4561.1

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CHAPTER 19. TAX-EXEMPT FINANCING UNDER SECTION 103(b)(4)(A)

19-1. GENERAL. Interest on industrial development bonds issued by State

or local government units is generally subject to Federal income

taxation. However, Section 103(b)(4)(A) of the Internal Revenue

Code and the IRS implementing regulations at 26 CFR, Section

1.103-8(b) exempt such interest when:

A. Substantially all of the bond proceeds are used to finance a

\"residential rental project\"; and

B. At least 20 percent of the project units (15 percent in the case

of a \"targeted area project\") will be occupied by \"individuals

or families of low or moderate income\" for the term of the

\"qualified project period.\"

19-2. IRS DEFINITIONS

A. Residential rental project. (See 26 CFR, Section

1.103-8(b)(4).) A building or structure, together with any

functionally related and subordinate facilities, containing one

or more similarly constructed units which:

1\) Are used for non-transient purposes;

2\) Are available to members of the general public and

3\) Once available for occupancy, are rented or available for

rental on a continuous basis during the longer of:

a\) the remaining term of the obligation, or

b\) The qualified project period.

B. Targeted area project. (See 26 CFR, Section

1.103-8(b)(8)(iii).) A project located in a qualified census

tract (as defined in 26 CFR, Section 6a.103A-2(b)(4)) or an area

of chronic economic distress (as defined in 26 CFR, Section

6a.103A-2(b)(5)).

C. Individuals or families of low or moderate income. (See 26 CFR,

Section 1.103-8(b)(8)(v).) Individuals and families whose

adjusted incomes do not exceed 80 percent of the median gross

income for the area.

D. Qualified Project period. (See 26 CFR, Section 1.103-8(b)(7).)

For projects financed with obligations issued on or after

September 4, 1982, the period starting on the later of the date

of issuance or the date on which 10 percent of the project units

are first occupied, and ending on the latest of:

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4561.1

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(19-2) 1) The date which is 10 years after the date on which half of

the project units are occupied;

2\) The date which is a \"qualified number of days\" (i.e., half

of the term of the tax-exempt obligations with the longest

maturity) after the date on which any of the units in the

project is first occupied; and

3\) The date on which any assistance to the project under

Section 8 of the U.S. Housing Act of 1937 terminates.

19-3. COVENANT REVIEWS BY LENDER. Before initial endorsement (the single

endorsement for coinsurance on completion), the lender must review

proposed Section 103(b)(4)(A) covenants for acceptability pursuant

to paragraph 19-5.

19-4. STATE AND LOCAL RESTRICTIONS. Lenders may not, without HUD

Headquarters approval, coinsure projects subject to State or local

occupancy restrictions more stringent or burdensome that the

requirements of Section 103(b)(4)(A), regardless of whether the

restrictions are to be recorded as covenants running with the land.

Send requests to the Office of Insured Multifamily Housing

Development, and include:

A. Description of the statutory, regulatory, judicial, or other

basis for imposing the restrictions; and

B. Brief analysis of the likely effect of the restriction on

project occupancy, marketability, and overall feasibility.

19-5. COVENANT REQUIREMENTS. Because of their inherent rigidity and

lasting effect, Section 103(b)(4)(A) covenants are permitted on

coinsured projects only if:

A. They are expressly subordinate to the coinsured mortgage (i.e.,

must contain a subordination clause);

B. The covenant does not conflict with applicable HUD mortgage

insurance or Section 8 regulations. The following paragraph

must be included:

Notwithstanding anything in this document to the contrary,

the provisions hereof are subordinate to all applicable HUD

coinsurance (and Section 8, if applicable) regulations and

related administrative requirements. In the event of any

conflict between the provisions of this document and the

provisions of any applicable HUD regulations, related HUD

administrative requirements, or HUD/FHA loan documents, the

HUD regulations, related administrative requirements or

loan documents shall control.

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6/85 19-2

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4561.1

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(19-5) C. They automatically terminate upon foreclosure or transfer of

title by deed in lieu of foreclosure (i.e., must contain

automatic termination clause);

D. Failure to comply with them will not be a basis for default on

the coinsured mortgage;

E. They do not appear in the note, mortgage, coinsurance regulatory

agreement, or any other HUD loan document;

F. The covenant provides that its enforcement will not result in a

claim against the project, mortgage proceeds, any reserve or

deposit required by HUD in the mortgage transaction, or rents or

other income from the property, other than:

1\) Available surplus cash if the mortgagor is profit-motivated,

or

2\) Available distributions and residual receipts authorized for

release by the lender if the mortgagor is

limited-distribution;

G. The covenant contains a provision making any subsequent

amendment contingent on prior lender approval;

H. Any covenant requirement for owner preservation of tax-exemption

of the interest on the notes or bonds (or which prohibits the

owner from taking action that might jeopardize the

tax-exemption), specifically excepts HUD requirements (or

prohibitions) pursuant to:

\- National Housing Act

\- Coinsurance regulations

\- HUD/FHA loan documents

\- Section 8 of the U.S. Housing Act of 1937 and its regulations,

if applicable;

and

I. The covenant instrument is not, without HUD Headquarters

approval, more stringent or burdensome than necessary to comply

with the minimum requirements of Section 103(b)(4)(A) of the

IRS Code and the IRS regulations issued under it.

19-6. REQUIRED CONDITION FOR PROJECT APPROVALS/COMMITMENTS. Any SAMA/

feasibility letter or equivalent, conditional commitment, or firm

commitment for a project involving Section 103(b)(4)(A) financing

must be expressly conditioned on lender approval, before initial

endorsement, of any special covenants proposed for tax-exemption

(unless approval has already been granted).

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