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CHAPTER 12: Emergency Low-Income Housing and Preservation Act (ELIHPA)

Plans of Action

Section A

12-1. The ELIHPA, Title II of the Housing and Community Development Act

of 1987, as amended by the Stewart B. McKinney Homeless Assistance

Amendments of 1988, and the Department of Housing and Urban

Development Reform Act of 1989, restricts the ability of an owner

of \"eligible low-income housing\" from prepaying a project\'s

mortgage note after 20 years if the mortgage note is eligible to be

prepaid without the Secretary\'s consent. The regulations, 24 CFR

Part 248, with conforming amendments in Parts 50, 241, 219, 221 and

236, carry out these legislative provisions.

12-2. Evaluation and Processing. Though Low-Income Housing Preservation

Resident Homeownership Act (LIHPRHA) (Title VI of the 1990

Affordable Housing Act) replaces ELIHPA (Title II) and makes it a

permanent part of the statute, there are enough differences in

LIHPRHA particularly concerning rents and allowable incentives to

warrant separate treatment in this Handbook. The procedures

described here are intended for use by owners and loan servicers to

develop, process, evaluate and monitor an ELIHPA Plan of Action,

(POA). To avoid undue repetition, ELIHPA program elements already

covered in the LIHPRHA portion of the Handbook (Chapters 1-11) will

be specifically noted e.g., Notices of Intent (NOI), Eligibility

Rules, Terminations.

12-3. Eligibility. ELIHPA and LIHPRHA eligibility criteria are the same

except with respect to delinquent HUD-held mortgages (See Chapter

2).

A. Under ELIHPA, a POA involving a defaulted HUD-held mortgage

must include a plan to reinstate the defaulted HUD-held

mortgage.

B. HUD encourages owners to use incentives, i.e., an equity loan,

to reinstate the defaulted HUD-held mortgage. (Further

discussion of eligibility for HUD-held projects is in

Paragraph 12-10L).

12-4. Notice of Intent (NOI). The NOI (HUD Form-9608-B), APPENDIX 12-1

starts an owner\'s participation in the ELIHPA program.

Distribution and posting requirements are the same as the LIHPRHA

requirements described in Chapter 3, paragraphs 3-4 and 3-5 with

the following exceptions:

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(12-4) A. HUD does not supply foreign language translations of the NOI

for posting.

B. ELIHPA NOI\'s that propose termination of affordability

restrictions will be filed according to LIHPRHA guidelines In

Chapter 4.

C. References to the Homeownership Program (available only under

LIHPRHA) have been deleted in the Notice to the tenants.

12-5. Access to CFS/Tracs. On receipt of the NOI Form HUD-9608-B, the

Asset Management (AM) staff will access the CFS\\TRACS system for

the following information:

A. All Section 8 contracts outstanding and closed for the

project.

B. Number of LMSA units associated with the project.

C. Number of 236 or BMIR units associated with the property.

D. Current tenant profile information for the project.

12-6. Preservation Capital Needs Assessment (PCNA). The POA stage begins

when the local HUD Office receives from the owner the NOI HUD Form-

9608-B. The Production Branch, Architectural, Engineering and Cost

staff (A/E&C) performs the PCNA. On completion of the PCNA, the

Preservation Coordinator sends the PCNA to the owner. Tenant

notification requirements of Title VI apply.

12-7. Appraisal Options. To establish a preservation value before the
POA

submission, the owner has two options regarding the submission of

an independent, professional appraisal:

A. An owner may submit an appraisal within 60 days of HUD\'s

receipt of the NOI.

Valuation then has 60 days to:

1\. Review the appraisal;

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(12-7) 2. Make any necessary adjustments or do its own appraisal;

and

3\. Provide the value determination to the owner.

B. An owner may submit the appraisal with the POA within 6

months. All tenant notification requirements of Title VI

apply.

The appraisal:

1\. Conforms to the requirements set forth in Notice

H93-21, \"Production Branch Instructions for Processing

POA Under Title II of the Housing and Community

Development Act of 1987, and Associated Section 241(f)

Loan Applications.\"

2\. Determines the highest and best use of the property.

Permissible incentives will only be approved when it can

be shown that the property has a higher and better use

than subsidized rental property. This determination is

central to the HUD review appraiser\'s function in ELIHPA

processing.

3\. Provides an estimate of the owner\'s equity based on

consideration of one or more of the following approaches,

depending upon which is deemed appropriate by the

processing appraiser:

1\) capitalization of net income;

2\) direct sales comparisons; and

3\) replacement cost.

4\. Documents how hypothetical costs, if any, for the

purchase and installation of any upgrade improvements

were derived.

5\. Provides reasonable specification data for major

upgrades. Similar documentation also supports the

derivation of hypothetical conversion costs.

6\. Should be effective not later than 30 days before the

date of submission of the POA.

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12-8. ELIHPA POA. Requesting extension of low-income affordability

restrictions through retention or sale of the project in exchange

for incentives.

A. POA. The POA may or may not involve a prepayment of the

mortgage.

B. Contents of the POA. Includes the following: (Checklists in

APPENDICES 8-3 and 8-4 may be helpful, but note differences In

requirements for ELIHPA submissions):

1\. Tenant Income Profiles.

a\. The owner submits two income profiles of the

tenants.

1\) One profile should reflect tenant data as of

the date of the PA submission, and the second,

as of January 1, 1987, (based on the median

income limits established by HUD in February,

1987\) or if the January 1, 1987, profile is

unavailable, a certification of unavailability

and a profile as of January 1, 1989, (each

based on appropriate income limits).

2\) For tenants with Section 8 vouchers or

certificates, the owner may have to contact

the local Public Housing Authority (PHA) to

get the information.

3\) The profile as of POA submission must include

the following information for each unit:

o A code number to maintain tenant

anonymity;

o Unit type;

o Family size;

b\. Family\'s gross annual income and its classification

as very low, low-, or moderate-income;

1\) Very low-income (gross annual income is less

than or equal to 50 percent of area median

income adjusted for family size);

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(12-8) 2) Low-income (gross annual income is greater

than 50 percent, yet less than or equal to 80

percent of the area median income)

3\) If an owner chooses to use Flat Rents, the

low-income group is further divided into the

following sub-groups:

a\. Low One (51-60 percent of area median

income);

b\. Low Two (61-70 percent of area median

income);

c\. Low Three (71-80 percent of area median

income);

4\) Moderate-income (81 percent to 95 percent of

the median family income adjusted for family

size).

5\) Market income tenants (95 percent of median

and above) are included in the tenant census

for purposes of phased-in rents and

proportionality though these tenants will be

replaced by moderate-income tenants when they

move out.

6\) Number of vacant units (allocated to very low-

, low- and moderate income in proportion to

the share of occupied units in each category);

7\) Approved non-revenue units are not counted.

2\. A description of any proposed changes in the status or

terms of the mortgage or regulatory agreement.

3\. A description of any proposed changes in the low-income

affordability restrictions (i.e., rents, occupancy

restrictions), and a detailed assessment of the effect of

these proposed changes on each tenant of the project or

a statement that there are no changes.

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(12-8) Relocation and displacement requirements are covered in

Chapter 10.

4\. A complete Transfer of Physical Assets (TPA) package \[if

the POA proposes a change in ownership\]. (See Chapter 13

of HUD Handbook 4350.1 REV-1). The TPA must contain

complete details of any secondary financing.

5\. A description of any outstanding findings of

noncompliance with the Fair Housing Act (FHA); Title VI

of the Civil Rights Act of 1964; Executive Order 11063;

Section 504 of the Rehabilitation Act of 1973; Age

Discrimination Act of 1975; or with respect to the

project Regulatory Agreement.

6\. A waiver request by the owner, if appropriate.

7\. A list of any incentives (refer to paragraph 12-10) which

the owner may request in exchange for extending the low-

income use of the project for the remaining mortgage

term. The list should include dollar values for each

incentive, e.g., rent increases, amount of the Section

241(f) equity loan, amount of Flexible Subsidy (FS) loan,

etc.

8\. A FS Capital Improvement Loan Application (CILA) by a

nonprofit purchaser (only a nonprofit will qualify) if

the POA proposes to make improvements using this program.

Purchaser submits a complete FS package, including a

comprehensive Management Improvement and Operating Plan

(MIO), supported by specifications and cost estimates.

HUD Handbook 4355.1 contains guidance and procedures for

completing a Flexible Subsidy application. HUD will not

award final approval of the POA until the CILA is

fundable under a Notice of Fund Availability (NOFA).

9\. Documentation that the owner has sought assistance

through State and local government agencies and a

complete description of any assistance which such

agencies will provide.

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(12-8) 10. Complete description of the present debt secured by the

project, including current balances, interest rate,

monthly mortgage payments to principal, interest and MIP,

maturity date of the mortgage and copies of:

The first note and mortgage,

All ancillary notes and mortgages, loans by public

agencies, e.g., loan for rental rehabilitation and any

other mortgage liens and, Partnership debt secured by a

mortgage lien.

11\. A detailed statement of the proposed rental structure

(Form HUD-92458) at the property reflecting all the

project information and the rental structure with

incentives. Rents may be increased; however, they must

remain affordable.

12\. Certification using the format provided in APPENDIX 8-5,

Form HUD-9611, Low-Income Housing Tax Credits (LIHTC)

certification of owners, concerning the owner\'s intent

regarding the use LIHTC. Owner must disclose information

detailing the use of LIHTC, or certify that tax credits

will not be used.

C. Results of HUD\'s Review. (See Chapter 8 for detailed

discussion):

1\. Prepayment is approved and the owner will receive

incentives from the Federal government in return for

agreeing to conditions related to the continued use of

the project as low-income housing;

2\. Prepayment is not approved but incentives are granted

under the same conditions as in the preceding paragraph;

3\. Prepayment is not approved, and HUD will not offer

incentives of any kind.

12-9. POA REQUESTING PREPAYMENT AND TERMINATION OF AFFORDABILITY

RESTRICTIONS. See Chapter 8, Section 6 for the list of findings

HUD must make to approve a POA to terminate low-income

affordability restrictions, submission requirements, and processing

instructions.

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12-10. INCENTIVES TO EXTEND LOW-INCOME USE. The following are incentives

available to owners who agree to extend the projects affordability

restrictions for the duration of the original mortgage:

NOTE: HUD WILL PROVIDE INCENTIVES ONLY IF: (1) THE APPRAISAL

DEMONSTRATES THAT THE PROPERTY HAS A \"HIGHER AND BETTER USE\" THAN

AS LOW-INCOME RENTAL HOUSING; AND (2) LOW-INCOME AFFORDABILITY

RESTRICTIONS AT THE PROJECT ARE EXTENDED FOR THE REMAINING TERM OF

THE MORTGAGE.

A. Increased Distributions. An incentive distribution may: 1)

stay at 6 percent of revalued equity; 2) increase the

percentage of existing or revalued equity; or 3) be subject to

the surplus cash computation. Section 221(d)(3) mortgagors

may retain all rental collections beyond normal operating

costs and debt service as distributable, subject to the

surplus cash computation.

1\. The percentage of equity allowed as distributions will be

calculated as the projected net cash flow (after full

rent stabilization with a 5 percent vacancy factor and

management fee not to exceed \$45.00 per unit per month)

divided by the new equity base (recalculated equity).

Using current projections, the resulting increased

percentage is the mortgagor\'s annual authorized return on

equity. HUD applies this rate of return to the projects

new equity base (equalling the appraised value as

concurred by HUD at POA approval) minus the amount of

secured debt. If the mortgagor chooses to obtain

secondary financing, the amount of the second mortgage

will be subtracted from the new appraised value, with the

remaining balance of the first mortgage, to calculate the

nev equity base. Annual adjustment increases will be

budget-based.

2\. Surplus Cash Distribution. There will be no restrictions

on the distribution of surplus cash, as defined in the

Regulatory Agreement. Total rents for surplus cash

projects are subject to annual increases using an Annual

Adjustment Factor (AAF).

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(12-10) 3. Section 236 projects remain subject to the surplus cash

computation and collection and remittance to HUD of all

excess income. Distributions may be taken only after the

local HUD Office has determined that the project is

properly maintained and all reserve accounts are properly

funded.

B. The Production Branch appraiser can approve an increase in an

owner\'s equity based on the \"As Is\" value of the property.

\"As Is\" value is the unsubsidized fair market value of the

property, less the costs of any required repairs, upgrade

improvements, and net discounted conversion costs that an

owner would have incurred by an owner/converter in the

marketplace to get the hypothetical highest and best use.

Owner\'s equity is the net value of the property obtained by

deducting all HUD-approved indebtedness from the \"As Is\"

value.

C. SectIon 241(f) Equity Loan. If an owner borrows against the

revalued equity base by obtaining a Section 241(f) equity

loan, a conventional loan or any other long-term indebtedness,

either secured against the property or unsecured, the equity

portion of the Section 241(f) loan amount shall be added to

the existing outstanding indebtedness for purposes of

recalculating the remaining equity base, i.e., recalculated

equity, to determine the amount of limited distribution. An

owner entity that does not request a 241(f) loan as an

incentive either because it does not require a rehab loan, or

prefers to apply for an equity loan at some future date will

have the approved Authorized Annual Return (AAR) applied to

the Revalued Equity amount to determine the amount of

distribution. Refer to Production Branch Instructions for

Processing POA under Title II of the Housing and Community

Development Act of 1987;\" Section 17, pp.40-41.

1\. HUD cannot issue a commitment to insure a Section 241(f)

loan before Final Approval of a POA. Approval of the POA

qualifies the owner for loan eligibility and provides

sufficient operating income to support a 241(f) loan.

2\. Section 241(f) loan applications must be accompanied by

the certification of LIHTC tax credits required by Notice

H90-17. Refer to APPENDIX 8-7 for the required

documents.

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(12-10) D. Non-Insured Financing. HUD will only approve proposed non-

insured secondary financing if, upon evaluation, it proves to

be cost effective and assures HUD\'s security.

E. Access to Reserves in Extensions and Sales Transactions.

Owners may be permitted access to the Residual Receipts

Account if projects are in good physical condition, as

determined by the local HUD Office. Escrow and trust accounts

(tax, insurance, and tenant security deposits) must be

properly funded. Owners may also have access to the Reserve

for Replacement Account (RRA) provided the required repairs

have been completed. AM will determine if the RRA is

sufficiently funded. Also, current policy permits access to

RRAs in sales transactions.

F. Rent Increases. \"Monitoring Project Rent Increases After POA

Approval\".

G. Section 8 Loan Management Set Aside (LMSA).

1\. Existing units. HUD will increase section 8 rents to the

lesser of:

a\. The Fair Market Rents (FMR) or

b\. The Project Specific Rent (PSR).

2\. New units. HUD will provide new Section 8 Loan

Management Set Aside (LMSA) units for all very low-income

tenants at the lesser of the FMR or the Project Specific

Rents (PSR). HUD also may provide Section 8 assistance to

lower income tenants (51-80 percent of median income) in

a sale to the tenants or a qualified nonprofit entity.

3\. Subject to appropriations, law and the availability of

funds, HUD will extend the contracts pursuant to a POA.

H. If HUD is unable to extend these LMSA contracts or provide

comparable assistance, HUD will take the following successive

actions:

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(12-10) 1. Modify the rent and occupancy restrictions that are

dependent on the Section 8 LMSA and which the owner

agreed to maintain in executing the Use Agreement;

2\. Release an owner from the rent and occupancy

restrictions. If these actions result in default of the

insured loan, revise the POA affordability restrictions.

I. Flexible Subsidy. Flexible Subsidy Capital Improvement Loans

(CILS) are only available to nonprofit Purchasers of ELIHpA

projects with insured mortgages. The loan may be a deferred

note (payable on sale or refinancing of the project) with a

term coincident with the expiration of the project\'s insured

mortgage note, accruing interest at a rate of 1 percent.

Projects with HUD-held mortgages or State Agency non-insured

financing are eligible for CILs as an ELIHPA incentive and

will be funded according to a published NOFA funding schedule.

Although the POA may request a CIL as an incentive and AM may

review and give Preliminary approval of the POA including a

CIL, HUD may not give final approval until the CIL is funded

under a Notice of Fund Availability (NOFA). If an owner

requests this incentive, a complete Flexible Subsidy package

including a Management Improvement and Operating (MIO),

detailed specifications, cost estimates, and LIHTC tax credit

certification must be included with the POA. HUD Handbook

4355.1 contains instructions for Flexible Subsidy assistance.

J. Prepayment of the original HUD-insured or HUD-held loan

provided project meets criteria for prepayment and termination

of the regulatory agreement. See Chapter 11 for processing

instructions.

K. Transfer of Physical Assets (TPA). Transfers to a qualified

nonprofit organization, limited equity tenant cooperative,

public agency, or other entity acceptable to HUD will be

considered. If a POA involves a TPA, the POA and the TPA must

be reviewed and approved concurrently. Approval of the TPA

should be obtained before granting preliminary approval of the

POA. TPA applications must be prepared according to the

instructions in HUD Handbook 4350.1, REV-1, Chapter 13,

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(12-10) L. Delinquent and Defaulted HUD-held Mortgages. Will include a

plan to reinstate and maintain the HUD-held loan at the time

of approval of the POA.

1\. Incentives such as equity loans may be used to reinstate

the defaulted HUD-held mortgage. In rare instances, a

provisional workout agreement may be necessary, e.g., a

project requiring an extensive repair program.

2\. Mortgages in default and under workout may provide for

incentive compensation to be received by the owner only

after reinstatement of the mortgage. The approval of the

POA proposing incentives is contingent on satisfactory

completion of the workout. (Increases in distribution

rates or amounts provide little incentive when the

regulatory agreement prohibits distributions due to the

mortgage default). All proposed workouts must be

consistent with the instructions contained in Handbook

HUD 4350.1 REV-1, Chapter 11.

M. Project Oversight Costs are reasonable expenses incurred by a

nonprofit purchaser in hiring third parties to help the

purchaser\'s board of directors in making ownership decisions.

1\. Retroactive requests: Nonprofit purchasers with approved

POAs receiving incentives before the publication of the

Regulation at 24 CFR Part 248.5, are eligible to apply

for this additional incentive. A POA may be amended to

include project oversight costs.

2\. Project Expenses: Limited to the lower of:

a\. justified costs for approved purposes;

b\. one (1%) percent of the Gross Rent potential (GRP);

or

c\. \$10,000.

3\. HUD will allow additional expenses, as required, for

maintenance of the nonprofit organization itself,

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(12-10) organization itself, including changes in organizational

documents (articles and by-law amendments).

4\. The Multifamily Housing Director may adjust these

standards based on the actual costs for these services.

5\. The AM Branch will provide the Production Branch

appraiser with the determination of the oversight costs

to be included in the operating expenses on the Form HUD-

92264 before the completion of the Section 241(f) loan

commitment.

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Section B

Reviewing and Evaluating the ELIHPA POA

12-11. General. AM staff reviews and analyzes a POA adhering to strict

statutory review and processing time frames The guidelines that

follow apply to all POAs:

A. Initial review. The AM staff of the local HUD Office performs

an Initial review of the POA.

1\. All major components of the contents of the POA (listed

in Paragraphs 2-5 (A through I) above must be present.

2\. An acknowledgement or rejection letter (APPENDIX 12-2)

must be issued within 5 days of receipt of the POA \[LOG

date).

3\. If major components are missing, immediately return the

POA to the owner with a brief letter which indicates the

missing parts.

B. Receipt. Upon receipt and acknowledgement of a complete POA,

AM staff begins the formal review.

C. Project history. The AM staff reviews the project\'s history

(mortgage documents, the docket, and other project files) for

agreements such as a Flexible Subsidy Use Agreement, Urban

Renewal Agreement, Land Disposition Agreement, known zoning

restrictions or rent control ordinances that may restrict the

occupancy or use of a project.

1\. If a POA proposes prepayment and termination of

affordability restrictions, a prior agreement may not

preclude prepayment of the mortgage; however, it may

restrict the use of the property to low-income use for

the duration of the original mortgage.

2\. If a POA requests Incentives in exchange for an extension

of affordability; such a restrictive agreement may

preclude the Project from having a \"higher and better

use\" than low-Income housing, and therefore, prohibit the

Department from awarding incentives.

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(12-11) D. A deficiency in the POA is anything that prohibits HUD from

approving the POA.

1\. Inform the owner of any deficiencies in the Plan

within 60 days \[Log date sent\] of the Office\'s

acknowledgement of the POA.

2\. A complete Notice of Deficiencies must contain sufficient

detail to enable the owner to make the necessary

corrections and must include the local HUD Office\'s

recommendations for correction.

12-12. POA Requesting Incentives and Extension of Affordability

Restrictions. The following guidelines cover POAs involving

incentives and the extension of low and moderate-income

restrictions at the property:

A. Requirements For Approval. To approve a POA involving

incentives, HUD must determine that the project meets the

following requirements;

1\. The owner will maintain the low and moderate income

affordability restrictions at the property for a period

not less than the remaining term of the original

mortgage. If the mortgage was reduced at final

endorsement and the amortization schedule and monthly

Level Annuity Monthly Payment (LAMP) were not adjusted,

amortization of the mortgage note may be completed before

the original 40-year term. The owner must, in these

cases, agree to maintain the affordabIlity restrictions

for the original 40-year term.

2\. The project has a higher and better use other than low

and moderate-income housing.

3\. The incentives are necessary to provide a fair return to

the owner, but equity takeout loans may never exceed

HUD\'s determination of the owner\'s \"As Is\" revalued net

equity in the property, regardless of available surplus

cash, loan source, or any other factors.

4\. A description of any outstanding audit findings or

findings of non-compliance with the FHA; Title VI of the

Civil Rights Act of 1964; Executive Order 11063; Section

504 of the Rehabilitation Act of 1973; Americans

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(12-12) with Disabilities Act; Age discrimination Act of 1975;

the project Regulatory Agreement with a description of

the resolution, or proposed resolution, of any such

findings, or a certification that no violations exist.

NOTE: The owner must correct any violations before

POA approval.

5\. Repairs are determined by the required project

Preservation Capital Needs Assessment (PCNA). The AM

staff will not approve a POA for a project that is in

poor physical condition.

6\. Throughout the remaining term of any insured mortgage or

use agreement, adequate expenditures will be made for the

proper maintenance and operation of the housing.

7\. The owner cannot displace current tenants (except for

good cause).

8\. If the POA involves a TPA, the local HUD Office will

issue preliminary approval of the TPA.

9\. If rents are increased because of incentives to maintain

affordability:

a\. The owner must recertify all tenants annually.

b\. Any increase in rent contributions by current

tenants will be to a level that does not exceed 30

percent of the adjusted gross monthly income of the

tenant or the Section 8 Fair Market Rent (FMR) for

the area, whichever is lower. The rent contribution

must include all utilities. If utility allowances

are in place, the amount of the utility allowance

must be included to figure out the total tenant

rent.

c\. Any increase in rents paid by tenants living in the

project at POA approval (except for increases made

necessary by increased operating costs) must be

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(12-12) must be phased-in. Increases attributable to

increased operating costs may also add to the

amount of the phased-in rent increase. However,

this \"pass through\" of operating costs occurs only

during the phase-in period. The requirements at

Paragraph 12-14 still govern maximum tenant rents.

d\. Rent Phase-In. If the total rent increase is:

1\) Greater than 30 percent of the existing rent,

it must be phased-in equally over a period of

not less than 3 lease years; the first

increase will occur upon the effective date of

the POA and the subsequent two increases will

occur annually.

2\) Greater than 10 percent yet less than 30

percent, it must be phased-in at no more than

10 percent per year.

e\. Rent increases may not be phased-in less time than

allowed by the above Paragraphs, c.and d. THE

METHOD FOR IMPLEMENTING THE PHASE-IN IS PROVIDED IN

(APPENDIX 11-1), FORM HUD-90010, \"Owner\'s

Calculation of Rent Phase-In Due to Approval of

POA\" designed to enable the owner to calculate the

annual phase-in of the Total Tenant\'s Rent (TTP).

This form calculates rent phase-in for both LIHPRHA

and ELIHPA with a few minor changes noted on the

form and instructions where Flat Rents and Floor

Rents come into play.

f\. Rents for units becoming available to new tenants

must be affordable at the lower of 30 percent of

adjusted income or the FMR.

g\. Tenant Profiles. The owner must agree to maintain

the units as affordable to the same tenant income

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(12-12) profile (percentages of tenants who are very low-,

low-, or moderate-income) when determining the

proportions.

1\) When determining proportions, count market

rate tenants as moderate-income tenants.

Moderate-income tenants replace market rate

tenants when they move out. The owner may

admit a higher proportion of very low-income

tenants; however, such additional very low-

income tenants will not receive Section 8

assistance under the POA, but may receive

other Section 8 assistance or be subsidized by

the owner.

2\) If an owner chooses to divide the low-income

group into subgroups of Low 1 (51-60 percent

of Median Income), Low 2 (61-70 percent), and

Low 3 (71-80 percent), because the owner

chooses to use FLAT RENT FACTORS (FRF) for low

and moderate-income families, the owner must

maintain the tenant income profile for those

subgroups. Vacant units divide in the same

proportions as occupied units.

3\) The owner will reclassify a tenant when the

tenant\'s income changes. A moderate-income

tenant whose income decreases to below the

very low-income limit may be reclassified and

eligible for Section 8 assistance, if

available.

B. Reviewing and Evaluating the POA. To determine that the POA

has met the above requirements, AM staff will require input

from the Fair Housing and Equal Opportunity (FHEO) Division,

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(12-12) Production Branch, Valuation Branch and AE/C Branch. The Loan

Management staff must send a copy of the POA and instructions

for POA approval to each Branch.

1\. FHEO is responsible for informing AM whether the owner or

management of the project has any outstanding findings of

noncompliance with the FHA, Title VI of the Civil Rights

Act of 1964, Executive Order 11063, Age Discrimination

Act of 1975, the Rehabilitation Act of 1973.

2\. Production Branch Appraiser. To establish the

preservation value before the POA submission, an owner

has the option to submit the appraisal within 60 days of

receipt of the PCNA. The HUD appraiser, then, has 60

days to review the appraisal, make adjustments, if

necessary, do its own appraisal and provide the value

determination to the owner. The owner then has an

additional 6 months from the date of the HUD value

determination to submit a POA.

3\. The HUD Appraiser reviews the owner\'s appraisal to

determine:

a\. whether:

\(1\) the appraisal\'s content and conclusions are

accurate, and

\(2\) the project has a higher and better use than

subsidized low and moderate income housing.

b\. provides:

\(1\) a determination of value as non-residential

housing both as restricted and unrestricted

market rate rental housing, and

\(2\) rent comparables for unassisted units in the

area to help the AM staff in determining

Section 8 rents.

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4350.6 CHG-4

Section C

Preservation Rents

12-13. Establishing Affordable Preservation Rents. The following are

rules for achieving affordable rents under an ELIHPA POA involving

the extension of affordability restrictions.

A. Section 8 LMSA. The number of Section 8 units will be based

on:

1\. Very Low-Income Tenants. (Tenants whose gross annual

income is less than or equal to 50 percent of the area

median income). Section 8 may be provided for the greater

of the number of very low- income tenants who either

currently reside at the project, or resided at the

project on January 1, 1987, (as determined by the income

limits effective February 6, 1987).

2\. Lower Income Tenants. (Tenants whose gross annual income

is greater than 50 percent, yet less than or equal to 80

percent of the area median income Section 8 assistance

may be provided to lower income tenants if the POA

involves a sale of the property to the tenants or a

qualified nonprofit entity. The number of LMSA units

provided is dependent on which tenant income profile the

owner will maintain: the profile established at January

1, 1987, or the current profile.

3\. Section 8 Contract rents may exceed the rents established

for comparable non-Section 8 units in the project, but

may not exceed the lesser of the FMR for existing housing

or the Project Specific Rents (PSR).

B. FRFs. The Department has developed factors which produce

rents which are substantially higher than current rents yet

remain affordable for new low and moderate-income tenants.

The rents are based on the \"effective\" median income for the

area in which the project is located.

The effective median income is the lesser of the median income

or 125 percent of the national median income. If an owner

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(12-13) median income. If an owner chooses to use \"flat\" rents for

low-income families, the low- income groups (51 - 80 percent)

divide into subgroups (51 60 percent, 61- 70 percent, 71 - 80

percent) to establish equitable rents for these households.

To find the affordable factored rent multiply the \"effective\"

median income by the appropriate \"FRF.\" Factors break down by

unit size and by income category. APPENDIX 12-3 lists the

FRFs. Owners may find factors advantageous because they

provide predictable Net Operating Income for purposes of

refinancing or secondary financing.

C. Special Requirements for Projects under the Section 236

Program. Under a POA approved for surplus cash distribution,

rents collected up to the Basic Rent (BR) are available to

cover operating expenses, debt service, and distributions

(subject to the surplus cash computations). Rents collected

in excess of the aggregate BR constitute \"excess rents.\" These

excess rents must be remitted to HUD in accordance with 236

regulations and procedures. Basic Rents are calculated as

follows:

1\. Units assisted by Section 8 subsidy will have a BR set at

the Section 8 contract rent.

2\. For low-income units, the BR will be set at a factor

applied to the effective median income. This factor

approximates what a family at 75 percent of the median

income would pay for rent with 30 percent of adjusted

gross monthly income, and is equal to the factors used

for the 71-80 percent income level.

3\. For moderate income units, the BR also will be set at a

factor applied to the effective median income. This

factor approximates what a family at 90 percent of the

median income would pay for rent with 30 percent of

adjusted gross monthly income.

4\. The computation of Section 236 market rents does not

change.

5\. The 236 Basic Rent Factors are:

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4350.6 CHG-4

(12-13) Bedroom Size Low Income Moderate Income

Studio 0.013125 0.01575

1 0.0140625 0.016875

2 0.016875 0.02025

3 0.01933593 0.02320313

4 0.02109375 0.0253125

5 0.02285 0.02742

\* Notwithstanding these Special Requirements, the

maximum rent that may be charged for any unit is

the FMR.

\*\* NOTE: THE BASIC AND MARKET RENTS ARE ESTABLISHED AS

A WAY OF DETERMINING HOW MUCH EXCESS INCOME THE

OWNER MUST RETURN TO HUD; AND HOW MUCH THE OWNER

GETS TO KEEP. IT HAS NOTHING TO DO WITH WHAT A

TENANT ACTUALLY PAYS FOR RENT.

12-14. NON-SECTION 8 TENANT RENTS. All Section 8 gross rents, rents
based

on 30 percent of adjusted income, FMRs, and PSRs include utilities.

If a tenant pays some or all of the utilities, tenant rent payments

are adjusted by a utility allowance. The following are rules for

setting tenant rents under a POA.

A. In a project for which an owner has not selected FRFs, the

Total Tenant Payment will be the lower of:

1\. The FMR (or PSR, where applicable) or

2\. The higher of 30 percent of Adjusted Gross Monthly Income

(AGMI) or the Floor Rent (Minimum Rent).

B. Current Tenants. In a project for which an owner is charging

the Flat Rents, the TTP for current non-subsidized tenants

(tenants living at the project at POA approval), will be the

lowest of:

1\. The FMR (or PSR where applicable); or

2\. The higher of 30 percent of AGMI or the Floor rent

3\. The FRF.

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4350.6 CHG-4

(12-14) C. Future Tenants. In a project for which an owner is charging

the Flat Rents, the TTP for future nonsubsidized tenants (not

living at the project at POA approval) will be the lower of:

1\. The FMR (or PSR where applicable)

2\. The FRF.

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Section D

APPROVING THE POA

12-15. A. Time frames for approval. The AM staff will approve

the POA within 180 days and notify the owner in writing if the

POA is not approvable. If the AM staff is unable to approve

the POA within 180 days, the local HUD Office must notify the

owner in writing that the POA is not approvable. \[LOG date

notice sent\] The notice to the owner must:

1\. Describe the reasons why the POA is not approvable,

including delays by the owner in the submission of the

revised POA;

2\. Describe actions that the owner must take to meet the

criteria for approval; and

3\. Give the owner an opportunity to revise the POA and

resubmit it for approval.

B. Preliminary Approval. The local HUD Office approves a POA in

two stages, preliminary approval and final approval.

1\. Preliminary Approval of a POA involving a prepayment and

termination of the low-income affordability restrictions.

The Multifamily Housing Director may grant preliminary

approval of a POA involving prepayment and termination of

the low-income affordability restrictions only if the POA

meets the requirements of Chapter 8, Section B.

2\. Preliminary approval of a POA involving extension of the

low-income affordability restrictions. The Multifamily

Housing Director may grant preliminary approval of a POA

including incentives in exchange for extension of the

low-income affordability restrictions only after ensuring

that the POA meets the requirements indicated in

Paragraph 12-12. A copy of the approved POA must be

attached to the letter granting the owner preliminary

approval.

a\. Once the POA receives preliminary approval, the

owner must notify all the tenants of its terms and

provide 60 calendar days for the tenants to

comment.

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4350.6 CHG-4

(12-15) b. If the POA involves a TPA, the AM staff must

evaluate the TPA and issue preliminary approval of

the sale to the purchaser. Preliminary approval of

the TPA must be made simultaneously with approval

of the rest of the POA.

c\. Tenant Notice. AM staff will prepare a notice

advising tenants of the approval of the POA and

summarizing the transaction. The owner must post a

copy of this notice in a conspicuous place in each

occupied building of the project. At a minimum, the

notice must include:

1\) A statement that the POA is approved pursuant

to Title II, Subtitle B of the Housing and

Community Development Act of 1987, and HUD\'s

implementing regulations at 24 CFR Part 248.

2\) A statement of the rents that will be charged

to current tenants, the procedure by which

these rents will be increased, and the

anticipated dates for carrying out these rent

increases.

3\) A statement describing any assistance that

will be made available to the current tenants,

and the duration of the assistance. If

tenants will be relocated, a description of

the relocatIon plan.

4\) A statement describing the duration of the

terms of the PA.

5\) A statement that indicates that each tenant

will receive a recorded copy of the Use

Agreement/Amended Regulatory Agreement.

6\) The following statement concerning the

tenant\'s right to comment on the proposed POA:

\"HUD has granted preliminary approval of this

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4350.6 CHG-4

(12-15) preliminary approval of this POA. If you have

any comments concerning the POA, HUD will take

your comments into consideration before

granting final approval. If you wish to

submit a comment, you must do so within 60

calendar days from the date of this notice.

Please address them to the local HUD Office AM

Branch Chief.\"

7\) The owner must also write to each affected

tenant explaining how that tenant will be

affected by the POA. If the approval of the

POA contains provisions for a rent Increase,

the owner\'s letter must explain the rent

phase-in provisions, if applicable. All

additional requirements for rent increases,

contained in Chapter 7 of HUD Handbook 4350.1,

REV-1, Insured Project Servicing Handbook,

must be followed and the owner must post a

notification of the rent increase:

a\) After POA approval;

b\) Before execution of the Use Agreement;

and

c\) At least 30 days before the effective

date of any rent increase.

d\. State and Local Government Notice. AM staff must

write to all affected State and local governments

to advise them that the POA has been approved.

12-16. Request for Fund Reservation. Within 30 days after issuing

preliminary approval, the local HUD Office must request funding to

implement the approved POA from the Office of Multifamily Housing

Preservation and Property Disposition.

A. Section 8 new unit funding requests require unit composition,

approved rents, contract authority, and budget authority

according to annual funding instructions.

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4350.6 CHG-4

(12-16) B. Section 8 amendment funding requests require existing
contract

number - and contract authority and budget authority needed.

C. Flexible Subsidy requests from nonprofit applicants must

conform to Departmental NOFA requirements for Capital

Improvement Loans and instructions for processing (HUD

Handbook 4395.1 REV-1, Flexible Subsidy).

IMPORTANT: POA funding requests for Section 8 LMSA are

not subject to NOFA requirements.

12-17. Final approval. The period between the dates granting preliminary

and final approval of the POA allows the tenants sufficient time to

propose comments to the Plan, and the local HUD Office to consider

the comments and make any changes to the POA. This period also

allows the local HUD Office sufficient time to prepare any required

Use Agreements and amendments to Regulatory Agreements, and to

ensure that Section 8 and Flexible Subsidy funds are reserved.

A. The AM staff cannot issue final approval until it has reviewed

the tenant comments and the resulting changes, if any, have

been made.

B. Effective date. The approved POA is effective when the owner

or purchaser:

1\. Prepays and terminates affordability restrictions and

executes and records a Use Agreement for current tenants

\[LOG effective date\], or

2\. Executes the Use Agreements to extend affordability

restrictions \[LOG execution date\]. In the latter case,

no other action (e.g., rent increases, Section 8

contracts, Section 241(f) loan commitments, Flexible

Subsidy contracts, distribution of surplus cash, etc.),

is permissible before the owner\'s execution and recording

of the Use Agreement.

C. POA expenses incurred by the owner pursuant to filing and

negotiating a POA are the owner\'s responsibility until POA

approval. Such expenses may be paid as project expenses only

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4350.6 CHG-4

(12\--17) expenses may be paid as project expenses only from residual

receipts, surplus cash or distributions as approved in the POA

and only after the POA is effective. Expenses charged to the

project before POA approval require the local HUD Office\'s

normal regulatory enforcement action and prevent approval of

the POA.

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Section E

12-18. Monitoring: Project Rent Increases After POA Approval

A. Limited Distribution Projects. Rent increases will be

approved only after the State/Area Office has determined that

the project is properly maintained and that the Reserve

Accounts are properly funded. All rent increase requests will

be reviewed, processed, and approved by the AM staff. The

requirements for posting a Notice to Tenants of Intention to

Request a Rent Increase (24 CFR part 245) must be observed

even though tenants are not directly affected by project rent

increases.

1\. Methodology. Using the tables in Form HUD-90011-A

(APPENDIX 12-4) calculate section 8 gross rents as

follows:

For Section 8 contract units, rent increases will be

budget based. The section 8 contract rents will be

calculated by projecting the rents paid by the lower and

moderate income tenants and subtracting these rents from

the total amount required to support the increased

project budget.

2\. The rent projection for Moderate-Income Tenants is based

on calculations using 80 percent of the area median

income.

3\. The rent projection for Low-Income Tenants is based on

calculations using 65 percent of the area median income.

4\. When FRFs are used the rent projections for the three

Lower Income subgroups is based on 55 percent, 65

percent, and 75 percent of the area median income. Rents

are adjusted by applying the factored rent to increases

in the median income. The Section 8 Income Limits are

established by a Notice regularly published by HUD.

B. Surplus Cash (Unlimited) Distribution Projects. Section 8 rent

increases for projects approved for surplus cash distribution

will be (1) the application of the Section 8 Annual Adjustment

Factor to Section 8 LMSA unit rents and (2) either the

application of FRFs to the change in median income, changes

12-29 7/95