[Link to
GHM-0029](http://www.hud.gov/offices/adm/hudclips/lops/GHM-0029LOPS.doc)

[Link to
GHM-0030](http://www.hud.gov/offices/adm/hudclips/lops/GHM-0030LOPS.doc)

Prepayment of Mortgage on Section 236-Insured Project

Legal Opinion: GHM-0036

Index: 3.346, 3.160

Subject: Prepayment of Mortgage on Section 236-Insured Project

June 2, 1992

Kip M. Sweda, Esq.

Roetzel and Andress

75 East Market Street

Akron, Ohio 44308-2098

Re: Kentway Apartments

Kent, Ohio

Project No. 042-44007

Dear Mr. Sweda:

This is in response to your letter of April 13, 1992 to

Susan Sturman concerning the eligibility of the owner of Kentway

Apartments to prepay its mortgage and terminate the low income

use restrictions on the property.

Kentway Apartments (the \"Project\") is owned by Kentway, Inc.

(the \"Owner\"), a private nonprofit organization. The Project is

subject to a mortgage insured by the Secretary under Section 236

of the National Housing Act. The Owner requested permission from

the HUD Cleveland Office to prepay the mortgage and received a

reply from Garreth H. Dowlen, Director Housing Management

Division, dated February 28, 1992. Mr. Dowlen indicated that,

inasmuch as the Owner is a nonprofit organization, it is not

entitled to prepay its mortgage. As counsel for the Owner, you

then requested our opinion as to the right of the Owner to prepay

the Section 236-insured mortgage.

Section 236.30 of Title 24 of the Code of Federal

Regulations governs prepayments of mortgages insured under

Section 236 of the National Housing Act. Paragraph (a)(1) of 24

CFR 236.30 provides that a limited distribution mortgagor may

prepay a 236-insured mortgage without the consent of the

Department where the prepayment occurs after twenty years from

the date of final endorsement of the mortgage and no rent

supplement contract exists or where the prepayment occurs as a

result of the sale of the project to a cooperative or private

nonprofit organization and the sale is financed with a mortgage

insured under Section 236.40(d) of the regulations. In his

February 28, 1992 letter, Mr. Dowlen\'s decision that the mortgage

on the Project could not be prepaid after twenty years from final

endorsement, was most likely based on the fact that the Owner is

not a limited distribution mortgagor and is, therefore, not

entitled to prepay its mortgage without HUD consent, as provided

in Section 236.30(a)(1). However, this decision disregards the

language of Section 236.30(a)(2).

Section 236.30(a)(2) of Title 24 of the CFR states that

\"in all cases, except those outlined in Section 236.30(a)(1) , a

mortgage indebtedness shall not be prepaid in full and the

Commissioner\'s controls shall not be terminated unless the

Commissioner gives his prior consent to such prepayment.\" The

language contained in the Mortgage Note for the Project provides

that \" T he debt evidenced by this Note may not be prepaid either

in whole or in part prior to the final maturity date hereof

without the prior written approval of the Federal Housing

Commissioner.\" (The Note enumerates certain circumstances,

including those contained in Section 236.30(a)(1), where

prepayment is permitted without HUD consent, but those

circumstances are not relevant to the issue at hand.)

Since the Project does not fall within the parameters of

paragraph (a)(1) of Section 236.30 because the mortgagor is not a

limited dividend entity, the Project must be subject to paragraph

(a)(2), which controls in all other cases. Therefore, pursuant to

Section 236(a)(2), the Owner may prepay its mortgage, but only

after receiving the consent of the Department.

Prior to giving consent to the mortgage prepayment, the

Department must comply with Section 250(a) of the National

Housing Act. Section 250(a) states that where Departmental

approval is required for a mortgage prepayment, such approval may

not be given unless the Secretary makes the following findings:

\"(1) the Secretary has determined that such project is

no longer meeting a need for rental housing for lower income

families in the area;

\(2\) the Secretary (A) has determined that the tenants

have been notified of the owner\'s request for approval of a

prepayment; (B) has provided the tenants with an opportunity

to comment on the owner\'s request; and (C) has taken such

comments into consideration; and

\(3\) the Secretary has ensured that there is a plan for

providing relocation assistance for adequate, comparable

housing for any lower income tenant who will be displaced as

a result of the prepayment and withdrawal of the project

from the program.\"

These findings should be made by the Housing Management

Division in the Field Office and then forwarded to the Office of

Preservation in Headquarters with the recommendation that the

prepayment be either approved or disapproved.

The Department\'s current policy is that once the findings

required by Section 250(a) are made, the Department is willing to

consider the mortgage prepayment as long as the Owner agrees to

comply with certain restrictions which are similar to those

imposed on owners seeking to prepay their mortgages pursuant to

the Low Income Housing Preservation and Resident Homeownership

Act of 1990. The Owner must agree to:

2

1\. maintain the housing as low and moderate income housing

for the remaining useful life of the property, approximately

fifty years from the date of the agreement;

2\. rent to the same proportions of very low, low and

moderate income families that resided in the project on

January 1, 1987 or at the time of approval of the

prepayment, whichever yields a greater number of very low

income families;

3\. limit rents for current tenants to the lesser of 30

percent of each tenant\'s adjusted income or the Section 8

existing fair market rent;

4\. prevent the displacement of current tenants, except for

good cause; and

5\. make adequate expenditures to properly maintain the

housing throughout the term of the agreement.

If the owner is amenable to these conditions, we suggest

that you resubmit your request to prepay the mortgage to the

Cleveland Field Office and ask that office to make the findings

required under Section 250(a) of the National Housing Act. I

have forwarded a copy of this letter to the Housing Management

Division in the Cleveland Field Office in order to clarify our

position as to mortgage prepayments requiring Departmental

consent.

If you have any further questions regarding this matter,

please contact Susan M. Sturman at 202-708-3667.

Very sincerely yours,

Gains E. Hopkins

Acting Chief Attorney

Loan Management and Property

Disposition Section

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