4350.1 REV-1

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CHAPTER 7. PROCESSING BUDGETED RENT INCREASES

AND FEES FOR COMMERCIAL SPACE AND SERVICES IN

INSURED, DIRECT LOAN AND NON-REGULATED HUD PROJECTS

SECTION 1. OVERVIEW

7-1. PURPOSE. This chapter provides procedures for

processing budgeted rent increases in certain HUD

projects and outlines guidance in the calculation of

utility allowances and charges for commercial

facilities and services provided in those projects.

Included in the chapter are the relevant tenant

participation procedures which must be followed in

processing these increases and charges. In preparing

the procedures in this chapter, HUD\'s prime interest is

in promoting the efficient management and continued

financial viability of its projects. In reviewing

requests from owners concerning rents and charges, the

Field Office should be guided by the fact that these

rents and fees should and must provide sufficient and

adequate funding to operate the projects. This chapter

gives guidance on program evaluation used in

conjunction with required procedures for MIPS budgeted

rent increases.

7-2. APPLICABILITY. These procedures for processing a gross

potential rent increase, increases in charges for

commercial space and charges for services apply to the

projects listed below:

A. Section 231, and 221(d)(3) market rate projects:

231 projects (LDs) whose rents are still

controlled or who have opted for the alternate

rent mechanism.

B. Section 202 projects, except those that use the

Section 8 Annual Adjustment Factor (AAF).

C. Section 213, Section 236 (including cooperatives),

Rent Supplement, 221(d)(3) market rate and

221(d)(3) BMIR rental and cooperative projects,

Sections 810 and 908 (military housing);

D. Projects that have converted from Rent Supplement

to Section 8 Loan Management Set-Aside;

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7-1 9/92

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4350.1 REV-1

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E. Previously HUD-owned projects that have been sold

to nonprofit owners or that use a budget (rather

than the Section 8 AAF) to compute rents;

F. Section 207\'s and 231\'s both regulated and

controlled by alternative rent mechanism; Section

220 and 221(d)(4)\'s that are regulated; and 234

rentals that did not convert to condominiums;

G. Those projects listed in paragraph 7-2(A) through

\(F\) that are not automatically preempted by HUD

and request exemption from local rent control.

NOTE: Regulatory agreements require Section 202,

Section 231 and cooperative projects to annually

submit operating budgets and obtain HUD approval

of rents or carrying charges. Field Offices shall

enforce this requirement in lieu of the

requirement that budgets be submitted only when

the owner believes a rent increase is needed.

The Field Office in enforcing the regulatory

agreement requirement for annual budget

submissions, shall require the owner to include in

their submission any information required by

Section 4, paragraph 7-22 of these procedures.

7-3. PROJECTS SUBJECT TO THE ALTERNATE RENT DETERMINATION

MECHANISM.

For projects insured under Section 207, 231(c)(4), 213

Rental, 223(f), and 234 Rental prior to November 30,

1983, and for 221(d)(4) projects, regardless of when

the project was insured, the owners may request an

amendment to the Regulatory Agreement subject to

Section 3 of this chapter requiring HUD to determine

their rents using the alternative rent mechanism

described in Section 4.

7-4. DEFINITIONS.

A. HUD Authorized Rent. These are the unit rents

shown in column 3 of the most recently approved

Rent Schedule (Form HUD-92458). In the Section 236

program these rents are called basic rents.

Depending on income, some 236 tenants will pay

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9/92 7-2

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4350.1 REV-1

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market rent or something between basic and market

rents which represents 30 percent of adjusted

income.

B. Maximum Allowable Rent Potential. The maximum

annual rent the owner may collect by charging the

rents authorized by HUD on the Form 92458.

C. Utility Allowance. (APPLIES ONLY FOR PROJECTS

RECEIVING SUBSIDY ASSISTANCE WHERE ALL OR SOME

UTILITIES ARE PAID DIRECTLY BY THE TENANT.) An

estimate of utility costs (except telephone) for

an average family occupying a unit.

Clarification: Section 221(d)(3) BMIR projects

that were built with tenant paid utilities

(separate meters) do not need utility allowances.

If the project has Rent Supplement or LMSA units,

those units however, receive an allowance.

D. Section 8 Contract Rents. The rent level called

for under the subsidy contract and adjusted

annually. Rent used for units subsidized under

Section 8 (LMSA) where the owner has had his rent

decontrolled or used the alternative rent

mechanism.

E. Services. This refers to such benefits as may be

provided by the project owner to tenants that are

not included in the rent and are optional on the

tenant\'s part (i.e., cable T.V., laundry

facilities and use of community space in the

project.)

SECTION 2. TENANT COMMENT PROCEDURES FOR A RENT INCREASE

7-5. GENERAL. Tenant comment procedures for the rent

increase process are provided for in Section 202(b)(1)

of the 1987 Housing and Community Development

Amendments (HCDA) and Section 329(F) of the 1981 HCDA.

Regulations at 24 CFR 245 set the Department\'s policy

on the subject (See Appendix 1). These requirements

for tenant comment on rent increases and utility

allowance reductions apply to all projects listed in

Section 1, Paragraph 7-2 except those rentals under

Section 207, 213, 234, Section 231, 220 and Section

221(d)(4) and 202s assisted under Part 885. They also

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7-3 9/92

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4350.1 REV-1

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do not affect cooperatives whose residents elect a

Board of Directors which must approve any proposed

increase in carrying charges. This mechanism more than

provides a means of comment in the management of the

project.

7-6. APPLICABILITY, The requirements of this section affect

ONLY those owners whose requested rent potential would

exceed the Maximum Allowable Rent Potential for that

project. If the proposed rent potential is less than

or equal than or equal to the Maximum Allowable Rent

Potential, the tenant comment procedures outlined in

this section do NOT apply. (See Section 4.)

7-7. OWNER RESPONSIBILITIES: Owners must issue a Notice to

Tenants of any proposed rent increase. The Notice must

contain all of the information included in the sample

notice shown in the Appendix 1. initial submission of

the request to HUD for a rent increase shall go forward

at the same time as the Notice is being given to

tenants. The HUD Field Office shall receive a copy of

the Notice to Tenants along with the documents and

information that will be used to justify the rent

increase as part of the formal rent increase request.

A. For high-rise projects, owners must \"post\" or

\"deliver\" the Notice to each tenant. For all

other types of projects, owner need only \"deliver\"

the Notices.

B. Delivery. A copy of the Notice must be mailed to

each tenant or hand carried directly to each unit.

IMPORTANT: The Notice should also be delivered to

those tenants who pay market rent and to tenants

who would not be affected by an increase because

they pay a percentage of income.

C. Posting. If applicable, the owner must post the

Notice in at least three conspicuous places in

each high-rise building in which dwelling units

are located AND in one conspicuous place at the

address where the material supporting the owner\'s

request will be available for tenant review and

copying.

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9/92 7-4

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4350.1 REV-1

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IMPORTANT: Owners must keep the posted Notices in

place and in legible form for the tenant comment

period.

7-8. TENANT REVIEW AND COMMENT. During the 30 days

following the date the Notice to Tenants was given, the

owner must make all of the materials listed in Section

4, paragraph 7-22 plus any additional information used

to justify the increase available to tenants or their

representatives to review and/or copy. For the purpose

of computing tenant comment periods, owners must

consider the date the Notice was given to be the date

by which all Notices had been hand carried or mailed

and all required copies had been initially posted. The

materials must be available at least during normal

business hours.

7-9. COMMENT SUBMISSION. Tenants may submit written

comments on the increase request to the owner or to the

HUD Field Office or both. In cases where comments are

submitted to the owner, all such comments must be

reviewed and evaluated. The comments and evaluations

should then be forwarded to the HUD Field Office as

part of the formal rent increase request.

7-10. CHANGES TO SUPPORTING DOCUMENTATION. If during the 30

day comment period the owner makes a material change in

any of the documents submitted in support of the

increase, the owner must notify the tenants of the

change(s) in a notice to be distributed in the exact

same manner as the original Notice to Tenants. The

owner must make the revised materials available for the

tenants to review and/or copy for the LONGER of 15 days

after the revised notice was given or the days

remaining in the initial 30-day comment period.

7-11. SUBMITTING THE FORMAL REQUEST FOR AN INCREASE. At the

conclusion of the tenant comment period as defined in

either paragraph 7-8 or paragraph 7-10 above the owner

must forward in addition to the tenant comments and

evaluations, an executed copy of the owner\'s

Certification as to Compliance with 24 CFR Part 245\'s

Review and Comment Procedures. (See Appendix 2)

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7-5 9/92

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4350.1 REV-1

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SECTION 3. DECONTROL OF RENTS

7-12. DECONTROL OF SECTION 220/221. On April 19, 1983 the

Department issued regulations (effective 6/1/83) which

changed the requirements for HUD control of rents and

other charges in Section 207, 220, and 221(d)(4).

First, HUD used the discretion it already had under

Sections 220/221(d)(4) to decontrol rent and other

charges in unassisted projects. Regulation would

continue only for projects receiving certain types of

Section 8 assistance, projects receiving Section 8 LMSA

and projects insured under Section 221(d)(3). The

regulation of certain charges for facilities and

services continued for each of these units and

projects, as well as for Section 221(d)(4) elderly and

handicapped projects. Second, HUD implemented the

Alternative Rent Mechanism (discussed in Section 4 of

this chapter) for determining maximum allowable rents

for unsubsidized projects insured under Sections 207,

213 (rental), 223(f), 231(c)(4) and 234(rental).

7-13. HURRA OF 1983. In November 1983, Section 431(a)(1) of

the Housing and Urban-Rural Recovery Act of 1983

amended section 207(b)(2) of the National Housing Act

(NHA) to make discretionary the Secretary\'s authority

to regulate rents and other charges for multifamily

housing projects insured under Section 207 on or after

November 30, 1983. The owner needed only to submit an

amended regulatory agreement and HUD would sign it.

7-14. DECONTROL OF SECTION 207. Exercising the discretion

granted by the change in 431(a)(1), the Department

implemented regulations on June 4, 1986 (effective

7/21/86) which deregulated rents and other charges for

mortgages insured under Section 207 on or after

November 30, 1983. Regulation continued for Section

236 subsidized projects refinanced under Section

223(f). HUD also authorized owners of 221(d)(4) and

220 projects with LMSA to decontrol rents provided they

amended the Regulatory agreement and to have its

Section 8 rents determined annually by the applicable

annual adjustments factor.

7-15. SECTION 207/LMSA. For those projects insured before

November 30, 1983, the 1986 regulations gave Section

207, 220, and 221(d)(4) project owners receiving

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9/92 7-6

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4350.1 REV-1

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Section 8 LMSA assistance the option to request the

Alternative Rent Mechanism, provided they agree to

amend the Regulatory agreement, and have the Section 8

rents determined by the applicable annual adjustment

factor.

7-16. 1987 HOUSING ACT. The Housing Act of 1987 imposed

restrictions on the decontrol of rent and use of the

alternative rent mechanism which affected owners who

had not requested changes in their regulatory

agreements. For those owners whose request for a

regulatory change was received before 12/1/87, HUD will

process the request and sign the new agreement.

However, for owners of projects who were eligible under

the 1983/86 regulations BUT who did not request the

necessary amendment prior to 12/1/87, the Act requires

that the project meet the following tests before the

amendment can be approved: (1) The project may not have

a project based Section 8 contract; and (2) no more

than 50 percent of its tenants can be defined as lower

income.

7-17. PROJECTS NOT COVERED BY THE 1987 ACT. Projects

endorsed and insured (or co-insured) on or after

11/30/83 under Section 207 and 223 are NOT covered by

the 1987 Housing Act. This is notwithstanding any

language presently contained in the regulatory

agreement.

7-18. PROJECTS COVERED BY THE 1987 ACT. The Field Office

will apply the tests required in the 1987 Act to:

\(A\) Unsubsidized Section 207, 213(rental), 223(f),

231(c)(4), and 234 (rental) projects that could

have elected the Alternative Rent Mechanism under

the April 19, 1983 rule, but did not do so before

12/1/87.

\(B\) Unsubsidized 220 and 221(d)(4) projects insured

prior to 6/1/83 who could have elected to

deregulate charges for rents, facilities, or

services under April 19, 1983 rule, but did not do

so before 12/1/87.

\(C\) Section 207, 213(rental), 223(f), 231(c)(4), and

234 (rental), 220 and 221(d)(4) projects insured

prior to 11/30/83 and assisted by Section 8 LMSA

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7-7 9/92

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4350.1 REV-1

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that were permitted by the June 4, 1986 regulation

to request the Alternative Rent Mechanism or

decontrol as applicable, but did not do so before

12/1/87.

7-19. SPECIAL CASES. HUD continues to regulate a certain

limited class of projects which would otherwise be

eligible under regulations to request decontrol. This

group consists of those projects discussed in this

Section where the mortgagor opts to remain controlled

in order to maintain the project\'s tax exempt status

and those projects where deregulation would result in

the imposition of local and state rent control which is

inapplicable as long as HUD is regulating the rent. In

both cases the maximum permissible rent charges are

determined by the Alternative Rent Mechanism.

7-20. PMMs. Regulation of rents at projects with Purchase

Money Mortgages sold with insurance will be in

accordance with the rules for Section 221(d)(4).

SECTION 4. OWNER REQUEST FOR A RENT INCREASE

7-21. PROCEDURES FOR REQUESTING A RENT INCREASE. Owners are

allowed to charge only the rents shown on the rent

schedule they submitted and which have most recently

been authorized by HUD. When current rent levels are

NOT sufficient to cover anticipated or unavoidable

increases in operating costs, owners should request

that HUD approve an increase in rents. If the increase

in proposed potential rent is less than or equal to the

Maximum Allowable Rent Potential, owners need only

submit a new Rent Schedule 92458. Tenant comment

procedures in 24 CFR 245 do NOT apply. If the proposed

rent increase exceeds the Maximum Allowable Rent

Potential, owners must take the actions discussed in

this Section.

7-22. INITIAL SUBMISSION. In addition to the proposed rent

potential, the initial submission to request a rent

increase should include the materials listed below,

plus any additional documents being used to support the

request.

A. A cover letter that briefly does all of the

following:

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9/92 7-8

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4350.1 REV-1

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1\) Summarizes the reasons why a rent increase is

needed and the date the increase will be

effective. Describe the project\'s physical

condition and any improvements that have been

budgeted for. The letter may refer to the

reasons stated in the Notice or elaborate on

those reasons. (The main reasons stated in

the letter must be the same as the main

reasons stated in the Notice to Tenants, if

the project was subject to the tenant comment

procedures in Section 2.)

2\) Identifies any proposed change in services,

equipment or charges and the reasons for the

change.

B. A Budget Worksheet (Appendix 4(d) format)

providing income and expenses for the 12 months

following the anticipated effective date of the

proposed rent increase.

C. A brief statement explaining the basis for any

increase in the expense line items on the budget

work sheet. Generally, if an increase amounts to

5 percent or more, it must be documented. If the

income or expense was estimated at the prior

annual period\'s actual, or the increase is less

than \$500, no explanation is required. (Appendix

4(b) provides a sample owner explanation of budget

items.)

D. Where applicable, a copy of the Notice to Tenants

annotated to show where and how the Notice was

distributed (e.g., posted, mailed, hand carried).

E. An executed copy of the Owner\'s Certification

Regarding Purchasing Practices and Reasonableness

of Expenses (Appendix 3).

F. A status report on the project\'s implementation of

its current Energy Conservation Plan (See Chapter

12). This may be: (1) a narrative report coded to

facilitate references to the plan; or (2) copy of

the plan annotated to show the current status of

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7-9 9/92

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4350.1 REV-1

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all items that were scheduled to be completed

within 60 days after the rent increase is proposed

to be effective. THIS APPLIES ONLY TO SECTION 236

AND BMIR PROJECTS, PROJECTS THAT RECEIVE RENT

SUPPLEMENT ASSISTANCE, AND PROJECTS THAT CONVERTED

FROM RENT SUPPLEMENT TO SECTION 8. This

requirement is to assure compliance with Section

329(c) of the Housing and Community Development

Amendments of 1981.

G. A signed request for an increase in the Reserve

for Replacement if such an increase is

contemplated as part of the rent increase request

(Appendix 6).

H. For Protects with Utility Allowances, a

recommendation to what utility allowance is

appropriate for each unit type and a summary of

how the owner/agent arrived at that amount with

appropriate documentation as prescribed by

paragraph 7-24 of this section.

7-23. USE OF THE ALTERNATE RENT MECHANISM. For projects

insured under Section 207, 231(c)(4), 213 Rental, 234

Rental, 223(f) and 221(d)(4), where the necessary

amendment to the regulatory agreement has been executed

(See Section 3), owners may request that HUD determine

a rent increase using the Alternative Rent Mechanism.

These steps are to be followed:

A. Owner Submission for Alternative Rent

Determination mechanism. In addition to the

information required in Section 4, paragraph 7-22,

the owner who chooses the Alternative Rent

Determination process must submit the following:

1\) An appraisal of the residential value of the

property performed by a qualified real estate

appraiser of the mortgagor\'s choice which

includes the comparable rents for units in

similar projects.

2\) A request for HUD approval of a rent

increase.

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9/92 7-10

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4350.1 REV-1

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B. Processing Procedures for Budgeted Rent

Determination.

1\) Section 207, 231, 213, 220, 221(d)(4) owners

or owners of projects which are required to

have their rents approved by HUD, who do not

choose to use the Alternative rent

Determination procedures will continue to

have their rents determined as prescribed in

this chapter and no Regulatory Agreement

amendment is necessary.

2\) Section 207 owners or owners of projects who

require HUD approval of rents or owners of

projects who otherwise could chose not to

have HUD control rents, that wish to use the

Alternative Rent Determination Procedures

provided for, shall have their rent

determined by HUD based on the submission

required in paragraph 7-23(A) of this

section. HUD will approve the lower of the

following two rent potentials: (1) apply the

original debt service factor to the current

market appraisal covering the residential

value of the property. Then process the

rents as outlined in this chapter, to

determine Gross Potential Rent; or (2) the

comparable rents submitted as part of the

appraisal.

NOTE: The independent organization or person hired

by the owner to conduct and provide the

certified appraisal must be a recognized

professional appraiser. The appraiser in

making his/her rental analysis must determine

the residential rental income separate from

the commercial income and provide a

delineation in the value of the residential

portion separate from the commercial portion

of the value. The Field Office in

determining the Gross Potential Rents using

the new appraisal will use the residential

rent portion of the certified appraisal to

apply the original debt service factor set at

the time of final endorsement in determining

the new debt service allowed in the rent

computation and insert the new appraised

residential value in Box H of the Rent

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7-11 9/92

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4350.1 REV-1

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Calculation Worksheet. Offices shall follow

outstanding instructions contained in this

chapter in processing the expenses used in

determining the final Gross Potential Rent.

C. HUD\'s Approval of Alternative Rent Increase

Method.

1\) Based on the analysis submitted and assuming

the owner is otherwise eligible for a rent

increase as covered in this chapter, the Loan

Management Branch Chief (LMBC) shall approve

in writing the lesser of the rents computed

in paragraph 7-23(B)(2) of this section.

2\) If the LMBC determines that the owner is not

entitled to a rent increase as covered in

this Handbook, the LMBC shall submit the

finding(s) to the Director of Housing

Management or Director of Housing for review.

The Director will deny or approve the LMBC

finding in writing providing the reasons for

the final decision if it reverses or alters

the LMBC recommendation.

D. Future Processing After Initial Determination of

Rents Using Alternative Mechanism.

1\) If the rent based on comparables and

supported by the appraisal as defined in

paragraph 7-23(B)(2) are less than the

processed rent utilizing the appraised value,

use the comparable rents submitted by the

owner as the approved rent. The Field Office

is NOT to become involved in determining

comparable rents. This should already have

been done as part of the appraisal package.

2\) If the budgeted rents in paragraph 7-23(B)(2)

using the most recent appraisal and current

operating costs are less than comparable

rents, the budgeted rent level shall be

approved. For future requests, continue this

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9/92 7-12

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4350.1 REV-1

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process until such time as the comparable

rents are less than budgeted rents. When

this happens, the comparable rents shall be

approved as the Rent Level.

3\) As long as the owner submits a comparable

Rent Level which is less or equal to the rent

level that would be provided using the last

appraised value in determining rents as

described in paragraph 7-23(B)(2) of this

Section, a new appraisal is not required.

However, when the comparable rents exceed the

rents allowed using the last appraised value,

then the owner must either submit a new

appraisal showing that the rents based on the

appraisal are more than the rents based on

comparables in order to charge the comparable

rents or he/she must charge the rent as

determined by using the new appraisal which

is less than the comparables.

E. Thirty Day Processing of Alternative Rent.

The LMBC must (in writing) approve, disapprove or

approve for a different amount requested by the

owner within 30 days of receipt. Failure on the

part of the LMBC to notify the owner in writing of

the findings will provide temporary authority to

the owner to charge the proposed rents. In the

event that the owner implemented the rents at the

end of 30 days without HUD\'s written approval, the

additional rents shall be placed in an escrow

account or a letter of credit shall be provided so

that in the event HUD fails to approve the rent

increase, or approves the increase for less than

requested, the owner shall immediately return to

the tenants that portion of the rent collected

which HUD later disapproved. This applies only to

rents processed using the alternative rent

mechanism.

F. Allowable Project Costs.

While the cost of the appraisal and/or market

analysis can be paid for out of project income, it

is not to be used as an allowable project expense

in the rent determination defined in Section 5 of

this chapter.

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7-13 9/92

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4350.1 REV-1

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7-24. DETERMINATION OF A UTILITY ALLOWANCE. (see Section 1,

para 7-4c for applicability) for each request for an

increase in the HUD authorized rent potential, the

owner must recommend a utility allowance for each unit

type. The recommended utility allowance should

represent the owner\'s best estimate of the average

monthly utility cost that an energy conscious resident

will incur for the year. The utility allowance is not

meant to pay all actual utility costs, but rather it is

to reimburse a prudent utility consumer for their

utility expense. Both the proposed and the current

allowance levels should be included in the notices to

the tenants.

A. As part of the submission for an increase or

decrease in the utility allowance, each owner must

submit a summary supporting the proposed change to

the utility allowance. That summary should:

1\) Identify the type of utilities covered by the

utility allowance (e.g., gas for heating).

2\) State whether any utility rate increases or

decreases were implemented during the past 12

months or are expected to be implemented

during the next 12 months and the amount of

those increases or decreases.

3\) State how any energy conservation initiatives

have or will impact consumption.

B. In addition, the owner must request HUD approval

of revised utility allowances whenever a utility

rate change would cause a cumulative increase of

10 percent or more in the most recently approved

utility allowances.

C. Owners must recommend additional utility

allowances if the project\'s design is such that

utility costs will vary significantly for units of

the same size (e.g., end units vs. interior

units).

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9/92 7-14

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4350.1 REV-1

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7-25. FIELD MANAGEMENT OF THE RENT REQUEST PROCESS.

Field Offices must establish a tracking system

that will facilitate and monitor compliance with

the following processing times:

A. When the Proposed Potential does NOT exceed the

Maximum Potential. In these instances, the Field

Office need only review the proposed utility

allowances and the Rent Schedule. Field staff

should complete these actions and return the

signed Form 92458 within 10 working days of

receiving the owner\'s request.

B. When the Rent Increase Exceeds the Maximum

Potential,

1\) All Projects. The Field Office should check

the completeness of the owners, initial

submission within 5 working days of its

receipt. Doing so will expedite any required

reposting and reduce processing delays.

2\) Projects NOT subject to 24 CFR 245 Tenant

Comment requirements. Complete these reviews

and issue a decision letter within 30 days

after receipt of all materials required by

Section 4, paragraph 7-22.

3\) Projects subject to 24 CFR Tenant Comment

procedures. Issue decision letters within 30

days after receipt of the formal rent

increase request which includes the tenant

comments and other materials required by

Section 2, paragraph 7-11. Final approval

cannot take place before the tenant comment

period has ended.

C. Check the completeness of the Owner\'s Initial

Submission. Within 5 working days of receipt of

the owner\'s initial submission, answer the

following questions where applicable.

1\) Does the Notice to Tenants contain all of the

information included in the sample notice in

Appendix 1? If it doesn\'t, require the owner

to revise the Notice and distribute it as

directed.

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7-15 9/92

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4350.1 REV-1

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2\) Has the owner submitted ALL of the materials

required by Section 4, paragraph 7-22? If

not, do the following.

a\) Call the owner/agent and ask them to

submit the missing materials and follow

up in writing,

b\) Be sure the missing materials are made

available for any required tenant

review. (See Section 9, paragraphs 4, 5

and 6.)

D. You may NOT require that projects routinely submit

materials NOT listed in Section 4, paragraph 7-22.

You may require additional submissions ONLY if the

actual or projected expense estimates appear to be

excessive and the narrative without additional

information, cannot support requested expense

levels. Special requests should only be made in

cases where estimates will have significant

monetary impact on the authorized rent potential.

NOTE: Your requests for additional information

must be made in writing and within 30 days of

receipt of initial package. The owner must

distribute a second Notice to tenants and comply

with Section 2, paragraph 7-10 where applicable.

Be flexible, consider the needs of the project

tenants and protection of government interest

before requesting additional information.

7-26. SEASONAL RENTS

A. The housing programs of HUD contemplate relatively

permanent occupancy at rents within the ceilings

established for year-round occupancy, hence

seasonal rents are not generally in accord with

the objectives of those programs. In particular,

occupancy charges at seasonal rates would be

inconsistent with the objectives for which

projects are built for cooperative use or for use

by families of low and moderate income, or for

elderly occupants.

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9/92 7-16

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4350.1 REV-1

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B. Conversely, in areas where seasonal rents are

customary, there may be rental housing projects

which experience financial difficulty because

year-round occupancy cannot be maintained. In such

circumstances, HUD will not object to the

establishment of seasonal rents for a temporary

period provided that:

\(1\) Preference at all times in all units will be

given to permanent tenants at the established

year-around rental rate.

\(2\) None of the units in the project will be

rented for a period of less than 30 days.

\(3\) There will be no increase in existing maximum

permissible gross rent by reason of seasonal

rates being allowed, and as to the individual

units, the aggregate gross rent collected

during any fiscal year should not exceed the

established maximum rent.

\(4\) Seasonal rents are not permitted in any

project receiving a project-and/or

mortgage-based subsidy.

C. If examination of the project operations supports

the need for seasonal rents, the Housing

Management Division (or Insuring Office) Director

will grant approval in the form of a letter

agreement which shall define the number and type

of units so covered, and shall evidence the

mortgagor\'s acceptance of the foregoing conditions

under which approval is given. Deviations from

the terms under which approval was obtained will

operate to breach the agreement.

7-27. BMIR RENTS PAID BY OVER-INCOME TENANTS. HUD-91709,

Schedule of Computation of Rental Income in Excess of

BMIR Rent Paid by Over Income Tenants, is a monthly

schedule to be completed by BMIR mortgagors in order to

compute the amount of rent in excess of BMIR rent paid

by over-income tenants. These funds are available for

credit to the residual receipts account if the project

has a surplus cash position at the end of the fiscal

year. The completed form shall be used by Housing

Management Division personnel and project accountants

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7-17 9/92

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4350.1 REV-1

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to arrive at this amount without having to review all

of the project\'s records by lease, Form HUD-91705, etc.

This will not, however, eliminate the need to spot-check

these records when determined necessary to assure

correctness of the schedule. Unless requested by HUD,

this form is retained as a part of the mortgagor\'s

record.

7-28. SECTION 236 PROJECTS. RENTS COLLECTED IN EXCESS OF

BASIC RENT.

For all types of Section 236 projects, including

noninsured projects, the Regulatory Agreement or the

Interest Reduction Contract provide that, subsequent to

the commencement of the term of the Interest Reduction

Contract, the project owner shall remit each month the

amount by which the total rentals collected on the

dwelling units exceed the sum of the approved basic

rentals. The prescribed reporting form, Monthly Report

of Excess Income, Form HUD-93104, must be submitted by

the tenth of each month, whether or not a remittance is

required. Mail the Form to the address printed on the

Form.

A. Determining the Amount of Excess Income, In order

to determine the amount of excess income, if any,

which must be remitted to HUD, the project owner

must prepare HUD-93104A, as of the end of the

reporting month, or have the same information

shown on this detailed schedule readily available

from some other source, such as a computer printout

sheet. This schedule must be attached to the

retained copy of Form HUD-93104, and made

available, upon request, for audit by HUD or the

Comptroller General of the United States.

B. Collecting Excess Rentals Prior to the

Commencement of the Interest Reduction Contract.

Any excess rentals collected prior to the

commencement of the term of the Interest Reduction

Contract shall not be treated as a return of

subsidy to HUD but as regular project income.

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9/92 7-18

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4350.1 REV-1

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C. Adhering to Excess Income Requirements. The

Section 236 law states that the project owner

shall accumulate, safeguard, and periodically pay

to the Secretary all rental charges collected in

excess of the basic rental charges.\" HUD\'s

continued payment of interest reduction subsidy to

the mortgagee is contingent on the owner\'s strict

adherence to program requirements.

\(1\) The Subsidized Housing Programs Division,

Office of Finance and Accounting, shall send

to the mortgagor or the designated management

agent a demand letter, and one follow-up

letter if no answer is received within 15

days. Copies of these letters shall be sent

to the appropriate Housing Management

Division Director and to the Director, Office

of Multifamily Housing Management.

\(2\) Upon receipt of a copy of the first demand

letter to the mortgagor, the Housing

Management Division Director shall

immediately take whatever action is deemed

appropriate to obtain compliance.

\(3\) Upon receipt of a copy of the follow-up

letter to the mortgagor, the Housing

Management Division Director shall intensify

efforts to obtain compliance. These efforts

shall include, but not necessarily be limited

to, immediate notification to the mortgagor

by Certified Mail, Return Receipt Requested,

that it may be subject to the penalties in D.

below unless and until the required Form

HUD-93104 together with any amount due, are

received by the Mellon Bank Lockbox within 30

days of the date of the letter. (See Appendix

12). Copies of the Notice to the owner shall

be sent to the mortgagee; the Subsidized

Housing Programs Division, Office of Finance

and Accounting and; the Office of Multifamily

Housing Management, Operations Division. The

Housing Management Division Director shall

continue efforts to obtain compliance during

the 30-day period.

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7-19 9/92

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4350.1 REV-1

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D. Enforcement actions to be taken by the Director.

Housing Management Division. If upon expiration

of the thirty (30) days notice, the owner has not

complied, the Housing management Division Director

shall notify the Director, Office of Multifamily

Housing Management, Operations Division, of the

noncompliance. The notification shall:

\(1\) Provide information as to any circumstances

beyond the mortgagor\'s control or of an

unusual or special nature, and

\(2\) Recommend imposition of one or more of the

following enforcement remedies:

NOTE: Field Offices shall impose enforcement

remedies for which they have authority and

Make recommendation for approval to

Headquarter for actions which have not been

delegated.

\(a\) Use Residual Receipts to pay excess

income; (provided account has ample

funds for this and other anticipated

needs);

\(b\) Suspension or Debarment from HUD

Programs;

\(c\) Denial of releases of Reserve for

Replacement Funds;

\(d\) Prohibition of distributions;

\(e\) Require repayment of any dividends or

distributions improperly paid by the

mortgagor to stockholders or partners;

\(f\) Require replacement of the Management

Entity or Agent;

\(g\) Offset subsidy vouchers against excess

income due until paid in full (Section

8, Rent Supplement, RAP);

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9/92 7-20

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4350.1 REV-1

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\(h\) Suspend interest reduction payments to

the mortgagee and in the event the

mortgage is insured, upon assignment to

HUD, immediately recommend foreclosure;

\(i\) Recommend assessment of Civil Money

Penalties in accordance with the

provisions of Section 1735f-15 of Title

12 of the United States Code;

\(j\) Assess Double Damage penalties,

authorized by Section 1715z-4a of Title

12 of the U.S. Code;

\(k\) Assess interest on the excess income due

at the current Treasury borrowing rate,

i.e., the cost to the Government for the

money;

\(l\) Denial of rent increases, Transfers of

Physical Assets, Plans of Action, Equity

loans; and other owner-requested actions

until delinquent amounts are paid in

full;

\(m\) Request the insured mortgagee to

accelerate the debt;

\(n\) Request Inspector General to audit the

project\'s books and records;

\(o\) Collect all rents in connection with the

project and use such collections to pay

excess income and other obligations

under the mortgage and Regulatory

Agreement;

\(p\) Take over possession and operation of

the project; and

\(q\) Apply to any court for injunctive

relief, appointment of a receiver, or

other appropriate relief.

\(3\) The Director, Office of Multifamily Housing

Management, if applicable, shall notify the

mortgagor by certified mail of the

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7-21 9/92

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4350.1 REV-1

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enforcement remedies imposed within thirty

\(30\) days. Copies of the letter shall be

provided to the Housing Management Division

Director; Office of General Counsel and the

Subsidized Housing Programs Division, Office

of Finance and Accounting, together with any

instructions necessary for implementation of

the penalties imposed. NOTE: Field Offices

shall impose enforcement remedies for which

they have authority and make recommendation

for approval to Headquarter for actions which

have not been delegated.

\(4\) If the mortgagor complies with submission and

payment requirements subsequent to any

penalty imposed, appropriate steps will be

taken by the Director, Office of Multifamily

Housing Management to restore the privileges

taken away.

E. Repayment agreements requested by the owner must be

negotiated with the Housing Management Division

Director. The Director shall arrange a meeting to

negotiate with the owner within two weeks from their

request. Repayment plans shall be based upon the

following criteria:

\(1\) Repayment Agreements shall be in writing, using

the Repayment Agreement and Note (See Appendix

14), and executed between the Project Owner and

the Housing Management Division Director.

Copies shall be forward to:

Subsidized Housing Programs Division, Office of

Finance and Accounting.

\(2\) Repayment Agreements shall generally be for twelve

\(12\) months or less in term. Any repayment which

would exceed this twelve month period must be

justified in writing and approved by the Regional

Director of Housing, but shall, in no case, be

approved for more than thirty-six (36) months.

\(3\) All Repayment Notes must stipulate that failure to

pay timely in accordance with the terms of the

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9/92 7-22

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4350.1 REV-1

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Agreement will result in the entire rescheduled

amount becoming immediately due.

\(4\) Repayment Agreements executed previously shall be

incorporated into and made a part of the Repayment

Agreement, constituting one (1) Agreement and

Note.

\(5\) Repayment Agreements shall not:

\(a\) result in any inclusion of delinquent amounts

as a line item or portion in the budgeted

rent increase processing;

\(b\) result in a reduction of living standards of

the tenants;

In addition, where the owner is a limited dividend

owner who took a dividend or distribution during the

period of delinquency, and the amount due is less than

or equal to the amount improperly distributed, the

owner shall be required to return the dividend or

distribution in a lump sum payment in sufficient amount

to repay the outstanding amount due. The owner may

accrue any amount returned and repayment to partners

may be made at future semi-annual or annual

determinations that the project is in a surplus cash

position.

F. Monitoring responsibilities associated with reporting

and collection of excess income. The project owner is

required to send original Reports, Form HUD-93104, and

any Excess Income on a monthly basis to a lock box

(Mellon Bank). Copies of these Reports are sent

simultaneously to the field office. The lock box

forwards excess income funds to the Department of

Treasury. Original Reports and collections are

forwarded to OFA. Based upon this information, the

automated accounting system will generate the

following;

\(1\) First and second demand letters to delinquent

owners.

\(2\) Monthly summary reports for the Field Office which

lists owners who are delinquent.

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7-23 9/92

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4350.1 REV-1

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\(3\) After demand letters are sent out and owners

remain delinquent, Housing Management Division

field staff will notify owners to comply by

either:

\(a\) Remitting the full amount owed, or

\(b\) If extenuating circumstances exist, enter

into a repayment agreement.

\(c\) If the owner does not comply, the Housing

Management Division should institute

enforcement action.

\(4\) The Subsidized Housing Programs Division, OFA will

provide monthly information to the Director,

Housing Management Division in the field office

detailing those owners who fail to remit

Multifamily Excess Rental Income funds or reports.

This is accomplished through the Multifamily

Excess Rental Income (MERI) System.

The MERI system will generate four reports on the

Field Office Print List (PRTLST) on a monthly

basis. The Print List shows outstanding

delinquencies for each project. You should

contact the Management Information Division in

your respective Field Office to coordinate receipt

of these reports. The data will be available on

the PRTLST the first three workdays of the month.

The reports available are:

o Statement of Account (A25CHCA). This report,

generated monthly, may be produced on request

by the Office of Finance and Accounting in

Headquarters. The statement provides

information regarding reporting and

collection activity obtained from the Form

HUD-93104, Monthly Report of Excess Income.

o Monthly Detail of Delinquent Reports

(A25DFCB). This listing denotes those

projects delinquent in submitting their Form

HUD-93104, Monthly Report of Excess Income.

o Detail Aging of Amounts Due HUD (A25FDCB).

This report provides detailed aging data for

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9/92 7-24

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4350.1 REV-1

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each project. The amounts due HUD are for

projects which have Form HUD-93104 on file,

but did not remit the funds due to HUD.

o Summary of Delinquencies (A25FICA). This

report provides the number of delinquent

projects and total amount of delinquencies by

Field Office from October 1985 to the present

month.

Loan Management is responsible for obtaining these

reports, following up with owners, and monitoring

and enforcing program compliance.

\(a\) The Director, Housing Management Division

shall notify the Director, Subsidized Housing

Programs Division, OFA, in writing if any

problems are experienced receiving reports

timely or regularly, and any other errors,

e.g., posting.

\(b\) Section 236 Multifamily Excess Income records

will receive greater emphasis by the Housing

Management Division during the Management

Review process, and on-site physical and

occupancy inspection.

G. Refund of Excess Income. If it is determined that due

to a project owner\'s revision of a prior reporting

period(s), that a refund is due, the project owner must

request the refund in writing. Refund requests are to

be directed to the Office of Finance and Accounting,

Subsidized Housing Programs Division, ATTN: Excess

Rental Income, 451 7th Street, SW, Room 3206,

Washington, D.C. 20410. Project owners are to include

the revised reports when requesting a refund.

Overpayments cannot be used to offset any future excess

rental income.\"

H. Considerations in the case of incentives to owners to

maintain their projects as low-and moderate-income

housing. Title II of the Housing and Community

Development Act of 1987, authorizes the Secretary to

provide incentives to owners of \"eligible low income

housing\" who agree to maintain their projects as low

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7-25 9/92

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4350.1 REV-1

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and moderate-income housing until the maturity date of

the mortgage. In order to provide the owners with a

fair rate of return through such incentives, Title II

authorizes the approval of higher rents than would

otherwise be approvable under applicable program

regulations and procedures.

Therefore, in the case of several Section 236 projects

that are subject to Plans of Action approved by HUD

under Title II, the terms of the Plan of Action provide

for the owner to retain all or a portion of the excess

income.

\(1\) In such cases:

\(a\) the incentive must be approved as part of the

executed Plan;

\(b\) the Plan of Action or implementing Use

Agreement must specify the amount and/or term

covering the agreed retention period; and

\(c\) the incentives under the Plan of Action may

include the retention of prospective excess

income amounts, but not the forgiveness of

excess income delinquencies accumulated

before May 1991.

\(2\) Where the owner is permitted to keep ALL of the

excess income, the Form 93104 is no longer

required to be submitted, for the period covered

by the Use Agreement.

\(3\) Where the owner is permitted to keep a PORTION of

the Excess Income, the Form 93104 is required in

accordance-with this Chapter, showing the total

excess income due, the amount being retained, and

the amount being forwarded to HUD.

\(4\) Any agreement entitling the owner to retain all or

a portion of the excess income must be documented

and made part of the record. The Loan Management

Branch must supply this information to the

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9/92 7-26

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4350.1 REV-1

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Subsidized Housing Programs Division, Office of

Finance and Accounting for their records and

reporting information.

SECTION 5. REVIEW OF PROJECT INCOME AND EXPENSES

7-29. FOCUSING THE REVIEW. Determine if the project has any

special conditions that will affect income and expense

estimates.

A. Assess the project\'s physical condition. To do

so, review any:

1\) Recent HUD or mortgagee on-site inspections;

2\) Tenant complaints and any resolutions on

maintenance;

3\) Energy Conservation Plan on file for the

project;

4\) Recent replacement reserve analysis or

withdrawals;

5\) Repair schedules required by TPAs, flexible

subsidy contracts, or workout arrangements.

(Determine whether project income or other

funds will pay these repairs.)

B. Review available financial information. If

applicable, include any recent monthly accounting

reports (Forms HUD-93479, 80, 81 or reports

comparing budgeted and actual expense) and the

MIPS Financial Summary Reports; and the servicer\'s

and IPA\'s review of the most recent audited annual

report.

C. Review any recent GAO/IG reviews of this project

or the agent\'s management procedures for this or

other projects.

D. Determine if the owner is requesting any change in

the services or equipment to be included in the

rent. (See the Rent Schedule and cover letter

transmitting owner\'s rent increase request.)

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7-27 9/92

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4350.1 REV-1

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E. Assess the impact of any procedural changes,

repair schedules, escrows, or owner contributions

required by any TPA, workout or flexible subsidy

contract.

F. Review the Field Office\'s files on other projects

managed by the owner. Have the owner\'s past

expense projections significantly exceeded actual

expenses later reported on the project\'s financial

statements? Have HUD\'s on-site reviews, the IPA\'s

Report on Internal Controls and Compliance, or

GAO\'s or IG\'s audits detected serious weakness in

cost controls or purchasing procedures (e.g.,

failure to compare prices or take advantage of

discounts)? Is the owner requesting a rent

increase to cover expenses and physical

improvements for which previous rental increases

were authorized? If so, why? If you answered

\"yes\" to any of the above questions, you should

determine why those conditions exist and document

this for the record.

1\) If the conditions are caused by agent\'s

practices, you must scrutinize the budget.

You may need to reduce the projections. If

reduced, make appropriate notes for the

Administrative Review as to why and how you

adjusted these expense items.

2\) If past expenses were excessive and the

amount will not be offset by legitimate

increases, you may need to allow even less

than the prior period\'s expenses. If

reduced, again make notes as to why and how

you adjusted these expense items,

G. ANALYZE THE OWNERS INCOME AND EXPENSE

PROJECTIONS. Make an initial assessment during

the tenant comment period. If applicable, when

tenant comments are later submitted, evaluate

whether the tenant comments would change your

initial assessment.

Suggested form of letter for use with appropriate

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9/92 7-28

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4350.1 REV-1

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modifications for type of project and situation by

Housing Management Division Directors in

accordance with Section 4, paragraph 7-28(C).

1\) Compare the project\'s past and present

project expenses. Be concerned if the

owner\'s choice of delivery systems causes

higher expenses; (i.e., use of an

identity-of-interest company or use of contract

rather than project staff to do things that

might be done by staff. Relatively high costs

or rates of increase can be due to special

circumstances (vandalism, large number of

evictions, emergency repairs). It is project

management which is satisfactory to HUD and

\" \.... give specific answers to questions \....

relative to the income, assets, liabilities,

contracts, operations, and condition of the

property\....).

2\) Review the owner\'s expense projections. Be

flexible, consider the needs of the project,

the owner\'s return on investment and

maintaining HUD\'s security interest. Keep in

mind that both underestimating and

overestimating expenses can have undesirable

impacts. If expenses are underestimated,

deferred maintenance and defaults can result.

If expenses are overestimated, the rents

charged will be higher than needed which

could result in HUD paying more subsidy than

necessary. If the project charges rents

which aren\'t competitive in the market then

vacancies result. This could cause a

possible default or an insurance claim.

Consider utilizing existing residual receipts

to offset repairs not covered by the Reserve

for Replacement or other costs that are of

one time occurrence. Allow reasonable

amounts for inflationary increases. But

before doing so assess whether the actual

expense base is reasonable for the level

maintenance expected during the next year and

whether the project is taking reasonable

efforts to control costs and is complying

with the terms of the Certification in

Appendix 3. If the prior period\'s actual

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7-29 9/92

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4350.1 REV-1

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expenses were unjustifiably excessive, adjust

the prior period\'s actual expense before

adjusting for inflation. Document this in

the record.

3\) REVIEW THE INCOME/EXPENSE ADJUSTMENTS using

the guidance in the next paragraph. For each

line, enter the adjustment you will allow.

If your allowance significantly differs from

the amount the owner entered, carefully

document the reasons for the difference.

7-30. GUIDANCE FOR EVALUATING THE APPROPRIATENESS OF PROJECT

EXPENSES

A. Administrative Expense

1\) Renting Expense. Amount allowed should be

reasonable related to vacancy pattern and

marketing area. Weigh impact of increased

expenditures on reducing vacancy. If expense

increase is due to poor marketing procedures

or appears to be a cushion, adjust down to

expense of similar projects. If rental

expense appears low, some upward adjustments

may be made if the project is experiencing

high vacancy.

2\) Salaries. To evaluate reasonableness

consider:

a\) Whether salary is for project employee

or employee of agent. Recertification

clerk or similar clerical employees may

be, considered project employees even if

work is performed in agent\'s office.

Other project employees will normally be

located on site. Where employees

working in the agent\'s office have their

salaries attributed in whole or in part

to the project, owner must present

documentation outlining exactly how the

expense was computed.

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9/92 7-30

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4350.1 REV-1

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b\) Number of project employees. Number of

employees will depend on size and

condition of project and whether

maintenance or other services are

contracted.

c\) Salary levels. Salaries should be

commensurate with the size of the

project and duties required and

comparable to similar positions at other

similar projects in the same area.

d\) Identify-of-interest relationships.

Where such relationships exist salary

levels should be closely reviewed to

ensure they do not exceed rates in

arms-length relationships.

3\) Office Supplies. Inflationary increases

should be allowed if prior year amount was

adequate.

4\) Legal. If legal expenses are significant,

determine reason(s): 1) large number of

evictions; 2) above average fees to attorney

(may be caused by lack of shopping around for

adequate counsel); or 3) including legal

services that should be borne by the owner

and not the project. Since the amount of

legal fees should normally be within

owner/agent\'s control (i.e., effective

managers should screen prospective tenants

and shop around for reasonably priced legal

services), the amount allowed should not

exceed the norm for similar projects in

similar locations unless there was a problem

unique to that project.

5\) Auditing. Keep in mind that audit costs can

vary according to the type of project and its

requirements, the size of the accounting firm

and the quality of the project\'s records and

accounting systems. (See page 7-4 of

Handbook 4370.4, Basic Accounting Desk

Reference for HUD Loan Servicers, for a

further discussion of how audit costs vary.)

If this project\'s audit costs are high

determine the cause of the higher costs. To

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7-31 9/92

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4350.1 REV-1

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do so, talk with a IPA or review prior

management or occupancy review reports and

the IPA\'s comments on the Internal Control

and compliance Questionnaire. If costs are

out of line, require future audits to be

conducted by auditors who bid on the job.

NOTE: Reasonable fees for preparing any

Federal, state or local tax return

information require of the project may be

charged against the project account and paid

from project income without regard to surplus

cash computations. For example, if the

mortgagor entity is a partnership, the cost

of preparing both the Form 1065 and the

related Schedules K and K-1 may be paid from

project funds. However, projects funds may

not be used to pay for tax advice rendered to

the mortgagor entity or its principals or for

preparation of the personal returns of the

project principal.

6\) Bookkeeping Fees/Accounting Services. If a

computer is used, amounts allowed should be

adequate to cover the cost of such services.

These charges must be approved by HUD prior

to the project paying. If identity-of-interest

firms are used, the cost paid by the

project should not exceed what it would cost

to use a non-identity-of-interest firm.

7\) Telephone. Allow amount for local and long

distance calls related to project operations.

Long distance calls from the project to the

office of the management agent are chargeable

to the management fee not the project.

8\) Miscellaneous Administrative. If the MIPS

Financial Flag Report indicates this expense

category exceeds 5% of the subgroup require

the owner to justify the need.

B. Operating and Maintenance Expense.

1\) Supplies. Check management review reports to

determine if owner/agent is shopping around for

lowest possible prices and is taking advantage of

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9/92 7-32

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4350.1 REV-1

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quantity discounts and discounts for early payment

of bills. Consider need for supplies and

owner/agent efficiency. The budget cost of

one-time repairs should be listed under project

improvements. The quality of the purchase must be

considered when looking at the cost. Purchasing a

superior product with a longer life span at a

higher cost might very well be more cost effective

than purchasing a lower quality item which does

not last. Cost is not the only thing you should

consider when allowing an expense item.

2\) Contracts. Consider the trade off between salary

costs and contracts costs. A high level of

contract repairs may indicate a need for improved

maintenance capability, identify-of-interest

relation with vendor, a one-time rehabilitation,

or a cost-effective business decision.

3\) Security. To determine reasonableness of expense,

the Loan Specialist should consider: 1) need for

expense, (i.e., is there a security problem), 2)

reason for security problem, (i.e., lighting,

location, layout of physical structure, or need

for better project management); 3) extent to which

security problems are within the control of the

agent, (i.e., would stricter enforcement of lease

provisions reduce security problem); 4) trade off

between security services (agents) and security

devices (locks, alarms, lighting, etc.); and 5) is

security expense cost effective, i.e., does

security expense result in reduced turnover and

vacancy.

4\) Decorating. Determine whether new items should be

budgeted under the Reserve for Replacement

Account. For example, if an owner requests, a

painting reserve can be established (insure

monthly payments are adequate). Consider trade

offs. Is project using most cost effective

decorating items, i.e., would blinds be cheaper

than shades in the long run? Are additional

decorative items such as drapes needed to improve

or maintain occupancy?

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7-33 9/92

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4350.1 REV-1

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5\) Miscellaneous Maintenance. If amount is large,

identify source and determine need and

reasonableness of expense.

C. Payroll Taxes. Licenses and Insurance.

1\) Payroll Taxes. Payroll taxes will generally be

about 12-15 percent of project payroll costs.

Included in this category are FICA, State and

Federal unemployment and workers compensation. In

some areas the high costs of workman\'s

compensation can drive payroll taxes up to as high

as 20 percent. In cases where this occurs, owners

must document these costs. Known increases in

rates, as well as increase in salary base, will be

justification for budget increased in this

expense.

2\) Other Taxes. Identify source and assess

reasonableness of expected increases and cause for

increase. For example, in some states there is an

intangible tax on liquid assets. The Field Office

should consider assets that will be taxed during

the upcoming year instead of accepting last year\'s

estimate expense. Field Offices should be

cognizant of the outcome of any tax appeals and

adjust costs accordingly.

3\) Insurance. In assessing reasonableness consider

the following: a) types of coverage b)

deductibles and c) claim history. Rates vary

among carriers and owners should seek the lowest

rates available for equivalent coverage.

D. Utility Expense. Only utilities paid by the project

may be included. To determine reasonable consumption

levels, review the justification from owner energy

conservation survey, energy conservation plan, and

other related information.

1\) Ensure that the owner has analyzed utility rates

and requested the rates most advantageous to the

project. (Rates vary accordingly to consumption

levels and types of usage, e.g., commercial or

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9/92 7-34

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4350.1 REV-1

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residential. Often projects can apply for either

residential or commercial rates, whichever will be

cheaper).

2\) If the owner has taken the action required by the

preceding paragraph above, allow rate increases

which have been, or are expected to be approved

and implemented. Document the rates and effective

dates used in your projections.

3\) Generally, do NOT project for increased

consumption. Consumption should increase only

because of severe weather. Project for

consumption levels to decrease below prior periods

if: The prior period had severe extremes of

weather that are not expected to occur during the

period the rents will be in effect; or recent

energy conservation initiatives can reasonably be

expected to reduce consumption levels.

4\) THIS PARAGRAPH APPLIES ONLY TO BMIR AND SECTION

236 PROJECTS, PROJECTS THAT RECEIVE RENT

SUPPLEMENT, AND PROJECTS THAT CONVERTED FROM RENT

SUPPLEMENT TO SECTION B. Section 329(C) of the

1981 HCDA requires HUD to consider whether the

mortgagor could control utility costs by securing

more favorable utility rates or undertaking

feasible, cost effective actions to increase

energy efficiency or energy consumption. Section

329(C) provides that HUD may reduce budgeted

utility expenses if the owner has not taken

reasonable action to do so. (See 4350.1, Chapter

12 for more guidance on energy conservation

measures).

E. Property Tax, Review requirements of Chapter 23, in

HUD Handbook 4350.1. Allow only verified increases in

rates. If taxes have decreased due to changes in State

or local tax laws, use effective rates. Consider also

any changes in how the project is evaluated. Even if

there is a tax rate decrease, this could be offset by a

change in the appraisal process which increased the net

value of the project for tax purposes.

F. Mortgage Principal, Interest, MIP, Include principal,

interest and any MIP (or service charge on HUD-held

mortgages). Use the amount required by the mortgage.

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7-35 9/92

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4350.1 REV-1

If the mortgage has been permanently modified, use the

payment due under the new mortgage terms.

G. Other Notes/Loan Payments. The owner\'s narrative must

identify the loan terms and the purpose of the loans.

(For more guidance on what loans may be charged against

the project operating account, see Paragraph 2-23 (A)

of Handbook 4370.1 REV-2.

H. Reserve for Replacement. Use amount normally required

by HUD, not a lesser amount that may have been approved

as the result of a workout agreement. Even if the

owner/agent does not request any changes in reserve for

replacement deposit, this may be a good time for the

Loan Specialist to check the adequacy of the account

and level of deposits. If any change is required, the

Field Office should insure that a HUD 9250 is sent to

the mortgagee. NOTE: The Field Office should consider

very carefully any increase in the Reserve for

Replacement requirements for projects that are eligible

or will be eligible over the next ten years to prepay

their mortgages and are likely to do so. Since the

reserve is an asset of the mortgagor after prepayment,

this is an especially important issue in projects where

the reserve is paid for by project-based subsidy (i.e.

RAP, Rent Supplement or Section 8).

I. Owner Return. Projects Owned by Non-profit Mortgagors

and projects that have converted from non-profit to

limited dividend (LD) ownership, must budget only for

the non-profit contingency allowed in the Rent

Computation Worksheet.

1\) This procedure for LDs is required by the

regulations that govern the transfers of ownership

from non-profit to profit motivated entities (see

24 CFR 265.14(a)). While these projects may NOT

budget for a distribution, if surplus cash is

available 24 CFR 265.15 permits the new limited

dividend owners to collect a distribution of up to

6 percent of the cash contribution THEY MADE AT

THE TIME OF THE TRANSFER.

2\) For other LD projects not converted from non-profit

to limited dividend. Distribution remains

constant form year-to-year. Multiply the owner\'s

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9/92 7-36

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4350.1 REV-1

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initial equity investment by the rate of return

allowed, e.g., 6,8, or 10 percent whichever is

appropriate.

J. Project Improvement Needs. Includes: 1) Non-recurring

repair expense; 2) amounts needed to correct

financial deficiencies; and 3) project improvements.

Examples of eligible items include amounts needed to

1\) restore units that have deteriorated to the point

they no longer can be rented; 2) correct code

violations; and 3) pay accounts payable that affect

overall viability of the project (e.g., delinquent

utility bills). Ineligible items include luxury

improvements such as swimming pools and tennis courts.

While HUD does not prescribe a specific dollar amount

that may or may not be allowed, the Field Office should

keep in mind the following when reviewing project

improvement needs requests: 1) amount of lump sum

contribution (see Item 2 below); 2) causes of problems

and proposals to prevent reoccurrence (for major cost

items a MIO plan is recommended); 3) management

performance (check prior management review, physical

inspection, audit reports); 4) impact on expenditures

on rents and subsidy funds and 5) payback or potential

benefits from approving the project improvements.

1\) Do NOT allow for costs that will be paid from

project improvement funds (e.g., Flexible Subsidy

or TPA proceeds) or reimbursed from residual

receipts or a painting, replacement, or general

operating reserve.

2\) Owners should: Identify the total cost and scope

of work and provide a written schedule for

completing any capital improvements included here.

List payee\'s name, purpose, amount and date

incurred for each account payable included.

3\) Generally, allow amounts to clear accounts payable

only on troubled projects having significant

operating deficits. Allow for accounts payable

only if the project\'s purchasing procedures are

acceptable, expenses are reasonable and management

is satisfactory.

4\) Prorate capital improvements over an appropriate

period of time.

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7-37 9/92

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4350.1 REV-1

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K. Lump Sum Source. Consider the availability of all lump

sum sources. If owner is unaware of lump sum sources,

the Field Offices should advise the owner. Listed

below are some of the most used lump sum sources to

fund project improvement needs.

1\) Section 241 HUD Insured Supplemental Loans or

conventional financing for capital improvements,

etc. (The debt service should be shown the Budget

Worksheet under account 6830.)

2\) Owner\'s loan to the project. (The terms of such

a loan would have to be approved by the Field

Office as repayment of the loan is to be made out

of project income as an allowable line item in the

rent formula, rather than from surplus cash or

residential receipts.)

3\) Advances by the owners. (See HUD Handbook 4370.2,

Chapter 2, paragraph 2-11 for guidance.)

4\) Regular Flexible Subsidy or Capitol Improvement

Loans for troubled projects.

5\) Change in ownership. (New owner equity investment

can be designated for this purpose.)

6\) Releases from the residual receipts account, if

applicable or advances from the replacement

reserve account, provided a HUD-approved repayment

plan is included.

7\) Energy grants from such sources at State, county,

city agencies. (Field Offices should attempt to

keep abreast of what types of assistance are

available in the area.)

8\) Energy loans and grants from the Department of

Energy.

L. ASSESS NON-RENTAL INCOME.

1\) ESTIMATES SHOULD BE CONSERVATIVE. If non-rental

income is significantly overstated, rent potential

will not be sufficient to cover project operating

costs and owner distributions. Use previous year

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9/92 7-38

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4350.1 REV-1

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figures adjusted where solid projections are not

available.

2\) Includes income from all source except: 1)

apartment rents, 2) facilities and services (such

as furniture, air conditioning) provided by the

owner to tenants on a voluntary basis and 3)

interest earned on funds invested in replacement

and residual receipts reserve accounts. To assess

reasonableness, compare with income from prior

years.

a\) Laundry and Concession Income. Include income

from laundry facilities (only if they are leased),

parking space and leased commercial space in

subsidized projects only (see Section 8). Make

appropriate adjustments for existing commercial

vacancies.

b\) Investment Income

1\. Do NOT include security deposit interest that

must be paid to tenants or retained in the

security deposit account and income that is

retained in a painting or replacement reserve

or in a residual receipts account.

2\. If the project has large reserve balances and

interest income is not shown on the HUD-92410

or the owner\'s budget, ask the owner why the

reserves are not invested. While only some

projects are required to invest replacement

reserves or residual receipts, all projects

are encouraged to do so. Paragraph 3 of

Mortgagee letter 83-24 tells you which

projects must invest and how the interest

must be distributed (see Appendix 11). NOTE:

Interest income should not be used to reduce

expenses for the purpose of granting rent

increases.

3\. Other Miscellaneous Income, Do NOT include:

\"excess rents\" collected from Section 236

tenants paying above basic rent; (exclude

these amounts even if the HUD-93104, Excess

Income Report, shows the project is not

required to submit excess income to HUD;)

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7-39 9/92

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4350.1 REV-1

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late charges or damage charges; (if these are

collected, they will generate

distributions/residual receipts or cover

unexpected costs;) generally, these amounts

should be relatively small. The owner must

identify the purpose of any sizable amounts,

(If these amounts were not classified in

accordance with IG Handbook 2000.4, require

the owner to properly classify all future

expenses.)

M. Vacancy Losses on Apartments. Use the vacancy

rate that was in effect at final endorsement.

Normally, this will be 7 percent or 5 percent,

whichever is applicable. Note: There are no

vacancy factors for Section 202 projects with 100

percent Section 8.

N. Management Fees. Include only the management fee

approved in the appropriate HUD-9839, i.e., the

fee that is expressed as a percentage of apartment

rents/coop carrying charges collected. This

applies also to the fees whose yields have been

capped under paragraph 2-34, HUD Handbook 4381.5.

If a fee percentage will change during the budget

period, use a percentage that represents the

weighted average of the fee percentages that will

be in effect during the year covered by the

budget.

O. General Operating Reserve (GOR). (THIS APPLIES

ONLY TO COOPERATIVES.) While GOR deposits are

always a percentage of the carrying charges, the

percent varies between 0 and 3 percent according

to the GOR balances. To determine the GOR deposit

requirements for the year covered by the budget,

use the carrying charge potential now in effect

and the instructions in paragraph 2-21(B)(2)(a) of

Handbook 4370.1.

P. Contingency for Non-profit Owners. A 2 percent

contingency reserve is required for projects owned

by non-profits and those projects once owned by

non-profit but which have been sold to limited

dividend partnerships.

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9/92 7-40

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4350.1 REV-1

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7-31. Quality Control. In order to encourage uniform

policy, Branch Chiefs/Supervisors should try as

much as is possible to inform their staffs of: any

proposed increases in property taxes, payroll

taxes, and utility rates; the percentage of any

inflationary increases that should be allowed for

supplies, etc.; and any property tax abatements

for which different types of projects are

eligible. When reviewing the administrative

process Supervisor/Branch Chief should consider

the following.

A. The servicer\'s comments should be consistent with

other information - e.g., project conditions,

recent servicing actions taken on this project,

tenant comments, the Field Office\'s experience

with this agent?

B. Are the servicer\'s comments dated and firmly

attached to the Rent Computation Worksheet? Do

the servicer\'s comments: explain any significant

differences between the owner\'s and the servicer\'s

income, expense or utility allowance estimates? Do

they adequately support the servicer\'s

projections?

C. Are all staff making the same projections as to

increases in property taxes, utility rates, and

other expenses?

D. Does the servicer\'s decision letter identify: any

physical improvements for which operating funds

were budgeted for in the Rent Increase Budget

Worksheet; or any special conditions imposed on

the owner in conjunction with approval of the rent

increase request?

E. Evaluate the rent increase\'s or utility allowance

adjustment\'s impact on any tenant-based subsidy

contract? Are funds available in the current

contract? If not, has action been initiated to

obtain the necessary funding?

SECTION 6. COMPUTING RENT POTENTIAL AND UTILITIES

7-32. MAXIMUM ALLOWABLE MONTHLY RENT POTENTIAL. To compute

the maximum allowable rent potential, select the

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7-41 9/92

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4350.1 REV-1

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appropriate formula from Box A of Rent Computation

Worksheet and then complete Box F. In the case of

Section 236 Projects, also compute the maximum

allowable market rent potential and Market Rent Factor

using Box G of the Rent Computation Worksheet. The

first time you use the Rent Computation Worksheet for a

particular project, use Appendix 4(c) to compute the

monthly HUD subsidy. For subsequent rent increases,

enter the monthly subsidy you computed on the prior

Rent Computation Worksheet.

7-33. NEW MAXIMUM UNIT RENTS. (Section 236 Only.) Where a

basic and market rent for each unit type must be

computed, spread the monthly rent potential across the

different unit types. (Rents may vary by floors if

these differentiate were approved at initial

endorsement. This can be changed only if HUD and the

owner think it necessary.) Follow the procedures in

Box H of the Rent Computation Worksheet. The

Worksheet\'s procedures give each unit type the same

percentage increase in rent. Also, compute new maximum

rents, and new maximum market rents. NOTE: The dollar

difference between basic rent and market rent should be

the same as it was between basic and market rents at

final endorsement.

7-34. REVIEW THE OWNER/AGENT ESTIMATE OF NON-RENTAL INCOME.

A. Assess the reasonableness of the incomes the owner

entered. Compare them with the actual amounts

shown on financial statements the project has

previously submitted. Note that any over-estimation

of these amounts could result in a rent

potential insufficient to support both operating

expense and owner distributions. Enter in the

column the amounts HUD will allow. If these

amounts significantly differ from the owner\'s

estimates, document why you did not accept the

owner\'s estimates.

B. Document your reasons for approving other than the

owner\'s estimated expense or income. Since the

Rent Increase Worksheet does not provide much

space for comments, write any comments on a

separate sheet of paper. COMMENTS MUST BE DATED,

LABELED WITH THE FHA PROJECT NUMBER AND FIRMLY

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9/92 7-42

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4350.1 REV-1

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ATTACHED TO THE RENT COMPUTATION WORKSHEET and

signed by the Servicer and LMBC.

If HUD\'s analysis results in a reduction of the

rent level requested the owner/manager must be

given on opportunity to support their request

prior to HUD approving a rent level.

7-35. DETERMINE THE NEW UTILITY ALLOWANCES. Complete

the following steps and then enter the new

allowances on the Rent computation Worksheet.

A. Review the owner\'s utility analysis and

recommended allowances. (See Section 4, paragraph

7-24(A)) for a description of the information the

owner must submit.)

B. Answer the following questions.

1\) Are the owner\'s comments on recent and

proposed rate increases consistent with any

information you have obtained from other

projects, utility suppliers, news report?

2\) Has the owner appropriately adjusted for

recent and planned rate increases?

3\) Has the owner appropriately adjusted

consumption estimates to reflect any

significant savings likely to result from

recent energy conservation effort?

C. If the owner\'s analysis does not appear to support

the request, discuss your concerns with the

owner/agent and request additional information, if

needed. KEEP IN MIND THAT BOTH UNDERESTIMATING

AND OVERESTIMATING CAN HAVE AN ADVERSE IMPACT.

D. You should usually be able to set allowances at

the levels recommended by the owner. If you

approve utility allowances that deviate from those

recommended by the owner, document your reasons

for doing so.

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7-43 9/92

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4350.1 REV-1

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SECTION 7. NOTIFICATION AND IMPLEMENTATION

7-36. NOTIFYING THE OWNER. Once a decision has been reached

on a rent request, the owner should be notified by

letter.

A. The letter must:

1\) Explain the reasons for your decision to

approve the increase or to deny all or part

of the increase. The increase approved can

be greater than what the owner requested if

justified by your analysis.

2\) Identify any project improvements for which

funds were budgeted on the Rent Computation

Worksheet, e.g., paint exterior of four

buildings by Spring.

3\) Confirm the amount and effective date of any

revised replacement reserve deposit and

complete the HUD 9250. (A recorded amendment

to the regulatory agreement is not needed.)

Transmit copies of the HUD 9250 to the owner,

to the mortgagee and to the Management Agent.

4\) Require owners to give tenants 30 days

written notice of any increase in the

tenant\'s rent under the terms of the lease.

5\) Remind owners, who are subject to 24 CFR

245\'s tenant comment procedures. to notify

tenants of HUD\'s decision.

6\) Require the owner to complete parts A and F

of the Form 92458 Rental Schedule reflecting

unit rents not to exceed the maximum rent

potential authorized, and transmit the

original and one copy to HUD for signature.

A signed copy will be returned to the owner.

B. Send the original letter to the owner and a copy

to the Management Agent, unless the owner has

requested a different distribution.

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9/92 7-44

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4350.1 REV-1

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C. If the mortgage is HUD-held and delinquent, send

the following to your desk officer in the Office

of Multifamily Housing Management.

1\) Your decision letter;

2\) Rent Schedule;

3\) Rent Computation Worksheet.

7-37. REVIEW THE OWNER\'S SUBMISSION OF THE RENT SCHEDULE

(FORM HUD-92458) WHEN THE PROPOSED INCREASE WON\'T

EXCEED THE HUD APPROVED GROSS RENT POTENTIAL.

A. Proposed rent potential is LESS than or EQUAL to

the maximum allowable potential computed on the

last Rent Computation Worksheet. The owner should

have completed all of the Rent Schedule, except

Parts F and I.

1\) Check the accuracy of the owner\'s entries.

Be sure: Parts D and E agree with the

assumptions you made on the Rent Computation

Worksheet regarding non-revenue producing

space and commercial space. The effective

date is correct.

2\) Enter the Maximum Allowable Potential in Part

F. (Obtain this amount from the last Rent

Increase Worksheet you completed.)

3\) Sign and date the Rent Schedule in Part I and

distribute it as directed in paragraphs 7-36

\(B\) and (C) of this section.

7-38. IF THE PROPOSED POTENTIAL EXCEEDS THE MAXIMUM MONTHLY

RENT POTENTIAL computed in the last Rent Increase

Worksheet, complete columns 3 through 8 of Part A. If

the owner will charge the maximum allowable rents,

enter the rents computed by the owner in the Rent

Increase Worksheet. (NOTE: HUD will prepare the rents

by bedroom type in the case of Section 236.) Otherwise,

enter the reduced rents you are authorizing the owner

to charge. Complete Steps 1, 2 and 3 under the

preceding paragraph.

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7-45 9/92

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4350.1 REV-1

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7-39. INCREASE IMPLEMENTATION. Owners may implement HUD

approved changes in rents or utility allowances only

after they have: complied with tenant notice

requirements; and completed any HUD-50059 or HUD 50059

Worksheet required by EXHIBIT 3-4 of Handbook 4350.3,

Occupancy Requirements of Subsidized Multifamily

Housing Programs. (NOTE: These forms are not required

for Section 231 or Section 202 tenants who do NOT

receive tenant-based subsidies.) Owners must implement

the new utility allowances for all tenants within 75

days after HUD approves them. Owners may NOT stagger

implementation to coincide with tenant\'s annual

recertifications. If a reduction in utility allowances

causes the Tenant Rent to increase, the owner must give

the tenant at least 30 days advance written notice of

the increase.

7-40. NOTIFYING TENANTS

A. All projects. If the rent increase or utility

allowance reduction will cause an increase in the

Tenant Rent, the owner must give the tenant 30

days advance written notice of the increase. The

Notice must specify the new Tenant Rent and the

date it will be effective.

B. Projects subject to 24 CFR 245\'s Tenant Comment

Procedures. The owner must notify tenants of the

HUD Field Office decision. The owner\'s Notice

must be written and must:

1\) Be distributed in the manner required by

Section 2, paragraph 7-7.

2\) Tell tenants what rents and utility

allowances HUD has approved, the

effectiveness date, and any special

conditions HUD imposed on the increase (e.g.,

completion dates for project improvements

required of the management agent).

SECTION 8. CHARGES FOR COMMERCIAL-FACILITIES

7-41. Determining Charges. Generally, Field Offices should

require owners to set commercial rents at least at

levels that will cover the commercial space\'s share of

9/92 7-46

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4350.1 REV-1

project debt service and operating expenses. (Page 1,

Part C of Form 92264 shows how the gross square footage

is distributed between residential and commercial

space.)

A. Field Offices may authorized project owners to set

commercial rents at less than break-even levels

if:

1\. The owner has taken or is taking all

reasonable steps to lease the space at market

rents or break-even rates and the reduced

rates will not jeopardize the financial

condition of the project.

2\. The Field Office determines that the proposed

use of the space will offer significant

benefits to the project and would be more

beneficial than other alternatives.

B. Field Offices must NOT approve rents that are less

than the market rents for comparable space unless

it results in other compensatory financial

benefits for the project.

C. Owners must use either the minimum rents required

by paragraph 6a or 6b in Part E of the rent

schedule. If the owner is recommending a

commercial rent that is less than the market rent

for comparable space or less than the rent needed

to cover the commercial space\'s share of debt

service and operating expenses, the owner must:

1\. Certify whether there is an identity-of-interest

relationship between the operating

of the commercial space and the owner, the

agent or any principal of either the owner or

agent; and

2\. Attach the certification of the rent

schedule.

D. If owners lease commercial space for periods in

excess of 1 years, the lease should provide for

any rent increase needed to keep rents at the

levels required by this paragraph.

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7-47 9/92

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4350.1 REV-1

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SECTION 9. CHARGES FOR FACILITIES AND SERVICES

7-42. Facilities and Services Subject to Charge. Owners may

NOT charge separately tenants for equipment and

services that are included in the rent. Part B of the

Rent Schedule lists these services and equipment.

A. Owners may offer congregate services only on terms

that have been approved by HUD.

B. Owners may charge tenants for other services or

facilities (e.g., parking see (5) below , cable

TV, use of community space in the project) ONLY if

ALL of the conditions listed below are met.

1\. The services, facilities and charges have

been included in Part C of the most recently

approved Rent Schedule.

2\. A schedule of those charges has been posted

or distributed to the tenants.

3\. Use of those facilities or services is

optional on the part of the tenant.

4\. If not previously authorized the charges must

be approved to HUD prior to implementation.

5\. Owners can charge for parking only in

unsubsidized projects where HUD previously

approved it. The owner can charge for car

heaters in both subsidized and unsubsidized

projects in cold climates where parking

spaces are so equipped.

C. All income derived from service and facility

charges must be deposited in the project operating

account.

SECTION 10. PREEMPTION OF LOCAL RENT CONTROL

7-43. INTRODUCTION. For those projects that are subject to

State or local Rent Control, CFR 24 Part 246 (Local

Rent Control) provides for preemption as follows:

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9/92 7-48

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4350.1 REV-1

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A. Subsidized projects are preempted entirely by the

regulations in CFR 24, Part 246 - Local Rent

Control.

B. Unsubsidized projects are preempted under the

regulations when the Department determines that

the delay or decision of the local rent control

Board, or other authority regulating rents

pursuant to State or local law jeopardizes the

Department\'s economic interest.

All requests for HUD preemption of the local Board\'s

rent controls must be processed in accordance with the

procedures discussed in this section.

7-44. PROJECTS AUTOMATICALLY PREEMPTED. This part applies to

all projects with mortgages insured or held by HUD that

receive a subsidy in the form of:

A. Interest Reduction Payment under Section 236 of

National Housing Act.

B. Below Market Interest Rates under Section

221(d)(5) of National Housing Act.

C. Direct Loans at below-market interest rates under

Section 202 of the Housing Act of 1959.

D. Rent Supplement Payments under Section 101 of the

Housing and Urban Development Act of 1965.

E. Housing Assistance Payments under 24 CFR Part 886.

F. Those units in a project receiving Housing

Assistance Payments pursuant to a contract under

Section 8 of the United States Housing Act of 1937

or Section 23 of the Act, as in effect before

January 1, 1975. Units not assisted are not

subject to automatic preemption under this part

but are covered by paragraph 50 below.

7-45. ACTIONS OWNER MUST TAKE BEFORE SUBMITTING A FORMAL

REQUEST FOR PREEXEMPTION OF UNSUBSIDIZED PROJECTS. If

an owner decides to request HUD\'s preemption, the owner

must first have asked the local rent control Board for

whatever relief or redetermination is permitted under

State or local law. The owner\'s request must advise

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7-49 9/92

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4350.1 REV-1

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the Board of the owner\'s intent to request HUD-preemption,

if necessary. When filing the request for

relief, the owner must notify the project residents

that it intends to request HUD\'s preemption if the

Board does not respond to the request within 30 days or

renders a decision which is unacceptable to the owner.

A. Notice to Residents. The owner\'s Notice must contain

all the information in the format shown at Appendix 1.

The owner must: (1) hand deliver or mail a copy of the

Notice to each resident; and (2) post the Notice in at

least three conspicuous places within each high-rise

building in which the affected dwelling units are

located. The owner must comply with all

representations made in the Notice to Residents, and

must give residents 30 days to review materials that

will be submitted to the preemption request. The owner

may post the Notice as soon as it has submitted a

request for relief or redetermination to the Board.

B. Tenant Review and Comment. Procedures outlined in

Section 2 of this chapter are to be followed for tenant

comment on preemption applications.

C. Notice to HUD. Immediately after distributing and

posting the Notice to Residents, the owner must advise

HUD that it intends to request HUD\'s preemption of the

Board\'s actions. To do so, the owner must provide HUD

with copies of all of the materials listed below.

1\) A copy of the Notice to Residents, annotated to

show the date(s) the Notice was posted and

distributed.

2\) An audited Statement of Profit and Loss (Form

HUD-92410) prepared in accordance with HUD Handbook

4370.2 and covering the project\'s most recently

ended fiscal year. If more than 4 months have

elapsed since the end of the project\'s fiscal

year, the owner must also submit, and certify to

the accuracy of, an unaudited Form HUD-9410 for

the period elapsed since the end of the project\'s

last fiscal year.

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9/92 7-50

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4350.1 REV-1

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3\) A copy of the relief application the owner

submitted to the Board with supporting

documentation.

4\) A certified statement which provides for Itemization of

resident turnover rates and percentages of rent

potential lost to vacancies and to nonpayment of rent

on occupied units during the period covered by the

Forms HUD-92410 and by the fiscal year preceding those

periods. Each type of loss and each fiscal period must

be reported separately. The following format is

suggested:

Since end FY Ending FY ending

of Last FY \_\_/\_\_/\_\_\_\_ \_\_/\_\_/\_\_\_\_

Number of units

vacated \_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_ \_\_\_\_\_\_\_\_\_\_

Percentage of Rent

Potential lost to:

a\) Vacancies \_\_\_\_\_\_\_\_\_% \_\_\_\_\_\_\_\_\_%
\_\_\_\_\_\_\_\_\_%

b\) Collection Loss \_\_\_\_\_\_\_\_\_% \_\_\_\_\_\_\_\_\_%
\_\_\_\_\_\_\_\_\_%

5\) A certified statement covering known or approved

rate or cost increases or decreases during the 12

months preceding the date of the owner\'s Notice to

Residents. If such changes did occur, the owner

must give the date the changes were or will become

effective and the old and new rates and provide

documentation for following.

a\) Property tax assessment or valuation rates;

b\) Utility rates;

c\) Employee salaries or benefits;

d\) Insurance;

e\) Contract for services.

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7-51 9/92

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4350.1 REV-1

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7-46. PROCESSING AN EXEMPTION. The owner/agent shall file a

request for approval of an increase in rental charges

with HUD and in accordance with procedures detailed in

Section 4 of this chapter. The local HUD Office will

process the request in accordance with procedures

detailed in this chapter. Upon receipt of authorized

rents, the owners will comply with the posting

requirements detailed in this chapter.

7-47. INITIAL HUD REVIEW FOR COMPLETENESS. Immediately upon

receipt of the owner\'s submission, HUD must check the

package for completeness. If the submission does not

contain all of the information required by paragraph

7-45(C) of this section, HUD must request the missing

information from the owner within 48 hours of review.

When the submission is complete it will be held on

abeyance until the owner submits a formal preemption

request. If the materials omitted from the initial

submission or any changes to material previously

submitted were not previously made available to the

project residents, the owner must give residents an

additional 30 days to review these materials.

7-48. OWNER\'S FORMAL PREEMPTION REQUEST. After the resident

comment period has expired and the owner has evaluated

any resident comments received, the owner may submit a

formal request for HUD preemption. The request to HUD

should include all of the materials listed below.

A. Copies of all of the written comments the

residents submitted to the owner;

B. The owner\'s evaluation of the resident\'s comments;

C. The Board\'s decision and a statement as to the

insufficiency of the funds or a statement from the

owner certifying that a decision from the Board

has not been received;

D. The owner\'s certification that:

1\) The Notice to Residents required by paragraph

7-45(A) of this section was give as required.

2\) The owner has taken reasonable steps to

assure that: (a) the substance of the Notice

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9/92 7-52

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4350.1 REV-1

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has been conveyed to each resident household;

and (b) the posted notices were maintained

intact and in legible form for the full

resident comment period;

3\) Copies of the materials submitted in support

of the preemption request were located in a

place reasonably convenient to residents

during normal business hours and at least one

evening a week during business hours;

4\) Requests by residents to inspect such

materials, as provided for in the Notice,

were honored; and

5\) Copies of all comments received for the

residents were considered and are being

transmitted to HUD.

E. A cover letter which is signed by the owner and

includes a statement that \"under the penalties and

provisions of Title 18 U.S.C. Section 1001, the

statements contained in this application and its

attachments have been examined by me and, to the

best of my knowledge and belief, are true, correct

and complete.\"

7-49. EVALUATING THE FORMAL REQUEST. HUD must determine if

the owner\'s package includes all of the information

required by the previous paragraph and must request any

missing materials from the owner. HUD must carefully

review any residents comments, the owner\'s analysis of

those comments and any Board decision already received.

After reviewing those materials, HUD must within 10

days determine what rent levels are necessary to

operate the project.

A. If the rent levels computed by the Field Office

are greater than those permitted by the local

Board or if the local Board has not yet rendered a

decision on the owner\'s request for relief, the

Field Office must discuss the project\'s needs with

the Rent Control Board. If the Field Office and

Board are able to reach agreement on a rent level,

the Field Office should confirm the agreement in

writing and provide the Board and the owner a copy

of the agreement. If the Board and the Field

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7-53 9/92

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4350.1 REV-1

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Office cannot reach agreement on a rent level, the

Field Office must forward the case to the Office

of Multifamily Housing Management in Headquarters.

The Field Office must clearly explain both its own

and the Board\'s positions and recommend what

action Headquarters should take. The Office of

Multifamily Housing Management will review the

case and the issue a decision establishing the

maximum rent level the owner may charge. HUD

Headquarters will send copies of its decision to

all parties \-- the HUD Field Office, the owner and

the Board.

B. If the rent potential computed by the Field Office

is less than the potential authorized by the

Board, the Field Office must give the owner a

letter specifying the maximum monthly rent

potential the Field Office will approve. The

Field Office must send a copy of the letter to the

Board and to the Office of Multifamily Housing

Management in Headquarters.

NOTE: If the owner receives the Board\'s decision after

filing its preemption request with HUD, the owner

immediately notify HUD that a decision has been

received and must forward a copy of the Board\'s

decision.

7-50. OWNER IMPLEMENTATION OF HUD\'S DECISION ON PREEMPTION.

The owner must notify residents of HUD\'s final decision

on the preemption request. The owner\'s notice must be:

\(a\) hand delivered or mailed to each residents; and (b)

posted in at least three conspicuous places within each

structure in which the affected units arc located. The

owner\'s notice must convey HUD\'s reasons for approval

or disapproval of the preemption request. The owner

may implement the HUD approved rent levels only after

giving the project residents at least 30 days written

notice of the increase and complying with any other

applicable terms of the tenants\' leases.

7-51. PREEMPTION OF RENT CONTROL BOARD\'S LEASE REQUIREMENTS.

Some rent control Boards specify minimum lease terms

which are in excess of one year. If HUD decides to

preempt the Board\'s rent controls and it will take the

project more than 60 days to reach the rent levels

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9/92 7-54

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4350.1 REV-1

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authorized by HUD, HUD will preempt the local Board\'s

requirements on minimum lease terms. Until the project

is charging the HUD approved rent potential, the owner

may not offer residents leases with terms in excess of

one year.

SECTION 11. PROCEDURES FOR APPEALING BUDGETED

RENT INCREASE ADJUSTMENTS

7-52. LEVELS OF APPEAL. There are only two levels of appeal.

The first level of appeal is to the HUD Field Office

which issured the contested decision. This level of

appeal is at least on administrative level above the

level which made the final decision on the owner\'s

original submission. (For example, if the rent

adjustment letter is signed by the Loan Management

Specialist then the next level of appeal is the Branch

Chief). The final level of appeal is to the Director,

Regional Office of Housing, for the office having

jurisdiction over the property.

7-53. IMPLEMENTATION. Owners are permitted to delay

implementation of rent changes while the HUD Field

Office/Contract Administrator is processing the appeal.

7-54. TENANT NOTIFICATION. Rents resulting from the appeal

will be implemented as follows:

A. Projects with 100 percent Section 8

Since Section 8 tenants are not affected by the

increase in gross rents, there is no need for the

normal 30-day notification period accorded market

rate tenants. Owners may bill HUD for the new

Section 8 rents on the next regular billing cycle

under that contract. They must also comply with

Handbook HUD-4350.3, Occupancy Requirements of

Subsidized Multifamily Housing Programs, Exhibit

3-4 by completing a new form HUD-50059 and

appropriate worksheet.

B. Projects Subject to 24 CFR 245 Tenant Comment

Procedures

Owners may implement HUD approved changes in rents

only after they have complied with tenant notice

requirements and completed any HUD-50059 or

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7-55 9/92

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4350.1 REV-1

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equivalent worksheet required by Handbook

HUD-4350.3, Exhibit 3-4. See page 7-46 of this

Handbook.

C. All other Projects

If the appeal results in an increase to the Tenant

Rent, the owner must give the tenant 30 days

advance written notice of the increase. The

Notice must specify the new Tenant Rent and date it

will be effective.

7-55. INITIAL APPEAL TO FIELD OFFICE

A. ALL PROJECTS.

The appeal must be in writing and postmarked

within 30 days of the date of the rental rate

adjustment decision letter. It must, at a

minimum, include:

1\) A letter explaining why the owner disagrees

with our decision and stating the rents being

sought in the appeal

2\) All information required in the initial

submission in accordance with Chapter 7,

Section 4, Paragraph 7-22 of this Handbook.

B. Projects Subject to Title 24 CFR 245\'s Tenant

Comment Procedures

If the owner makes any material change in any

documents submitted in the initial submission, it

no longer constitutes an appeal, but is now a new

rent increase request and must comply with this

handbook chapter.

7-56. FINAL APPEAL. If the owner does not agree with the

initial appeal decision, the owner may submit a final

appeal to the Director, Regional Office of Housing.

The owner may, but is not required to, implement the

rent adjustments while the final appeal is being

processed. After the final decision is made, if that

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9/92 7-56

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4350.1 REV-1

decision results in a rent increase, the tenants must

be given a 30 day notice before the new rents are

effective.

A. The final appeal must be in writing and postmarked

within 30 days of the date of the initial appeal

decision letter.

B. The owner must send the Director, Regional Office

of Housing, the following:

1\) A copy of the original decision letter,

accompanied by any supporting documentation

sent with the original request or involved in

the original decision

2\) A copy letter explaining why the owner

disagrees with the decision on the initial

appeal

C. The owner must also send a copy of the letter

required in Item B-2 above to the Field

Office/Contract Administrator.

D. The owner may request a meeting with the Regional

Director of Housing, but such a meeting must be

requested and completed during the 30 day final

appeal period.

E. The Regional Office will process the appeal within

30 days. The owner may, but is not required to,

implement rent adjustments while the Region

reviews the appeal. When the Regional Office

issues a decision on the final appeal, rents must

be implemented as previously described under

Paragraph 7-54.

7-57. FURTHER APPEAL. Any decision rendered by the

Regional Director of Housing will be final and

will not be subject to further appeal above that

level.

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7-57 9/92

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4350.1 REV-1

APPENDIX 1

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Subpart D \-- Procedures for Requesting

Approval of an Increase in

Maximum Permissible Rents

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9/92 7-58

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4350.1 REV-1

APPENDIX 1

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Office of Assistant Secretary for Housing, HUD 245.315

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7-59 9/92

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4350.1 REV-1

APPENDIX 1

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245.320 24 CFR Ch. II (4-1-92 Edition)

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9/92 7-60

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4350.1 REV-1

APPENDIX 1

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Office of Assistant Secretary for Housing, HUD 245.410

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7-61 9/92

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4350.1 REV-1

APPENDIX 1

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245.415 24 CFR Ch. II (4-1-92 Edition)

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9/92 7-62

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4350.1 REV-1

APPENDIX 1

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Office of Assistant Secretary for Housing, HUD 245.435

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7-63 9/92

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4350.1 REV-1

APPENDIX 1

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245.505

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9/92 7-64

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4350.1 REV-1

APPENDIX 2

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OWNER\'S CERTIFICATION AS TO COMPLIANCE WITH TENANT COMMENT

PROCEDURES IN 24 CFR 245 (FORMERLY IN 24 CFR 401)

FHA or Non-Insured

Project Name \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_Project
No.\_\_\_\_\_\_\_\_\_\_\_\_

Acting on behalf
of\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_,

the Project Owner, I certify that project management has taken

ALL of the actions listed bellow.

1\) Distributed a Notice to Tenants, in the forms and manner

required by 24 CFR 245.310 and 245.410. (24 CFR 245.410

applies only if a reduction in utility allowances is

proposed.)

2\) Took reasonable steps to assure that any posted Notices

remained intact and in legible form for the full comment

period required by 24 CFR 245.

3\) Made all materials submitted to justify the increase

available during normal business hours in a place reasonably

convenient to project residents.

4\) Honored any resident\'s request to inspect those materials.

5\) Reviewed and evaluated all comments received from project

residents or their authorized representatives.

6\) Examined all materials submitted to HUD/the State Agency in

support of the rent increase request.

I also certify, that all information submitted with my rent

increase request is true, correct and complete.

WARNING: 18 U.S.C. 1001 provides, among other things, that

whoever knowingly and willingly makes or uses a document or

writing containing any, false, fictitious, or fraudulent statement

or entry, in any matter within the jurisdiction of any department

or agency of the United States, shall be fined not more than

\$10,000 or imprisoned for not more than 5 years, or both.

Signed by:

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Name

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Title

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Signature Date

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7-65 9/92

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4350.1 REV-1

APPENDIX 3

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CERTIFICATION AS TO PURCHASING PRACTICES AND

REASONABLENESS OF EXPENSES

FHA or Non-insured

Project Name\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Project No.
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Acting on behalf of,
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_,
the

Project Owner, I certify that ALL of the following statements are

true.

1\) The project is obtaining utilities at the lowest rates

available.

2\) The project has received or requested any tax relief for

which it is eligible and management has analyzed the

project\'s property tax bills and appealed any assessments

which appeared unreasonable.

3\) Amounts paid to individuals or companies having an

identity-of-interest with the owner or the management agent were

not excess of the costs that would have been incurred in making

arms-length purchases on the open market.

4\) Management has exerted reasonable effort to take advantage

of discounts and has credited the project with all

discounts, rebates or commissions received with respect to

purchases, service contracts and other transactions made on

behalf of the project.

5\) Management has obtained contracts, materials, supplies and

services, including the preparation of the annual audit, on

terms most advantageous to the project and at costs not in

excess of amounts ordinarily paid for comparable contracts,

materials, supplies and services in the area in which such

services, supplies, or materials are furnished.

6\) Management has solicited verbal or written cost estimates,

as necessary to comply with the Paragraphs 3 through 5

above. Management has documented the reasons for accepting

other than the lowest bid and will make the documentation

available to HUD, upon request.

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9/92 7-66

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4350.1 REV-1

APPENDIX 3

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WARNING:

o 18 U.S.C. 1001 provides, among other things, that

whoever knowingly and willingly makes or uses a

document or writing containing any false, fictitious,

or fraudulent statement or entry, in any matter within

the jurisdiction of any department or agency of the

United States, shall be fined not more than \$10,000 or

imprisoned for not more than 5 years, or both.

o 12 U.S.C. 1715z-4 provides in part: \"Whoever, as an

owner of a property which is security for a mortgage

(covering multifamily housing, as defined in the

regulations of the Secretary) or as a stockholder

beneficial owner \... trust \... or as an officer,

director or agent of any such owner (1) willfully uses

or authorizes use of any part of the rents or other

funds derived from the property covered by such

mortgage in violation of a regulation \... (2) willfully

and knowingly uses or authorizes the use, while such

mortgage is in default, of any part of the rents or

expense \... shall be fined not more than \$5,000 or

imprisoned not more than 3 years or both

Signed by:

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Name Title

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Signature Date

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7-67 9/92

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4350.1 REV-1

APPENDIX 4a

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RENT INCREASE BUDGET WORKSHEET-RENT INCREASE

SPREAD SHEET INSTRUCTIONS FOR COMPLETION

A. Instructions for Rent Increase Spread Sheet:

1\. Enter the following:

a\. Project Name;

b\. FHA #;

c\. Management Agent - if managed by Property

Management Agent;

d\. Percentage fee or PUPM Cap. Agent certification

contains authorized percent fee or PUPM Cap.

2\. If Applicable, complete the Rent Structure-current and

proposed and compute monthly potential.

B. Income and Expense Projections

1\. Enter Actual Expenses for prior FY in column 1.

2\. Enter Expense from current FY to date and number

of months covered. (Do not annualized) in column 2.

3\. Enter Budget Projections in column 3.

4\. Cash Requirements provides for entry of the following

payments.

1\) Mortgage (principal)

2\) Reserve for Replacement

3\) Painting Reserve

4\) Distribution

5\) Other - Cash expenditures no expended.

a\) Capital expenditures

b\) Other Reserves

NOTE - Account codes should parallel those on the HUD-92410.

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9/92 7-68

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4350.1 REV-1

APPENDIX 4b

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SAMPLE

Owner Explanation of Income and Expense Estimates

6210 - Advertising and Renting Expense. This includes: 1)

\$200 for periodic ads in local newspaper; and 2) the

cost of credit reports on new applicants.

6351 - Bookkeeping Payroll and Services. Includes this

project\'s share of centralized accounting operation.

Costs are prorated over all of the 20 projects managed

by our agent, Professional Management, Inc. Costs are

prorated according to each project\'s relative volume of

transactions.

6310 - Clerical and Occupancy Salaries. Includes one-fourth of

one occupancy clerk\'s time. Occupancy clerk also works

for XYZ Apartments and Evergreen Apartments.

6311 - Office Supplies. Projects a 4 percent inflationary

increase over the prior year\'s actual expense.

6330 - Manager\'s Salary. Includes manager\'s salary plus

contract rent on a 2-bedroom apartment. As payroll

schedule shows, manager will receive a \$100 per month

increase for cost-of-living and performance bonuses.

6340 - Legal. This represents retainer for an attorney who

handles all routine project matters. This is less than

last year\'s actual expense. Last year, a larger than

usual number of evictions were required because of the

former agent\'s failure to effectively screen

applicants. That agent was removed 6 months ago.

6350 - Auditing. Represents the contract price for the annual

audit required by Handbook 2000.4. After obtaining

proposals from two other firms, we executed a contract

with Jones and Smith, Inc. Their bid was \$1,200 less

than the other bids and we understand that HUD Field

Offices have found their work acceptable.

6360 - Telephone and Answering Services. Includes local

telephone service and answering service for evenings

and Sunday. Allows for \$15 per month increase in

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7-69 9/92

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4350.1 REV-1

APPENDIX 4b

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answering service, effective November 1, and \$5

increase in base telephone service rate.

6390 - Miscellaneous Administrative. Last year\'s actual.

6450 - Electricity. Reflects 4 percent rate increase and 5

percent decrease in consumption because are described

in our cover letter. NOTE: Utility company has

requested a 6 percent increase. Since the Commissioner

usually approves only about 2/3 of the requested rate,

we are budgeting for only a 4 percent increase. We are

assuming that the increase will become effective

February 1, 1986, the date requested by the utility

company.

6451 - Water. This is a 10 percent decrease over last fiscal

year\'s actual costs. While not rate changes are

expected, consumption should decline somewhat. Last

year\'s consumption was increased by: 1) drought

conditions; and 2) watering of newly seeded lawns.

6452 - Gas. Reflects 5 percent rate increase that has been

approved by the utility commission and will become

effective December 1985.

6453 - Sewer. Represents a 10 percent decrease from last

year\'s

actual. Sewer expense is one third of the water

expense is expected to decrease for reasons discussed

above.

6545 - Elevator. Cost of service contract with Elevators, Inc.

This amount was the lowest of the three bids we

obtained last Spring.

6510 - Janitorial and Cleaning. Last year\'s actual, plus 4

percent inflationary increase.

6570 - Motor Vehicle. Last year\'s actual.

6519 - Exterminating. Project\'s contract with Bug-Off provides

for one visit per month at cost of \$100 each. This

amount was \$10 higher per visit than other proposals

but we accepted this proposal because contractor\'s

performance over past 3 years has been excellent.

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9/92 7-70

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4350.1 REV-1

APPENDIX 4b

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6525 - Trash Removal. Contract rate increased by \$30 to

\$380/month, effective last May. This increase is

partly reflected in the partial year\'s HUD-92410 and

fully reflected in the budget. Trash is removed twice

a week.

6530 - Security. Cost of new deadbolt locks for 15 units on

Evans Street. There have been several break-ins at

single family homes near that side of the project. We

also have asked the police department to increase

patrols in that area.

6537 - Grounds. Contract with Evergreen Grounds covers

supplies and labor at \$6,000/year. Contract expires in

December 1986.

6560 - Decorating and Interior Painting. Represents cost of

repainting 12 units. Apartments of long-term residents

are repainted every 4 years. Replacement reserves will

pay for any needed drapery or carpet replacement.

6541 - Repairs Materials. Represents last year\'s repairs plus

a 4 percent inflationary increase. None of the prior

period\'s repair expenses were reimbursed out of

replacement reserves; all were routine repairs.

6540 - Repairs Payroll. Includes; a) salary expense for two

maintenance men at rates shown in the attached payroll

schedule; and b) a 50 percent discount on one

maintenance men\'s rent.

6710 - Property Taxes. The county has increased the assessed

value by 5 percent; tax rate in unchanged. Two years

ago, we successfully appealed the county\'s calculation

of the project\'s assessed value. At that time, the

calculation has used incorrect assumptions on income

and expense levels. Since the new, increased assessed

value used the revised assumptions agreed to in the

appeal, we are accepting the assessed value as

accurate.

6711 - Payroll Taxes. Budgeted at 11 percent (6.7 percent

FICA, 4.3 percent combined State and Federal

unemployment) of salaries listed in the attached

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7-71 9/92

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4350.1 REV-1

APPENDIX 4b

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payroll schedule. Increased cost is due to

cost-of-living increases in employee\'s base pay.

6719 Miscellaneous Taxes and License. Includes local

licensing fees for project elevators.

6720 Property and Liability Insurance. Cost of an all-risk

policy with Safeguard, Inc.

6722 Workmen Compensation. Policy covers all of agent\'s

employees. This is project\'s prorated share of the

total cost of the policy; the proration covers the

employees listed on the attached payroll schedule.

Replacement Reserve. Includes \$15 PUM increase in

monthly deposits to be implemented with this rent

increase. Deposits have not been increased since

project commenced occupance in 1978. Attached is an

Agreement formalizing this increase in deposits.

Project Improvements. Includes one-fourth of the cost

of painting the project exterior. (Future exterior

painting costs will be paid from the replacement

reserve. Costs of exterior painting were considered in

establishing the new deposit.)

Service Income. Average of actual income for last 2

years. Laundry machines are leased from Wash and Dry,

Incorporated. Income has consistently stayed at this

level.

Investment Income. \$6,000 to the \$48,000 replacement

reserve (balance as of May 31, 1985) will be withdrawn

for roof repairs. The remaining \$42,000 will be

invested as follows:

\$34,000 in Treasury Notes at 9.24 percent. \$8,000

in insured money market account at 8.5 percent.

NOTE: All replacement reserve interest is deposited in

the project operating account. State law requires that

interest earned on tenant security deposits be passed

through to tenants.

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9/92 7-72

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4350.1 REV-1

APPENDIX 4b

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Vacancy Loss. Decreased from prior year because we expect

new agent to reduce tenant turnover and more aggressively

market units.

Management Fees. Will request a one-half percent increase in

fees, effective March 1, 1983, if new agent performs as

expected. Agent has already made significant progress in

turning the project around.

NOTE: Line items should reference the specific HUD-92410

Account Code. Where the increase is less that 5 percent, no

justification is required. Capital expenditures should not

be included in 92410 line item Budget but in other Cash

expense.

If the rent increase is based on capital expenditures (non-reoccurring)

a reserve analysis should be included.

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7-73 9/92

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4350.1 REV-1

APPENDIX 4c

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Original Interest Rate on Mortgage

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6.75% 7.00% 7.25% 7.50% 7.75% 8.00% 8.25% 8.50%

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40 4.7021 4.9192 5.1383 5.3594 5.5821 5.8067 6.0328 6.2604

35 4.5639 4.7735 4.9851 5.1987 5.4141 5.6314 5.8054 6.0711

30 4.4152 4.6160 4.8189 5.0237 5.2303 5.4389 5.6492 5.8613

25 4.2560 4.4469 4.6397 4.8343 5.0307 5.2290 5.4290 5.6307

20 4.0864 4.2662 4.4476 4.6307 4.8155 5.0019 5.1898 5.3794

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9/92 7-74

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4350.1 REV-1

APPENDIX 4d

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[Budget
Worksheet](http://www.hud.gov/utilities/intercept.cfm?/offices/adm/hudclips/forms/files/92547-a.pdf)

Income and Expense

Projections

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7-75 9/92

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4350.1 REV-1

APPENDIX 4d

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9/92 7-76

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4350.1 REV-1

APPENDIX 5

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RENT COMPUTATION WORKSHEET

INSTRUCTIONS FOR COMPLETION

A. Enter the following

1\. Project Name.

2\. FHA Number.

3\. Management Agent.

4\. Management Fee - Enter percent or PUPM Fee if capped

\- Information can be obtained from Management

Certification.

5\. Initial Mortgage - For 236\'s 221(d)(3) and 202\'s.

6\. Replacement Cost for 221(d)(4)\'s, 207 and 231\'s.

7\. Modified Mortgage - If modified indicate YES and enter

Debt Service (P & I and MIP).

8\. Under workout - If project under workout enter YES and

workout Payment and ending date.

9\. Initial Equity - Enter for 236\'s and 221(d)(3) only.

10\. Debt Service Rate - Enter for 221(d)(3)\'s, 207\'s,

221(d)(4)\'s, 231\'s and 202\'s.

B. Compute the following

1\. Box A - Substitute requested valves and compute Debt

Service that will be allowed

a\) Use formula that pertains to specific section of

Act.

b\) Deregulated projects under alternative mechanism

insure you enter appraised Replacement Cost.

c\) 207\'s, 221(d) (4) and 231\'s not deregulated add 2

percent mortgage to Replacement Cost.

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7-77 9/92

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4350.1 REV-1

APPENDIX 5

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2\. Box B - Compute allowed return or income Reserve for

236\'s and 221(d)(3).

a\) Non-profit projects transferred to limited

dividend use Income Reserve computation not

distribution computation.

3\. Total Cash needs less Management - Box C.

a\) Enter allowed amounts from Rent Increase Budget

Worksheet less Management.

b\) Enter Funding to Reserve that will be authorized.

c\) Enter computed Debt Services.

d\) Enter computed return or Income Reserve.

4\. Management/Vacancy Factor, Box D - If Fee is not capped

factor equals (1 - Mortgage Fee) x(1 - Vacancy). If Fee is

capped factor equals (1 - Vacancy).

5\. Compute Authorized Monthly Rent Potential, Box E and F

a\) Rent Potential (includes other Income) equals

total cash (Box E) divided by Mortgage/Vacancy

Factor (Box D).

b\) Authorized Potential equals Rent Potential less

other Income.

1\) Other Income equals commercial income and

garage/parking and laundry.

2\) Monthly potential equals Authorized Potential

divided by 12.

3\) Percentage Increase equals (Authorized

Potential less Current Potential) divided by

Current Potential.

6\. Market Rent Potential, Box G - (236\'s only)

a\) Compute annual HUD subsidy (See Attachment
\_\_\_\_\_\_\_\_\_\_\_\_\_).

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

9/92 7-78

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4350.1 REV-1

APPENDIX 5

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

b\) New Market Potential equals new Authorized

Potential plus HUD subsidy.

c\) Market Rent Ratio equals new Market Potential

divided by new Authorized Potential.

7\. Unit Rent Computations, Box H

a\) Authorized Rent levels - for each unit type

multiply current unit rent by percent increase.

b\) Market Rate (236 projects only) multiply

Authorized Rent times Market Rent Ratio.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

7-79 9/92

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4350.1 REV-1

APPENDIX 5

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

RENT COMPUTATION WORKSHEET

PROJECT NAME \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ FHA
#\_\_\_\_\_\_\_\_\_\_\_ DATE \_\_\_\_\_\_\_\_

MANAGEMENT AGENT \_\_\_\_\_\_\_\_\_\_\_\_\_ FEE \_\_\_\_\_\_\_\_\_\_\_\_
(Capped Y/N)\_\_

MORTGAGE \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ REPLACEMENT COST
\_\_\_\_\_\_\_\_\_\_\_\_\_\_

(236, 221(d)(3) and 202) OR APPRAISED VALUE

(207, 221(d)(4), 231)

MODIFIED MORTGAGE (Y/N) \_\_\_\_\_\_ UNDER WORKOUT (Y/N)
\_\_\_\_\_\_\_\_\_\_\_

(If yes) Debt service \_\_\_\_\_\_\_\_ If yes w/o Payment
\_\_\_\_\_\_\_\_\_\_\_\_

(P & I & MIP)

Ending Date \_\_\_/\_\_\_/\_\_\_\_

INITIAL EQUITY \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ DEBT SERVICE RATE
\_\_\_\_\_\_\_\_\_\_\_\_\_

(If NP, Total Initial Equity = 0) (Line 5d 2264A)

236 & 221(d)(3) ONLY)

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

BOX A DEBT SERVICE COMPUTATION

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

236 = Mortgage x .03034273
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

221(d)(3) = Mortgage x Debt Service Rate
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

207/231 = Replacement Cost x Debt Service Rate \_\_\_\_\_\_\_\_\_\_\_

(Replacement Cost is new appraised cost)

202/207/221/231 = (Replacement Cost + Working Capital) x

Debt Service Rate \_\_\_\_\_\_\_\_

(Projects not deregulated)

Working Capital = 2 percent mortgage

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

9/92 7-80

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4350.1 REV-1

APPENDIX 5

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

BOX B DISTRIBUTION COMPUTATION

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

236/221(d)(3) = Initial Equity x .06
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

207/231/221(d)(4) = Allowance calculated in conjunction with

Debt Service

INCOME RESERVE (NON-PROFITS)

236 NP = Mortgage Payment x .06393
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

221(d)(3) NP = Mortgage Payment x .05263
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

BOX C RENT POTENTIAL COMPUTATION

Allowed Expenses \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

less Management (\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_)

Plus

Reserves \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Debt Service \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Return/Net Income Reserve \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Total Cash less Management \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

BOX D MANAGEMENT/VACANCY FACTOR

Authorized Management Fee \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_% (1)

Allowed Vacancy Percent \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ (5% or 7%)

Factor = (1 - Management Fee) x (1 - Vacancy)

\(1\) PUPM Cap (Y/N) \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

If yes Fee = 0

Allowed PUPM \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

BOX E

RENT POTENTIAL = Total Cash divided by Factor (Box D above)

(No PUPM Cap)

RENT POTENTIAL (PUPM Cap) = Total Cash/Factor + (PUPM Management

Fee x 12 x Number of Units)

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

7-81 9/92

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4350.1 REV-1

APPENDIX 5

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

BOX F

1\. RENT POTENTIAL \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

2\. Less Other Income (\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_)

3\. Authorized Potential \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4\. Monthly Potential (Authorized

Potential/12) \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

5\. Percent Increase (Authorized Potential - Current

Potential divided by Current Potential

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

BOX G MARKET RENT POTENTIAL (236\'s ONLY)

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Annual Subsidy (Interest Reduction Payment)
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Authorized Annual Rent Potential (BOX F)
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

New Annual Market Rent Potential \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Market Rent Ratio (New Annual Market Rent

Potential Divided by

Authorized Annual Rent

Potential BOX F ) \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

BOX H UNIT RENT COMPUTATIONS

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Unit type

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Current Unit Rent

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

1 + % Increase

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Authorized Unit

Rent

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

9/92 7-82

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4350.1 REV-1

APPENDIX 5

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

MARKET RENT (236 ONLY)

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Authorized Unit

Rent

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Market Ratio

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

New Market Rent

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

UTILITY ALLOWANCES

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Current Utility

Allowances

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Approved Utility

Allowances

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

7-83 9/92

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4350.1 REV-1

APPENDIX 6

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

REQUEST TO INCREASE MONTHLY REPLACEMENT RESERVE DEPOSITS

PROJECT NAME \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ MORTGAGEE
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

FHA OR NON-INSURED

PROJECT NUMBER \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

I hereby request an increase in the monthly deposits to the

Replacement Reserve/Painting from the current amount as of

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_. Attached is the Reserve Analysis in
support of

this request.

Signed by:

OWNER

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

NAME

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

TITLE

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

SIGNATURE DATE

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

9/92 7-84

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4350.1 REV-1

APPENDIX 7

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

AMENDMENT TO REGULATORY AGREEMENT FOR SECTION 220 AND

221(d) (4) PROJECTS (FORMS 92466)

4\. (a) The owner shall not rent the units for a period of less

than thirty (30) days. Commercial facilities shall be

rented for such use and upon such terms as determined by the

owner. Subleasing of dwelling accommodations, except for

subleases of single dwelling accommodations by the tenant

thereof, shall be prohibited without prior written approval

of the owner and the Secretary and any lease shall so

provide. Upon discovery of any unapproved sublease, owner

shall immediately demand cancellation and notify the

Secretary thereof.

\* (For projects constructed for family use and do not

have a Section 8 Contract.)

\(b\) Owners may charge to and receive from any tenant such

amounts as from time to time may be mutually agreed upon

between the tenant and the owner for any rental

accommodations, facilities and/or services which may be

furnished by the Owner or others to such tenant upon his

request.

\* (For projects constructed exclusively for

handicapped tenants or who receive assistance

under Section 8.)

\(b\) Owners may charge to and receive from any tenant such

amounts as from time to time may be mutually agreed upon

between the tenant and owner for accommodations. Tenants

receiving Section 8 assistance shall have their rents

determined by the HAP Contract. No charge shall be made,

however, for facilities or services without the approval of

the Secretary.

\(c\) In the event the project is under jurisdiction of a

local rent control law or ordinance and the owner desires

the Secretary to preempt those controls, the owner shall

comply with applicable regulations or instructions in effect

at the time of application or preemption, currently 24 CFR

Part 246, Subpart B.

\* Delete the paragraph which does not pertain to the project at

hand. Do not delete paragraphs (a) and (b). Your choice is

limited to (b).

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

7-85 9/92

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4350.1 REV-1

APPENDIX 8

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

REGULATORY AGREEMENT AMENDMENT FOR MORTGAGES LIMITED

DISTRIBUTION PROJECT

1\. Subparagraph \_\_\_\_\_\_\_\_\_\_\_ 6(e)(1) in Form 92466, or its

counterpart of the Regulatory Agreement dated \_\_\_\_\_\_\_\_ in

connection with FHA Project No.\_\_\_\_\_\_\_\_\_ is hereby amended

to read as follows:

\(e\) Make, or receive and retain, any distribution of assets

or any income of any kind of the project except surplus

cash and except on the following conditions:

\(1\) All distributions shall be made only as of and

after the end of a semiannual or annual fiscal

period, and only as permitted by the law of the

applicable jurisdiction; all distributions in any

one fiscal year shall be limited to 1/\_\_\_\_\_\_\_ per

centum on the initial equity investment, as

determined by the Secretary which shall be

cumulative;

2\. The Regulatory Agreement is further amended by adding a new

paragraph at the end of the Regulatory Agreement (i.e. #18

in Form 2466) as follows:

\(18\) Owners shall establish and maintain, in addition to the

Reserve Fund for Replacements, a Residual Receipts Fund

by depositing thereto, with the mortgagee, the Residual

Receipts within 60 days after the end of the semi-annual

or annual fiscal period within which such

receipts are realized. Residual receipts shall be

disbursed only at the direction of the Secretary, who

shall have the power and authority to direct that the

residual receipts, or any part thereof, be used for

such purposes as the Secretary may determine.

The term \"residual receipts\" means any cash remaining

at the end of a semi-annual or annual fiscal period

after deducting from surplus cash the amount of

distribution as limited by paragraph 6(e) hereof.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

9/92 7-86

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4350.1 REV-1

APPENDIX 9

ADDENDUM TO REGULATORY AGREEMENT AND/OR CORPORATE

CHARTER FOR 207, 223(f), 608, 213 RENTAL, 234 RENTAL,

803, 810, 231(c)4 OR OWNERS OF 220 OR 221(D) (4)

PROJECTS WHOSE OWNERS CHOOSE THE ALTERNATE METHOD

Paragraph \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ of the Regulatory
Agreement

(Corporate Charter) \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

dated in connection with FHA Project No. \_\_\_\_\_\_\_\_\_

is hereby amended by adding the following:

As an alternative to the determination of rents by the

Secretary based on increases in taxes and operating and

maintenance costs, the owner may request and the Secretary shall

approve rent levels determined by the owner, provided that:

1\. The owner submits a certified appraisal of the property as a

rental project.

2\. The owner provided a schedule of proposed unit rents and

gross potential income.

3\. The owner for the initial determination shall provide an

appraisal conducted by a licensed appraiser of the property

(based on its use as residential rental property) which

includes a rental analysis of comparable conventionally

financed rental properties in the area and which shows the

proposed rent. For subsequent submissions, the owner may

use a qualified appraiser, a certified public accountant, or

a certified member of a national housing management

organization to perform the rental analysis.

4\. The owner agrees that if any units in a project are assisted

under the United States Housing Act of 1937, the

determination of rent levels for those units receiving such

assistance shall be processed in accordance with the

applicable section of that Act.

5\. Upon request by the owner, and provided there are no

violations of this agreement, the Secretary shall approve

rental rates based on the lesser of the following methods:

A\) By using the sum of the operating costs as determined

by the Secretary and the amount derived by multiplying

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

7-87 9/92

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4350.1 REV-1

APPENDIX 9

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

the debt service factor by the projects\' appraised

market value as residential rental property to

determine the approved Gross Potential Rent; or

B\) By using the comparable rents for similar

conventionally financed projects to determine the Gross

Potential Rents allowed.

6\. The owner agrees that in the event the alternative

method of maximum rent determination is requested

pursuant to 24 CFR 207.19(e)(2)(ii), which results in

the project being or becoming subject to local rent

control and, further, that should preemption of those

controls be requested, he/she must fully comply with

applicable regulations in effect at the time of the

request

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

9/92 7-88

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

4350.1 REV-1

APPENDIX 10

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PART 246 \-- LOCAL RENT CONTROL

[24 CFR Ch. II (4-1-92
Edition)](http://www.gpoaccess.gov/cfr/index.html)

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7-89 9/92

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4350.1 REV-1

APPENDIX 10

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Office of Assistant Secretary for Housing, HUD 246.7

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9/92 7-90

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4350.1 REV-1

APPENDIX 10

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246.8 24 CFR Ch. II (4-1-92 Edition)

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7-91 9/92

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4350.1 REV-1

APPENDIX 10

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Office of Assistant Secretary for Housing, HUD 246.10

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9/92 7-92

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4350.1 REV-1

APPENDIX 10

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246.11 24 CFR Ch. II (4-1-92 Edition)

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7-93 9/92

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4350.1 REV-1

APPENDIX 10

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Office of Assistant Secretary for Housing, HUD 246.31

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9/92 7-94

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4350.1 REV-1

APPENDIX 11

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Mortgagee Letter 83-24

October 25, 1983

MEMORANDUM FOR: ALL APPROVED MORTGAGEES

ATTENTION: Multifamily Mortgagees

FROM: W. Calvert Brand, General Deputy Assistant Secretary

SUBJECT: Requirements for multifamily Insured Projects

1\. Property Insurance Requirements

2\. Increases in Replacement Reserve Deposits

3\. Investment of Replacement Reserves and Residual

Receipts

4\. Distribution of Form HUD-9807, Request for Termination

of Multifamily Mortgage Insurance

1\. Clarification of Property Insurance Requirements. 24 CFR

207.260(c) requires that all projects encumbered by FHA insured

mortgages must carry hazard insurance policies which meet the

requirements of the Federal Housing Commissioner. Since those

regulations also make mortgagees responsible for monitoring the

adequacy of the coverage and for obtaining insurance when

mortgagors fail to do so, several mortgage companies have asked

the Department to clarify its insurance requirements for

multifamily projects. That clarification follows.

Section 207.10 of the Regulations requires that multifamily

projects carry a fire and extended coverage insurance policy in

an amount that meets the coinsurance requirements of the insurer

and is at least equal to 80 percent of the actual cash value of

the project\'s insurable improvements and equipment. These

insurance requirements apply as long as the mortgage is insured

by HUD and regardless of the unpaid principal balance of the

mortgage. To determine the amount of insurance required at

project completion, mortgagees must use the estimate of insurable

value shown in construction costs that have occurred since

project completion. After the first year of project operation,

HUD will consider insurance coverage to be adequate if the

insurance coverage met the insurer\'s coinsurance requirements at

the time the policy was issued and:

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7-95 9/92

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4350.1 REV-1

APPENDIX 11

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\(a\) the policy is endorsed with an agreed amount clause in which

the insurer acknowledges the adequacy of the insurance

coverage and agrees not to invoke any coinsurance penalty;

\(b\) the insurer annually certifies that the insurance coverage

meets its coinsurance requirements; or

\(c\) the mortgagor/the insurance agent/the mortgagee annually

correctly recomputes the project\'s insurable value by

applying cost factors published in one of the nationally

recognized building cost indices and insurance coverage is

increased to 8096 (or any higher percentage required by the

insurer\'s coinsurance clause) of the revised insurable

value.

If the mortgagor refuse to pay any higher premiums

associated with required increases in insurance coverage, the

mortgagee must pay the additional premiums and bill the mortgagor

for those premiums.

2\. Increase in Monthly Deposits to the Reserve for

Replacements. All projects subject to the replacement reserve

provisions of the revised Section 8 New Construction or

Substantial Rehabilitation regulations must increase their

monthly deposits to the replacement reserve annually by the

percentage amount of the annual adjustment approved for that

project. The revised regulations apply to all older Section 8

projects whose owners voluntarily opted to be bound by those

regulations and, except as noted below, all insured and non-insured

projects for which Agreements to Enter Into Housing

Assistance Payments Contracts (AHAPs) were executed on or after

November 5, 1979 for New Construction projects or February 20,

1980 for Substantial Rehabilitation projects. The replacement

reserve requirements of the revised Section 8 regulations do not

apply to previously HUD-owned projects sold pursuant to Section

886 (Subpart C). partially assisted projects, or Section 202/8

projects.

While HUD regulations do not require increases in deposits on

other projects, regulatory agreements on insured and HUD-held

projects do authorized HUD Field staff to approve changes in the

amounts of the monthly deposits. When processing rental

increases, HUD staff will analyze the adequacy of the deposits

and suggest that owners increase the deposits if the increases

are needed to meet replacement needs of the project.

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9/92 7-96

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4350.1 REV-1

APPENDIX 11

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Whenever deposits are increased pursuant to either of the two

preceding paragraphs, the Field Office will send the mortgagee

fee a Form HUD-9250, Reserve for Replacements Authorization.

This Form will specify the amount and effective date of the new

deposit.

3\. Investment of Reserves for Replacements and Residual

Receipts.

a\. Replacement Reserves. The revised Section 8

regulations require that projects subject to those

regulations invest the Reserve for Replacements. While

HUD regulations do not mandate that other projects

invest their Replacement Reserves, HUD encourages

owners to do so as prudent investment can offset

inflationary increases in repair costs and enhance a

project\'s financial condition. If an owner elects to

invest the Replacement Reserve, the Mortgagee\'s

Certificate (Form HUD-92434) provides that the

mortgagee must permit the investment. Either the

mortgagee or the mortgagor may effect the investment.

Mortgagors subject to the revised Section 8 regulations

must retain any investment earnings in the Reserve.

Mortgagors not subject to the revised Section 8

regulations must deposit investment earnings in

either the project\'s operating account for the

Reserve for Replacements; the choice rests with

the mortgagor. Investment earnings may not be

distributed directly to mortgagors without regard

to surplus cash considerations.

b\. Residual Receipts. In the past only projects subject

to Subpart F of the revised Section 8 regulations were

required to invest Residual Receipts. While the

Regulatory Agreements for other projects give HUD

control over the use and investment of Residual Receipt

funds, in the past HUD has elected to allow those

mortgagors to choose to invest or not to invest these

funds. We are now changing the requirements for these

projects. Effective immediately, we are requiring that

all projects\' Residual Receipts be invested and that

any earnings on the investment be credited to the

Residual Receipts account. Residual Receipts may be

invested only in the accounts or securities listed

under Paragraph c below. While mortgagors relinquished

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7-97 9/92

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4350.1 REV-1

APPENDIX 11

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control over Residual Receipts when they signed the

project Regulatory Agreement, at the present time

will allow the mortgagors to select among the

authorized forms of investment so long as the mortgagor

exercises due care and attempts to maximize earnings to

the extent consistent with the project\'s liquidity

needs.

c\. Forms of Investment. Reserves for Replacement and

Residual Receipts may be invested in Treasury

securities, securities issued by a Federal agency or

deposits which are insured by an agency of the Federal

government. Acceptable forms of investments are listed

in Paragraphs (1) through (4) below. Neither

Residual Receipts nor Replacement Reserves may be

invested in Repurchase Agreements (REPOS). Investments

must be established so as to: (1) permit the mortgagee

to convert the investment to cash at any time; and (2)

provide that the investments will at all times be under

the control of the mortgagee.

\(1\) Direct Obligations of the Federal Government

Backed by the Full Faith and Credit of the United

States. These include U.S. Treasury Bills, Notes

and Bonds.

\(2\) Obligations of Federal Government Agencies. These

include, for example, GNMA Mortgage Backed

Securities, GNMA Participation Bonds and Farm

Credit Administration issues.

\(3\) Demand and Savings Deposits. Demand and savings

deposits at commercial banks, mutual savings and

loan associations and credit unions are permitted,

provided that the entire deposit is insured by the

Federal Deposit Insurance Corporation (FDIC), the

National Credit Union Share Insurance Fund

(NCUSIF), or the Federal Savings and Loan

Insurance Corporations (FSLIC).

\(4\) Insured Money Market Deposit Accounts. Investment

in money market accounts is permitted, provided

that the account is

insured by one of the Federal agencies

identified in Subparagraph 3c(3) above.

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9/92 7-98

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4350.1 REV-1

APPENDIX 11

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d\. Choosing Among Available Forms of Investment. Except

as noted below, the mortgagor has the right to

determine which of the investment discussed in

Paragraph 3c will be used and a mortgagee may not

restrict the mortgagor\'s choice. A mortgagor may

authorize a lender to select the form of investment, if

the lender is willing to accept that responsibility.

If a mortgagor retains the authority to choose among

authorized forms of investment, the mortgagee may

require the mortgagor to provide written directions

as to the type of investment desired. A mortgagee may

refuse to honor mortgagor\'s request for a specific

investment only if:

\(1\) the mortgagee determines that the mortgagor\'s

choice of investment will significantly increase

the lender\'s cost of administering the reserve,

and the mortgagee identifies another investment

which offers liquidity, security and yield equal

to or better than that proposed by the mortgagor;

or

\(2\) the proposed investment does not meet the criteria

discussed in Paragraph 3.c. above.

e\. Mortgagee Fees. The mortgagee may charge a fee for

administering invested residual receipts or replacement

reserves if the fee is acceptable to the mortgagor. If

there is an identity-of-interest between the mortgagee

and either the mortgagor or its management agent, the

mortgagor must assure that such fees do not exceed the

amounts commonly charged when there is no

identity-of-interest between the mortgagee and mortgagor. The

mortgagor must disclose any such fees in the

Replacement Reserve or Residual Receipts supporting

schedules to the annual financial statement.

4\. Distribution of Form HUD-9807, Request for Termination of

Multifamily Mortgage Insurance. The mortgagee is required

to submit Form HUD-9807 when the mortgage is prepaid or the

mortgagor and mortgagee agree to terminate the mortgage

insurance. Instructions printed on Form HUD-9807 direct

mortgagees to mail the form only to HUD Headquarters. To

increase the accuracy of Field Office portfolio listings and

address lists, we are now asking that mortgagees mail all

HUD-9807 requests to both HUD Headquarters and the HUD Field

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7-99 9/92

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4350.1 REV-1

APPENDIX 11

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Office having jurisdiction over the project in question.

The Field Office\'s copy should be sent to the attention of

the Housing Division Director.

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9/92 7-100

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4350.1 REV-1

APPENDIX 11

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Mortgagee Letter 89-12

March 28, 1989

TO: ALL APPROVED MORTGAGEES/ATTENTION: Multifamily Mortgagees

FROM: James E. Schoenberger, General Deputy Assistant

Secretary for Housing

SUBJECT: Investment of Replacement Reserves and Residual

Receipts in Tax-Exempt Securities

HUD encourages, and in many programs requires, owners to

invest Replacement Reserve and Residual Receipts Funds in order

to offset inflationary increases in repairs and replacement costs

and to enhance a project\'s financial condition.

Mortgagee Letter 83-24 permitted the investment of

Replacement Reserves and Residual Receipts funds only in Treasury

securities, securities issued by a Federal agency, or deposits

which are insured by an agency of the Federal government. While

HUD encourages and often requires the investment of these funds,

provisions in the Tax reform Act of 1986 may prohibit mortgagors

from offsetting taxable interest earnings on these accounts with

passive losses from a project. Thus, there may be a disincentive

to invest in taxable securities/accounts.

For this reason, we have reevaluated Mortgagee Letter 83-24

and have attempted to identify a tax-exempt security or

securities which could be used as an investment of Replacement

Reserve and Residual Receipts funds. We have sought to identify

secure, liquid instruments, for which the return of principal and

payment of interest are assured, to the maximum possible extent.

Effective immediately, in addition to the investments

currently permitted in Mortgagee Letter 83-24, HUD will permit

the purchase of the following tax-exempt securities:

1\. AAA rated GNMA collateralized tax-exempt bonds

2\. AAA rated pre-refunded bonds. These are bonds that

originally may have been insured as general obligation

or revenue bonds but are now secured, until the call

date or maturity, by an \"escrow fund\" consisting

entirely of direct U.S. government obligations that are

sufficient for paying the bondholders.

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7-101 9/92

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4350.1 REV-1

APPENDIX 11

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NOTES OF CAUTION

1\. In order to assure that required amounts have been paid into

the Replacement Reserves and Residual Receipts accounts, the

actual costs (which in many cases may not be the face value)

of these and other approved securities, must be shown on the

project books. In addition, details of these transactions

should be disclosed in the footnotes to the Annual Financial

Statement.

2\. When HUD approves disbursements from Replacement Reserves or

Residual Receipts funds and the funds are invested in these

and/or other permitted securities, mortgagees must, to the

extent that reserves are available, assure that securities

are sold in an amount which results in proceeds sufficient

to cover the disbursement.

3\. Since the sale or redemption of these securities, as well as

others already permitted, may result in cash proceeds of

less than the amount invested, Chapter 4, Section 10,

paragraphs 1(c)(3) of Handbook 4350.1 applies.

4\. It is incumbent upon owners and managers, when making

decisions on the purchase of these and other approved

securities, to carefully consider the potential losses which

may arise from sale or redemption of the securities.

5\. Since HUD is limiting the purchase of these securities to

those that are AAA rated, HUD will not permit, as an

operating cost, fees for a Financial Advisor to assist in

selecting such securities for investment.

Questions on the above may be addressed to your local HUD

Field Office or the Office of Multifamily Housing Management,

Planning and Procedures Division, phone (202) 426-3944. This is

not a toll free number.

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9/92 7-102

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4350.1 REV-1

APPENDIX 12

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Suggested form of letter for use with appropriate modifications

for type of project and situation by Housing Management Division

Directors in accordance with Section 4, Paragraph 8(c)(3).

Certified Mail

Return Receipt Requested

According to our records, you have received a previous

letter from the Office of Finance and Accounting, Department of

Housing and Urban Development, requesting submission of page 1 of

Form (HUD-93104) (HUD-93104A), Monthly Report of excess Income,

and the excess income collected, if any, for the month(s) of\.....

This report is required to be submitted monthly from all projects

even in cases where there is no excess income.

You are hereby notified that, unless the requested page 1

of Form (HUD-93104)(HUD-93104A), Monthly Report of Excess Income,

and any excess income collected for the month(s) of\.....are

remitted to the Office of Finance and Accounting, Department of

Housing and Urban Development, Attention: Billing and Receivable

Division, 451 7th Street, S.W., Washington, D.C. 20410, within

thirty (30) days of the date of this letter, the interest

reduction payments to the mortgagee on behalf of this project,

beginning with the next payment falling due, will be suspended or

terminated in accordance with paragraph\...\...of the (Regulatory

Agreement) (Interest Reduction Contract).

Should such suspension occur, you will be liable to the

mortgagee for the full amount of the next mortgage payment

falling due. Your failure to make the full mortgage payment

within the usual time limit may result in a default under the

terms of the Mortgage which will be handed in accordance with

regular default procedures. (This last sentence is applicable to

insured and HUD-held projects only.)

You are strongly urged to contact this office immediately if

there are any factors beyond your control or of an unusual nature

which will prevent your immediate compliance with the above

requirements.

(To be signed by Housing

Management Division Director)

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7-103 9/92

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4350.1 REV-1

APPENDIX 13

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Rent Schedule

Low Rent Housing

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HUD-92458 (2-89)

HB 4566.2

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9/92 7-104

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4350.1 REV-1

APPENDIX 13

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\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

7-105 9/92

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4350.1 REV-1

APPENDIX 13

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\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

9/92 7-106

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4350.1 REV-1

APPENDIX 14 a

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

CONFESSION OF JUDGMENT NOTE

Amount: Date:

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, Maker
of this Note,

promises to pay to the order of the Secretary of Housing and

Urban Development (HUD), 451 Seventh Street, S.W., Washington,

D.C. 20410, the sum of
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Dollars

(\$ \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_), in monthly installments of \$
\_\_\_\_\_\_\_\_\_\_\_\_\_

starting on \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, 19 \_\_\_\_, plus one
final

installment of \$\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ on
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_,

19 , the due date of this Note.

Holder (HUD), its successors or assigns) may collect a late

charge of 10% on any installment that is at least five days past

due.

Failure to pay an installment within five days after the

date the installment is due shall constitute a default, and upon

such default Holder may, without notice, declare the unpaid

balance to be immediately due and payable.

This Note is secured by an Excess Rentals Repayment

Agreement, a breach of which shall constitute a default under

this Note.

In the event of default as specified above, Maker hereby

appoints HUD as its attorney, which appointment shall be

irrevocable, with the power to confess judgment against Maker in

any court of law having jurisdiction.

Should payment not be made by the due date, Maker agrees to

pay interest at the rate of \_\_\_\_\_ percent ( %) per year on the

amount past due until paid.

Maker severally waives demand, notice and protest, and any

defense due to extension of time or other indulgence by Holder,

or to any substitution or release of collateral.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

7-107 9/92

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4350.1 REV-1

APPENDIX 14a

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Maker agrees to pay reasonable costs of collection,

including attorney fees\', whether or not judgment is entered on

this Note.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Name (typed or printed)
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Address \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

9/92 7-108

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4350.1 REV-1

APPENDIX 14 b

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FHA Project No.:

Project name:

Project location:

EXCESS RENTALS REPAYMENT AGREEMENT

This Agreement is entered into this \_\_\_\_\_\_\_ day of
\_\_\_\_\_\_\_\_\_\_

19 by and between
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_,

hereafter referred to as \"Debtor\", and the Secretary of Housing

and Urban Development, his successors and assigns, hereafter

referred to as \"HUD\" Debtor\'s address is
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_.

HUD\'s address is 451 Seventh Street, S.W., Washington, D.C.

20410\.

RECITALS

Debtor is the owner of the above-identified project, which

is subject to a first mortgage (deed of trust) held by
\_\_\_\_\_\_\_\_\_\_

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Pursuant to subsection 236(g) of the National Housing Act,

12 U.S.C. 1715z-1(g), and by the terms of a Regulatory Agreement

or other contractual document entered into by Debtor with HUD,

Debtor is obligated to accumulate and periodically pay to HUD all

rental charges collected in excess of the basic rental charges.

HUD has made demand for payment of the excess rental charges

in the amount of \$\_\_\_\_\_\_\_\_\_\_\_\_\_, and the undersigned
warrants to

HUD that the Debtor, as of the date of this Agreement, owes HUD

that amount but asserts that it is unable to pay that amount in a

lump sum. The undersigned warrants further that he/she has been

authorized to enter into this Agreement and to execute the

Confession of Judgment Note secured by this Agreement (the

\"Note\") in the above amount on behalf of the Debtor.

HUD has agreed to accept periodic payments of said amount,

with interest, as included in the Note.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

7-109 9/92

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4350.1 REV-1

APPENDIX 14b

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UNDERTAKING

Therefore, in consideration of Debtor\'s execution of this

Agreement and of the Note, which bears interest at the rate of

\_\_\_\_\_ percent ( %) per year, HUD agrees to forbear from pursuing

its legal and equitable remedies against Debtor, but only for so

long as Debtor makes timely payment under the terms of the Note.

Debtor shall have \_\_\_\_\_\_\_\_ months to pay its debt, starting

from the first day of the first month after full execution of

this Agreement. Any unpaid principal balance of the Note, plus

all accrued interest, remaining unpaid at the end of such period

will become due and payable immediately as set forth in the Note.

Debtor agrees to submit to HUD Forms HUD 93104 for the

months of
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_,

which Debtor admits have not yet been submitted and are late.

No delay or omission of HUD to exercise any right to which

it might be entitled shall be construed to be a waiver of any

such right, and every right, power and remedy enuring to HUD in

equity, by law or contract may be exercised from time to time and

as often as may be deemed necessary by HUD.

This Agreement is assignable by HUD but may be amended only

by a written instrument executed by Debtor and by HUD or its

assignee.

This Agreement will be executed in three counterparts, each

of which shall be deemed an original. Debtor will receive one

counterpart, and HUD will receive two.

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9/92 7-110

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4350.1 REV-1

APPENDIX 14b

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In testimony whereof, Debtor and HUD have executed this

agreement effective the date first above written.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Debtor

By: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Secretary of Housing and

Urban Development

Witness: By:
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Director, Housing

Management Division

If repayment period exceeds 12 months:

By: \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Regional Director

for Housing

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7-111 9/92