations on

Form HUD-92023, Request for Final Endorsement of

the Credit Instrument,

3\. All work under the construction contract has been

inspected and approved by the controlling

jurisdictions and/or authorities,

4\. Certificates of occupancy or other required

approvals for the dwelling units, and non-dwelling

facilities, where applicable, have been issued by

governmental authorities having jurisdiction.

Separate buildings for community rooms, rental

offices, laundry rooms, etc., commonly require

certificates of occupancy.

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1-47 6/93

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4435.01 REV-1

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(1-28) 5. Permission To Occupy, Form FHA-2485 has been issued

by HUD for all units,

6\. All Davis-Bacon payroll requirements have been

satisfied,

7\. Surveyor\'s Certificate, Form HUD-92457, and survey

showing the location of all improvements, utility

easements and site utility distribution lines have

been submitted to HUD, and

8\. Retain, where applicable, an adequate amount for

the following:

a\. Items of delayed completion in an amount equal

to 150 percent of the HUD representative\'s cost

estimate for completion,

b\. Any owed or contested amounts indicated by

mechanics, subcontractor, supplier, or

equipment lessor liens, etc.,

c\. Lesser of the liquidated damages or actual

damages computed at cost certification, and

d\. Net effect of negative change orders.

D. Early Partial Release of Holdback.

1\. After 90 percent contract completion, the Field

Office Manager may release part of the contractor\'s

holdback and suspend further withholding of

holdback from payments due, where:

a\. The contractor has no identity of interest or

the contractor\'s only identity of interest is a

project ownership of less than 5 percent,

b\. The contractor, mortgagor and mortgagee request

the early release of the holdback in accordance

with Appendix 5 and attach the request to Form

HUD 92403, Application for Insurance of Advance

of Mortgage Proceeds, and

c\. Prior written consent from surety, if any, for

the early release of holdback is provided with

the request, and

2\. The Field Office Manager determines that:

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6/93 1-48

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4435.01 REV-1

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(1-28) a. The contractor\'s general performance warrants

partial release of the holdback without

conditions, or

b\. Partial release of the holdback with

conditions, e.g., measures to assure immediate

distributions to subcontractors or others,

would be in the mutual interest of all

participants, and

3\. The undisbursed holdback must equal or exceed 5

percent of the contract amount.

E. Projects In Difficulty. Release of part of the

contractor\'s holdback before 90 percent contract

completion may be granted only to prevent a default of

the construction loan and only if it would solve the

project\'s problems and enable it to reach construction

completion. See paragraph 4-5.D.

1\. Consider the contractor\'s performance including:

a\. The completed work must be satisfactory,

b\. The percentage of completed contract work must

be sufficient to ensure project completion

within the specified contract time, and

c\. Do not release any holdback if there are

serious, unresolved questions concerning:

1\) Quality of work,

2\) Compliance with the contract, including

outstanding change orders, or

3\) Work is progressing behind the

contractor\'s construction schedule, as

amended by approved change orders.

2\. Require a written consent for the early release of

holdback from the surety, if any, the mortgagor and

mortgagee.

1-29. ASSURANCE OF FUNDS TO MEET OPERATING DEFICITS. At initial

closing, the mortgagee may have accepted an Agreement to

Furnish Additional Funds, Form FHA-2476, instead of a

funded operating deficit escrow (see Handbook 4430.1 REV-1,

paragraph 1-28). Remind the sponsor at 80 percent

completion of the obligation to fund the escrow on or

before the estimated construction completion date.

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1-49 6/93

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4435.01 REV-1

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1-30. PRELIMINARY ASSESSMENT FOR INSURED MORTGAGE INCREASE.

A. Timing. Do not consider a request for mortgage

increase until the project is complete, cost

certification is complete, and final closing will

likely be achieved immediately following processing of

the mortgage increase, except:

1\. A mortgage increase may be granted at the time a

change order is approved provided:

a\. It qualifies under paragraph B.3. or B.5.

below,

b\. Other funds are not available to cover the cost

involved; and

c\. It will avoid default prior to final closing.

2\. The Field Office Manager determines that a mortgage

increase is necessary to avoid default before final

closing.

B. Basis For Considering A Mortgage Increase. To cover:

1\. Necessary change orders, i.e., latent project

conditions, changes in applicable code, architect\'s

error and declared natural disaster damage not

covered by casualty insurance, (see paragraphs

1-8.B.1. through 1-8.B.4.a.). Following are limiting

factors for approving a mortgage increase based on

necessary change orders:

a\. The cost of necessary changes to a substantial

rehabilitation project must exceed the project

contingency,

b\. Require compliance with subitems 1) and 2)

below as conditions for a mortgage increase,

where there is a determination of

architect\'s/engineer\'s errors or omissions. A

finding of Architect\'s/engineer\'s errors or

omissions should be made where: there is a

failure to request and/or perform necessary

subsurface investigations (new construction),

or assess existing conditions (substantial

rehabilitation project) consistent with sound

professional practices); failure to comply with

applicable codes and ordinances in existence at

initial closing; and failure to provide for

conditions that may adversely affect occupant

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6/93 1-50

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4435.01 REV-1

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(1-30) life safety or health, the project\'s physical

integrity, or pose potential project liability.

The mortgagor must:

1\) Pursue a claim to judgement against the

architect, where: the requirements were

overlooked at project planning and design,

and the cost of remedy exceeds the

estimated cost to the mortgagor, had the

property been properly designed initially,

and

2\) Apply any recovery (less legal and other

recovery costs) up to the mortgage

increase amount to mandatory prepayment of

the mortgage.

c\. Mortgage increases for change orders required

due to declared natural disasters are limited

only to construction hard costs to the extent

not covered by insurance.

2\. Betterment changes. See paragraph 1-8.C.

3\. Additional costs caused by extensions in contract

time meeting all of the following:

a\. Approved by HUD,

b\. Justifiable under AIA General Conditions, and

c\. Caused by problems beyond the contractor\'s and

mortgagor\'s control.

4\. Additional cost for replacing the original

contractor when the original contractor becomes

bankrupt, abandons the job or the contract is

terminated for cause and the surety has failed to

perform. Report any nonperformance by a surety to

the U.S. Treasury with a copy of the letter to the

Director, Office of Insured Multifamily Housing

Development, HMI. See paragraph 4-5.A.2.

5\. A substantial error in HUD cost processing which

would otherwise result in serious inequities. The

error must be a deviation from outstanding

technical instructions. Professional differences

in opinion and judgement exercised by a technician

do not constitute an error in HUD processing.

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1-51 6/93

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4435.01 REV-1

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(1-30)C. Mortgage Increase Restrictions. To be approved:

1\. A mortgage increase may not be granted for cost

overruns associated with: completion of the work

in accordance with the original contract documents

by the original contractor, changes made primarily

for the convenience of the mortgagor or contractor,

nor for the aggrandizement of the mortgagor or

contractor.

2\. Cost overruns are not a basis for granting a

mortgagor\'s request for mortgage increase nor are

changes made primarily for the convenience or

aggrandizement of the mortgagor or contractor.

3\. A mortgage increase must be greater than: \$50,000

or 2-1/2 percent of the original mortgage where

such amount exceeds \$50,000, and

4\. It must be supported by debt service, i.e., Form

HUD-92264-A, Criterion 5.

5\. A mortgage increase may not be granted for

replacing a contractor where the mortgagor sets up

a \"straw contractor\" for purposes of BSPRA.

D. Preliminary Review of Request For Mortgage Increase.

Analyze the request before referring it for technical

processing to:

1\. Ensure that all requested increases are fully

justified and eligible under the criteria in

paragraph B. above,

2\. Evaluate the project\'s potential for reaching final

closing in the event the mortgage increase is

granted,

3\. Consider other possible solutions, e.g., infusion

of new capital through new partners, syndication

proceeds, etc., and

4\. Prepare a memorandum for the file outlining

pertinent facts and citing the applicable paragraph

B. category upon which the technical processing of

the request for mortgage increase is to be based.

1-31. PROCESSING A MORTGAGE INCREASE. Forward acceptable

requests for mortgage increase to the Technical Branches

for processing. Technical processing consists of Step 1

through Step Four below:

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6/93 1-52

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4435.01 REV-1

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(1-31)A. Step One. Use the alternative applicable to the

condition being considered.

1\. Alternative One. Applicable to necessary and

betterment change order cost increases (see

paragraphs 1-29.B1. and B.2.).

a\. Architecture and Valuation review the change

orders to determine eligibility for processing

a mortgage increase and architecture further

reviews for the added cost.

b\. Mortgage Credit computes the allowable costs on

Form FHA-2331A, Cost Certification Review

Worksheet - Mortgage Credit Staff, Line 1.d.

c\. The adjusted hard cost forms the basis of the

mortgage increase computation.

2\. Alternative Two. Applicable contract time

extension increases to soft costs (see paragraph

1-29.B.3.).

a\. Mortgage Credit computes the allowable costs on

Form FHA-2331A, Cost Certification Review

Worksheet - Mortgage Credit Staff, Lines 3

through 6.

b\. The adjusted soft cost forms the basis of the

mortgage increase computation.

3\. Alternative Three. Applicable to construction

contract cost increases due to a change in the

contractor (see paragraph 1-29.B.4.).

a\. Architecture computes a new Form HUD-2328, and

Form HUD-92264, Section G through Line 50.

b\. Mortgage Credit computes the allowable costs on

Form FHA-2331A, Cost Certification Review

Worksheet - Mortgage Credit Staff, Line 1.c.

for hard cost increases between the original

contractor and the contractor completing the

work, and Lines 3 through 6 for soft cost

increases associated with the change in

contractor.

c\. The adjusted hard and soft costs form the basis

of the mortgage increase computation.

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1-53 6/93

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4435.01 REV-1

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(1-31) 4. Alternative Four. Applicable to a substantial

error in HUD cost processing (see paragraph

1-29.B.5.).

a\. Architecture computes a new Form HUD-2328, and

Form HUD-92264, Section G through Line 50.

b\. Mortgage Credit computes the allowable costs on

Form FHA-2331A, Cost Certification Review

Worksheet - Mortgage Credit Staff, Line 1.c.,

using the criteria in paragraph c. below.

c\. The allowable construction costs for processing

the increase will be based upon the lesser of:

1\) The amount of the construction cost

certified by the mortgagor, or

2\) The upset price of the construction

contract as adjusted by approved change

orders eligible for a mortgage increase,

plus the increases resulting from

correction or errors in the original

processing.

d\. The adjusted hard cost forms the basis of the

mortgage increase computation.

Note: The mortgage credit examiner must not use

the adjusted upset price of the

construction contact as a limiting

criterion at cost certification where

there is a substantial error in HUD cost

processing.

B. Step Two. Mortgage Credit must compute (for use by

Valuation in completing Step Three) the eligible costs

and fees for the following: architect\'s fees, bond

premium if paid by the mortgagor, other fees not

included in the construction contract and paid by the

mortgagor, interest, taxes, insurance, AMPO (if

applicable), legal, organizational and audit fees,

consultant\'s fees (if applicable), supplemental

management fund (if applicable), marketing (if

applicable), offsite costs, \"as-is\" land value and

\"as-is\" value of property (if applicable). Mortgage Credit

must comply with the following in computing the costs

and fees.

1\. Do not increase BSPRA or restore Contingency

Reserve or AMPO,

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6/93 1-54

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4435.01 REV-1

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(1-31) 2. Do not include non-mortgageable items (construction

or permanent loan extension fees; discounts; rate

maintenance fees, etc.),

3\. Offset non-mortgageable items by net income (net

non-proprietary income if applicable) earned during

the construction period,

4\. Apply any remaining net income (net non-proprietary

income if applicable) to offset amount of mortgage

increase, and

5\. For increases caused by natural disaster:

a\. Consider in the revised cost any increases from

any interim closing for: carrying charges,

financing fees, and legal fees. Do not include

any cost due to construction delays before the

disaster,

b\. Cut the new estimated replacement cost by the

amount of any actual recovery through insurance

proceeds, and

c\. Require prepayments to be made for any late

recovery of insurance proceeds.

C. Step Three. Valuation must use the costs and fees

developed by Mortgage Credit in Step Two in revising

Form HUD-92264. Valuation must consider each of the

following:

1\. Examination fee, initial service fee, GNMA/FNMA

fee, MIP and title and recording based on the

approvable increased mortgage amount.

2\. Net income derived from market rent, expense and

occupancy estimates current as of the date of

mortgage increase processing.

3\. In Section 8 projects, where Fair Market Rents

control rental rates, use the lesser of the

following:

a\. Rents by market comparison as of date of

processing, or

b\. The existing Fair Market Rents adjusted for

PBE.

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1-55 6/93

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4435.01 REV-1

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(1-31) 4. In the Section 8 Project Based Certificate Program,

use contract rents approved under the HAP

Agreement.

5\. Where the portion of the mortgage attributable to

the increase has an interest rate differing from

the original rate, determine maximum mortgage

supportable by debt service in the following

manner:

a\. Apply applicable net income ratio to net

income.

b\. Determine the amount of net income necessary to

support the original loan using the original

debt service rate.

c\. Deduct the amount in paragraph b. above from

the amount in paragraph a. above. The residual

may be debt serviced out at the new interest

rate to show amount of additional mortgage that

may be supported by debt service. If

amortization of the original mortgage has

commenced, the new debt service rate must

reflect the term between anticipated start of

amortization of the new mortgage and the ending

date of the original loan. If there is no

residual, a mortgage increase may not be

granted.

d\. The total of the original mortgage amount plus

the amount of mortgage supported in paragraph

c\. above represents the maximum mortgage

supported by debt service.

e\. Prepare a separate calculation using Appendix 3

to accompany the Trial HUD-92264A to Mortgage

Credit showing a composite (blended) interest

rate applicable to the new approvable mortgage

amount.

6\. The rents (rates) obtainable must support the

higher mortgage.

D. Step Four. Mortgage Credit must prepare a revised Form

HUD-92264A, using the revised Form HUD-92264 and Trial

Form HUD-92264A prepared by Valuation in Step Three.

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6/93 1-56

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4435.01 REV-1

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(1-31) 1. Use the rates arrived at in paragraph C.5.e. above

to complete a supplemental criterion 5 of Form

HUD-92264A when there is a difference in the interest

rate applicable to the portion of increased

mortgage.

2\. The mortgage attributable to the increase may bear

a construction and permanent interest rate

differing from that of the original mortgage. See

paragraph C.5.e. above.

E. Authorization To Reopen Mortgage Transaction. Advise

the mortgagee of HUD\'s approval or denial of the

request for a mortgage increase upon completion of

technical processing. Use Appendix 1, Specimen

Letter - Agreement Authorizing Reopening Of Mortgage

Transaction, to notify the mortgagee, where a

determination is made to increase the mortgage.

1\. Approval of a mortgage increase is subject to the

payment of the following fees based on the amount

of the increase.

a\. Examination fee of \$3.00 per thousand.

b\. Inspection fee of \$5.00 per thousand,

applicable only where the increase involves

construction (hard) costs.

2\. A mortgage increase does not change the maturity

date of the mortgage.

3\. The mortgagee must endorse the letter of agreement

as evidence of acceptance.

4\. Distribute copies of the endorsed letter as

follows: Washington Docket, Field Office Docket,

Field Counsel, Mortgage Credit Control File, and

mail a copy to:

U.S. Dept of HUD

Multifamily Insurance Operations Branch

P.O. Box 44124

Washington, D.C. 20026-4124

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1-57 6/93

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4435.01 REV-1

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1-32. DEFERMENT OF PRINCIPAL PAYMENTS. The request for deferment

must be supported by the mortgagee.

A. Requests for Deferment will be considered if:

1\. There has been a delay in construction; or

2\. The project requires additional time to reach

sustaining occupancy.

B. Approve The Request when:

1\. There are sufficient funds outside mortgage

proceeds for payment of interest overrun either by:

a\. Written assurance from the sponsor, or

b\. Exercise of action against the contractor.

2\. The mortgagor shows reasonable effort to complete

construction and attain a sustaining occupancy.

C. The Period of Deferment will be the additional time

necessary for the mortgagor to stabilize its operation.

D. Deferment Letter. Use Appendix 2, Specimen Letter

\- Agreement Authorizing Deferment of Principal Payments

For Level Annuity Monthly Payment, and distribute

copies as follows:

1\. Mortgagee (original and one copy), with one copy

each to

2\. Washington Docket,

3\. Field Office Docket,

4\. Mortgage Credit Control File, and

5\. Mail to:

U.S. Dept of HUD

Multifamily Insurance Operations Branch

P.O. Box 44124

Washington, D.C. 20026-4124

E. Deferment Instruments. The Manager is authorized to

approve modifications of the mortgage instruments as

may be necessary to effect the deferment of principal

payments, provided the instruments have been cleared by

the closing attorney.

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6/93 1-58

4435.01 REV-1

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\*

1-33. TRANSFERS OF INSURED MORTGAGES are acceptable for the

assignment of title, pledge of title and\\or partial

(beneficial) interest, and the transfer of partial

(beneficial) interest through a participation agreement or

other arrangement, subject to the following:

A. Assignment or Pledge of Title Before Full Disbursement.

The Director of Housing Development (DHD) must give

written approval before a mortgagee may assign or

pledge title to an insured mortgage, if the mortgage

loan has not been fully disbursed.

1\. Assignment of Title: The circumstances must

warrant the assignment and:

a\. The assignee must be an approved mortgagee,

b\. The mortgage must be assigned and the Note

endorsed to the assignee,

c\. The Building Loan Agreement, with mortgagor\'s

written consent, must be assigned,

d\. The assurance of completion (with the written

consent of the mortgagor, contractor and

indemnitor or surety) must be assigned,

e\. The assurance of installation of offsite

facilities, including deposits, must be

assigned,

f\. The working capital deposit, funds required for

completion of the project, and all other escrow

funds deposited with the project, if any, must

be transferred for deposit with the assignee or

under its control,

g\. There must be a written assumption by the

assignee of all obligations under the contract

of mortgage insurance and of all documents,

funds and escrow deposits in connection

therewith together with the written opinion of

the assignee\'s attorney as to the validity of

the entire transaction and of all documents in

connection therewith,

h\. There must be an Executed Mortgage Record

Change, Form HUD-92080,

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1-59 9/94

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4435.01 REV-1

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(1-33) i. There must be a written consent by the title

insurer of the transfer in regard to the title

evidence accepted at initial closing, and

j\. Field Counsel must render an opinion on the

documents listed in paragraph 1.a. through 1.i.

above, and on any additional documents that

should be considered due to working of

applicable law, to clear the mortgage

assignment before the DH/CU notifies any

interested parties of assignment approval.

2\. Pledge of Title. HUD approval is subject to:

a\. The mortgagee\'s written pledge to remove the

loan from the warehousing bank within 30 days

after final endorsement of the mortgage note,

b\. Determination by the DHD/CU that the

arrangement is practicable, and

c\. Any approval letter must draw mortgagee\'s

attention to provisions for assignment of the

mortgage title, 24 CFR Part 207.261, in the

event the pledgee exercises its rights under

the pledge.

1\) Paragraph A.1. above lists the

requirements for assignment of the

mortgage title before disbursement of the

mortgage, and

2\) Paragraph B. below lists requirements for

assignment of the mortgage title after

disbursement of the mortgage.

3\. Distribute Documents for paragraph A. as follows:

a\. Washington Docket and Field Office Docket: The

approval/disapproval letter. Additionally for:

1\) Assignments - Copies of all documents in

paragraphs 1.a. through 1.j. above.

2\) Pledges - Documents in paragraph 2.a.

above,

b\. Office of Multifamily Housing Management, HMH,

and Field Office Loan Management Branch:

forward the approval/disapproval letter only,

and

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9/94 1-60

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4435.01 REV-1

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(1-33) c. Mail a copy of Form HUD-92080, Mortgage Record

Change, (assignments only) to:

U.S. Department of HUD

Multifamily Insurance Operations Branch

P.O. Box 44124

Washington, D.C. 20026-4124

B. Assignment or Pledge of Title After Full Disbursement

may be made by the mortgagee without prior HUD

approval, where:

1\. The transfer (assignment) or pledge is made to a

HUD approved mortgagee,

2\. The assignment is reported to HUD in accordance

with Handbook 4350.4, paragraph 2-27.

C. Transfer or Pledge of Partial (Beneficial) Interest.

1\. Transfer. A mortgagee may transfer a 100 percent

(or less) beneficial interest in an insured

mortgage or pool of insured mortgages under a

participation agreement or arrangement, such as a

declaration of trust or the issuance of

pass-through certificates, without obtaining HUD

approval, subject to the following:

a\. Legal title to the insured mortgage(s) must

remain with an approved mortgagee (principal

mortgagee). The mortgagee of record at the

time beneficial interests are transferred must

remain the principal mortgagee, if it retains

title to the mortgage. Title to the mortgage

may also be assigned to another approved

mortgagee concurrently with or subsequent to

the transfer of beneficial interests in

accordance with paragraph 1-33. A. or B. above,

as applicable. In such case the assignee

(mortgagee of record) must be the principal

mortgagee.

b\. The participation agreement, declaration of

trust or other instrument under which the

partial interest is transferred must provide

that:

1\) The principal mortgagee must remain

mortgagee of record under the contract of

mortgage insurance,

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1-61 9/94

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4435.01 REV-1

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(1-33) 2) HUD has no obligation to recognize or deal

with anyone other than the principal

mortgagee regarding the rights, benefits,

and obligations of the mortgagee, and

3\) The mortgagor has no obligation to

recognize or do business with anyone other

than the principal mortgagee or its

servicing agent with respect to rights,

benefits, and obligations of the mortgagor

or mortgagee.

2\. Pledge. Prior HUD approval is not required of a

pledge of only the beneficial interests under a

participation agreement or arrangement. Pledge

documents must reflect requirements applicable to a

transfer, 24CFR Part 207.261(e), in the event that

the transfer provisions are exercised. \*

D. GNMA Backed Securities.

1\. No partial interest may exist in mortgages backing

Government National Mortgage Association (GNMA)

Construction Loan Certificates or GNMA Project Loan

Certificates.

2\. The GNMA must approve the assignment of any insured

mortgage used to back securities guaranteed by

GNMA.

3\. The mortgagee-issuer and the holder of a partial

interest under a participation agreement must

certify that the interest will terminate upon

release (delivery) of the Project Loan

Certificates, where an insured mortgage is to be in

a GNMA mortgage pool backing one or more GNMA

Project Loan Certificates.

\* E. Unauthorized Transfers. The Commissioner may terminate

the contract of insurance in the event of an assignment

of title, pledge of title and/or partial (beneficial)

interest, or transfer of a partial or participating

interest, where the applicable conditions of paragraphs

A. through D. above are not met. \*

F. Bonds or other obligations issued in connection with an

insured mortgage executed in the form of an indenture

of trust may be transferred as provided in the

indenture. Prior HUD approval is not required, nor

does paragraph E. above apply.

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9/94 1-62

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