[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 Under Bankruptcy Reorg. Plan

Legal Opinion: GHM-0031

Index: 3.346, 3.296

Subject: Prepayment of Mortgage Under Bankruptcy Reorg. Plan

April 6, 1992

Ruth Westmont, Esq.

Wisconsin Housing and Economic

Development Authority

1 South Pinckney St., Suite 500

Madison, Wisconsin 53701-1728

Dear Ms. Westmont:

This is in response to your letter of March 27, 1992 to

Lewis Nixon, Regional Counsel in Chicago. You requested the

opinion of the United States Department of Housing and Urban

Development (\"Department\") on the proposal of the owner of

Kenwood Apartments to prepay its mortgage as part of its

bankruptcy reorganization plan.

Kenwood Apartments (the \"Project\") is subject to a mortgage,

dated May 7, 1974, which is insured by the Wisconsin Housing and

Economic Development Authority (\"WHEDA\"). As a condition of

receiving mortgage insurance, the owner, Kenwood Apartments

Partnership (the \"Partnership\"), has executed a Regulatory

Agreement, of the same date, requiring that the Project be

maintained as low income rental housing until the maturity date

of the mortgage, June 1, 2015. The Project currently receives

Rental Assistance Payments from the Department and is the subject

of an Interest Reduction Payments Contract entered into between

HUD and WHEDA. The Rental Assistance Contract and the Interest

Reduction Payments Contract require that the Project be used as

low income rental housing for the term of the mortgage. Both the

Rental Assistance Contract and the Interest Reduction Payments

Contract terminate upon the maturity of the mortgage or when the

mortgage is paid in full, whichever occurs first.

Pursuant to the terms of the mortgage, the Partnership may

not prepay the mortgage within the first twenty years from the

date of the first mortgage payment without the consent of WHEDA.

Eighteen years from the date of the first mortgage payment, June

1, 1994, the Project will become subject to the terms of Subtitle

A of Title VI of the National Affordable Housing Act, the Low

Income Housing Preservation and Resident Homeownership Act of

1990 (\"LIHPRHA\"). LIHPRHA precludes prepayment of the Project\'s

mortgage from the twentieth year of the mortgage until its

maturity date unless the owner has a HUD-approved plan of action.

Congress enacted LIHPRHA in response to the risk of losing viable

low income housing projects due to owners prepaying their

mortgages and converting low income housing to more profitable

uses. LIHPRHA creates a permanent and comprehensive incentive

program to preserve privately owned low income housing projects

2

and minimize the displacement of current tenants from these

projects.

A prepayment of the Project\'s mortgage, as proposed by the

Partnership in its reorganization plan, would have the effect of

terminating all low income use restrictions on the Project.

Rental Assistance Payments and Interest Reduction Payments would

also terminate at the time of prepayment. The prepayment would

effectively result in the Project being lost from the country\'s

low income housing inventory and could cause the current tenants

of the Project to lose their homes.

This type of prepayment would circumvent the intent of

Congress by allowing an owner to prepay its mortgage without the

Department\'s approval and without being subject to the statutory

requirements of LIHPRHA, including those which would protect the

tenants of the Project if the use restrictions are terminated.

Permitting the Partnership to go ahead with its plan to prepay

the mortgage through a bankruptcy proceeding and to refinance the

Project without any low income use restrictions would create a

dangerous precedent for other owners who may be searching for a

means of circumventing LIHPRHA. Based on these grounds, the

Department strongly objects to the Partnership\'s prepayment

proposal.

If you have any further questions or require additional

information regarding this matter, please contact me at 202-708-

2495\.

Very sincerely yours,

Frank Malone

Director

Office of Preservation and

Property Disposition

cc:

Nixon

Yochim