4350.6-CHG.3

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Chapter 9. Resident Homeownership Program

Section A. General

9-1. Purpose. This chapter describes the requirements

of the Resident Homeownership Program.

A. General. A tenant group may form a Resident

Council (RC) which may acquire a project under

a Resident Homeownership Program. In

accordance with Paragraphs 9-2.A., B., and C.

below, as applicable, the RC will organize a

Homeowners Association or Condominium

Association, to be in effect at the time the

RC purchases the project, or a Cooperative

Association which will be the actual purchaser

of the project. The RC will make the units

available for purchase by residents who wish

to become homeowners. RCs intending to

purchase the project as rental housing may not

acquire the project under a Resident

Homeownership Program, but instead, should

follow the guidelines in Chapter 8, Sections C

and E.

B. Organization of the Chapter. This Chapter is

organized into Sections A through F as

follows:

1\. Section A covers:

a\. The formation of a Resident Council;

b\. The forms of homeownership a RC may

use.

c\. The procedures a RC must follow in

its attempt to purchase the project.

2\. Section B describes the requirements for

Resident Homeownership Plans (RHPs)

submitted by RCs seeking funds to

purchase the project when the mortgage on

the project is to be prepaid. The

following conditions apply:

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9-1 3/94

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4350.6-CHG.3

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a\. The RC will purchase the project,

initially fund the reserve for

replacement and operating cost

accounts, and pay for other costs

associated with the Resident

Homeownership Program, i.e., tenant

counseling, RC training, and

consultant fees, by means of a grant

from HUD. All insured loans

remaining on the project will be

paid off.

b\. The discussion in Section B assumes

that the RC is using a condominium

or other fee simple form of

homeownership. However, the RC also

may establish a cooperative form of

housing under the Resident

Homeownership Program. If the RHP

is for cooperative housing, the

terminology used in Section C would

be the appropriate language and

should be substituted, as

applicable, in Section B.

3\. Section C describes the requirements for

establishing a Limited Equity Cooperative

(LEC) where the existing mortgage on the

property is assumed and the RC receives

the same incentives as other purchasers.

4\. Section D describes the protection

afforded tenants who do not purchase

units or become members of a housing

cooperative.

5\. Section E describes the requirements for

resale of units or memberships to

subsequent homeowners or members of a

housing cooperative and the limits on

homeowner or member equity. For LECs

that assume the mortgages, this

information is contained in Section C.

6\. Section F describes the requirements HUD

staff must follow to monitor projects

with Resident Homeownership Programs.

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3/94 9-2

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4350.6-CHG.3

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9-2. Forms of Homeownership. There are several forms of

homeownership available to RCs. In addition, RCs

may establish several types of financing to assist

residents to buy their units including the option

of using HUD single-family insurance programs for

homeownership, if available. If the RC plans to

use HUD single-family mortgage insurance to finance

the sale of units, the guidelines for the RHP shown

be low must be supplemented by requirements in HUD

Handbook 4135.1, Appendix 9. The RC must be

certain that the RHP meets the provisions required

by any source of mortgage financing sought for

homeowners\' purchases. Following are descriptions

of the major eligible forms of homeownership that

RCs may use:

A. Fee simple ownership of units

(non-condominium) is most commonly used for

detached properties. Usually, title to the

unit, all of its walls, and the land

underlying the unit are conveyed to the

individual. For many multifamily properties,

condominium ownership is the most feasible

form of fee simple ownership because of unit

configurations and shared spaces involved.

However, other fee simple arrangements are

possible for multifamily properties, and the

other arrangements may be preferable when the

units take the form of attached units, e.g.,

townhouses.

1\. Planned Unit Development (PUD). In one

common form of fee simple ownership

(known as a PUD) which is suitable both

for attached and detached units,

homeowners hold title to the individual

units and the land under the units.

However, the shared common space (such as

grounds, parking, recreation facilities,

and possibly stairways and elevators in

multifamily buildings) is owned by a

Homeowners Association in which the

homeowners are members. Ordinarily there

may be no need for a PUD with a

Homeowners Association where there is

little or no shared common space. For

example, the interest of townhouse owners

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9-3 3/94

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4350.6-CHG.3

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sharing a wall may be governed by a

recorded party wall agreement, and other

forms of recorded mutual easements may

govern the interests of owners if there

are shared driveways or entryways.

However, projects purchased under LIHPRHA

which will be operated as fee simple

homeownership must establish a PUD with a

Homeowners Association. Establishment of

a PUD with a Homeowners\' Association

ensures that there will be a long-term

organization controlled by the owners and

capable of compliance with ongoing

responsibilities, including control of

any units not purchased by homeowners.

2\. Homeowners Association. The RC must

establish the Homeowners Association

prior to or at the time of purchasing the

project, so that it can own common

property and eventually take over

remaining functions of the RC when units

have been sold. Legal documents

establishing and governing the Homeowners

Association must be executed and

recorded.

3\. Organization of Homeowners Association.

It is important that the RC establish the

Homeowners Association in a form that

will be acceptable under the programs of

major organizations involved in home

purchase financing; e.g., the Federal

Housing Administration (FHA), the

Veterans Administration (VA), the Federal

National Mortgage Association (FNMA), the

Federal Home Loan Mortgage Corporation

(FHLMC) and the Farmers Home

Administration (FmHA). Because of the

special involvement of the RC, it is

probable that some changes must be made

to standard PUD documentation and the RC

should obtain the necessary approval for

these changes from potential financing

organizations before documents are

recorded. The RC should anticipate the

future needs of subsequent homeowners

when the documents are written; not just

those of initial homeowners.

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3/94 9-4

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4350.6-CHG.3

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4\. Control of Units. HUD requires that the

RC establish the Homeowners Association

so that the RC has authority to exercise

the special powers of control vis-a-vis

unit purchasers that would normally be

exercised by a developer in a for-profit

environment. Under such an arrangement,

the RC would control and provide the

financing for the operations of the

Homeowners Association, given through a

HUD grant and other sources, until most

of the units (typically 75 percent) have

been sold. Once 75 percent of the units

are sold, the unit owners would take

control of the Homeowners Association.

The RC can retain a voice in the

Homeowners Association, proportionate to

the number of units it still owns, or it

can choose to transfer the remaining

unsold units to the Homeowners

Association if the Association is

authorized and capable of exercising the

remaining responsibilities of the RC

under the RHP, Use and Grant Agreements

and this Handbook.

5\. Requirements of a Homeowners Association.

The Homeowners Association established by

the RC must meet the following general

requirements, local law (many states now

have legislation governing the

establishment and operation of Homeowner

Associations), and any special

requirements necessary to preserve the

eligibility of the units for home

purchase financing:

a\. It must be organized and operated to

provide for the acquisition,

construction, management,

maintenance and care of association

property.

b\. The gross income of the Homeowners

Association must come from

contributions, membership dues, fees

or assessments from owners of

residential units, including the RC

as long as it remains as an owner of

units.

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9-5 3/94

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4350.6-CHG.3

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c\. The expenditures of the Homeowners

Association must be for the

acquisition, construction,

management, maintenance and care of

association property and other

incidental functions.

d\. No part of any net earnings of the

Homeowners Association may inure to

the benefit of any private

individual.

e\. Every homeowner must be a member of

the Homeowners Association and is

entitled to voting representation

regarding its operations. No

tenants or non-residents of the

project may be members of the

Homeowners Association.

B. Ownership of a condominium unit is a form of

fee simple ownership. Condominiums are

established under state law, but a common

understanding of the interests of a

condominium unit owner is set forth in Section

234(c) of the National Housing Act. These

interests include fee simple title (or

long-term leasehold interest in fee simple title)

in a one-family unit in a multifamily project,

including a project in which the dwelling

units are attached, semi-detached or detached,

and an undivided interest in the common areas

and facilities which serve the project.

1\. Condominium Association. The condominium

owners are members of a Condominium

Association which operates much like a

Homeowners Association in a PUD. When a

for-profit developer establishes a

Condominium Association it has control at

the start and passes control to the

homeowners when most of the units

(typically 75 percent) have been sold.

The RC should proceed in the same manner

by establishing a Condominium Association

that will eventually be controlled

directly by the unit owners. The RC can

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3/94 9-6

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4350.6-CHG.3

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retain a voice in the Condominium

Association, proportionate to the number

of units it still owns, or it can choose

to transfer the remaining unsold units to

the Condominium Association if the

Association is authorized and capable of

exercising the remaining responsibilities

of the RC under the RHP, Use and Grant

Agreements and this Handbook.

2\. Organization of Condominium Association.

The Condominium Association established

by the RC must meet the general

requirements listed above for a

Homeowners Association for a PUD. As

with a Homeowners Association, the legal

documents establishing and governing the

Condominium Association must be executed

and recorded by the time of project

transfer, and the documents should be in

a form acceptable under the programs of

major financing organizations such as

FHA, VA, FNMA and FHLMC. In a properly

structured project, if it chooses and is

qualified, a family may purchase its unit

by way of a HUD/FHA insured mortgage made

by a private lender under Section 234(c)

of the National Housing Act.

C. Ownership of cooperative housing shares means

stock ownership in a corporation that owns the

property. Stock ownership gives a member the

right to occupy a unit in the cooperative.

Stockholders are cooperative housing members.

For purposes of this Handbook, stockholders

will be referred to as \"members.\" Members

occupy units under a proprietary lease. This

financing approach is advantageous to low-income

homeownership because the low-income

homebuyers do not have to qualify individually

for much of the mortgage debt carried by the

cooperative.

1\. Conversion to Cooperative Status.

Generally, the project is converted to

cooperative status when 70 percent of the

memberships have either been purchased or

have commitments to purchase from

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9-7 3/94

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4350.6-CHG.3

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prospective members. In LIHPRHA

projects, this number of commitments

would have been made by the prospective

members prior to the RC making the

purchase offer because earnest money

deposits representing a commitment to

purchase shares has been received from 75

percent of current tenants.

2\. Project Purchased by Cooperative.

Subscription Agreements from a minimum of

70 percent of tenants must be signed and

the Cooperative must be formed prior to

the Grant closing and project transfer,

if allowed by State and local law.

Therefore, although the RC makes

application to purchase the project, in

most cases, the grant will be made and

the project will be sold to a Cooperative

Association.

D. A Limited Equity Cooperative will have, in its

by-laws, a limited equity formula that ensures

long-term low-income affordability. The

formula restricts the profits that members can

receive when they resell their interests in

the cooperative. There are two types of LECs

that may be developed under the Resident

Homeownership Program:

1\. Those that acquire the project with a

grant from HUD, prepay the mortgage, and

carry out its housing cooperative program

exclusively in compliance with the

requirements of the Resident

Homeownership Program; or

2\. Those that acquire the project by

assuming the FHA-insured mortgage and

implement its housing cooperative program

as a priority purchaser in compliance

with the requirements for a POA in

accordance with a combination of Chapter

8 and certain elements of the Resident

Homeownership Program. This form of LEC

may receive Section 8 rental assistance

for its members. All information

specific to this type of LEC is in

Section C.

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3/94 9-8

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4350.6-CHG.3

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9-3. The Role of the Resident Initiatives Specialist

(RIS). The RIS, located in the Loan Management

Branch of the local HUD Field Office, is

responsible for providing the expertise to RCs and

nonprofit organizations working with RCs to achieve

the objectives of the Resident Homeownership

Program. Prior to working with RCs and nonprofit

organizations to develop Resident Homeownership

Programs, the RIS will:

A. Conduct special outreach activities to inform

tenants and tenant representatives about the

Title VI Resident Homeownership Program. This

outreach effort will include providing tenants

with information about:

1\. The goals and objectives of the Resident

Homeownership Program;

2\. The technical and financial assistance

available from HUD to assist in the

formation of a RC;

3\. The available forms of homeownership;

4\. HUD assistance available for paying costs

(see Paragraph 9-9.D.) necessary to

implement a Resident Homeownership

Program; and

5\. Funding from other sources such as State

and local governments, corporations and

private foundations

B. Carry out the tasks in Paragraph A:

1\. Through written communication;

2\. By holding meetings with tenant groups at

HUD or the project site (where the Field

Office travel budget permits); and

3\. By sending the organizations any HUD

publications on resident homeownership.

C. Assist Loan Management staff with the

development and maintenance of a list of

priority/qualified purchasers who will be

notified when purchasing opportunities are

available in accordance with Paragraph 7-3.

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9-9 3/94

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4350.6-CHG.3

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9-4. Organization of and Assistance to Resident

Councils. Tenants interested in homeownership must

establish a RC, which is a tenant-controlled

nonprofit group organized, in this case, to

develop a Resident Homeownership Program or LEC.

They must also organize a Homeowners Association,

Condominium Association, or Cooperative to take

responsibility for the project after sufficient

units or memberships have been sold. To ensure

that tenant groups have the capacity and experience

necessary to organize a RC and a Homeowners

Association, Condominium Association, or

Cooperative, as appropriate, and to own and manage

the project, the statute requires that they work

with a public or private nonprofit organization.

Such organizations must have sufficient experience

to help the tenants organize, write the RHP, and

then purchase and manage the project. The tenants

may also seek assistance from HUD during their

initial efforts to organize as a RC.

A. Organization of a Resident Council. The RC

must meet the requirements defined in

Paragraph 1-15. A suggested method for

organizing is described below:

1\. Organize a Petition Drive to Incorporate.

While this step is not necessarily

required, it encourages the involvement

of residents in the process. The

petition also can authorize a committee

of residents to work with an attorney to

draft a corporate charter and by-laws.

2\. Retain an Attorney. Obtaining

professional legal advice is an essential

early step toward incorporation.

Residents can hire an attorney, or

possibly find one willing to help free of

charge. In either case, the attorney

should be familiar with low-income

housing, sympathetic to resident

homeownership goals, and able to devote

sufficient attention to the needs of the

project. Community Legal Services

agencies are a possible source of such

assistance.

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3/94 9-10

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4350.6-CHG.3

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3\. Draft By-Laws and a Corporate Charter.

By-laws and a corporate charter define

the purpose of the organization, identify

its name and address, list the officers,

and state the rules by which the

organization will be governed. Most

practicing attorneys can provide standard

language for these documents or model

documents prepared by National

Associations or other organizations could

be adapted for RCs in the Preservation

program. Even if RCs obtain model

documents, however, residents should work

with an attorney to shape these model

documents to meet their particular needs.

4\. Elect Board Members and Officers. A

Board of Directors governs the RC and

represents the interests of residents.

The Preservation Program requires that

board members be democratically elected

to their positions by the residents and

that all these positions be held by

residents. The board serves on a

voluntary basis and watches over the paid

manager of the organization (if one

exists). The number of board members

must be defined in the by-laws and

typically ranges from four to eight

persons. The by-laws must also contain

written procedures for electing RC

officers on a regular basis.

5\. Form Committees. Committees can play a

very important role in getting full

participation and cooperation from the

organization membership. Some

committees, such as the finance

committee, may be required under the

corporate by-laws. Others may be formed

or dissolved in response to the changing

needs or desires of the organization

membership. Once the governing body is

assembled and officers appointed, the

process of forming committees can begin.

6\. Meet other needs of the RC during and

immediately after incorporation. First,

a room large enough to accommodate an

audience of residents must be found for

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9-11 3/94

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4350.6-CHG.3

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board meetings. Second, office space and

office equipment may be needed in order

for the RC to perform its administrative

functions. Also, the RC will need a

corporate identity, which can be created

by designing a logo, printing letterhead

stationery, and fabricating plaques or

banners to post in offices or the board

room. Together, the physical setting,

functional supports, and graphic symbols

of the new organization signify its

ambitions, both to those involved and to

others in the residential community.

B. The nonprofit organization working with the RC

must:

1\. Be a public agency or a public or private

nonprofit organization;

2\. Be incorporated or sanctioned under State

or local law;

3\. Have sufficient experience to help the

tenants consider their options. Such

organizations must demonstrate their

capacity to help tenants organize,

acquire and manage the project, and

develop a viable Resident Homeownership

Program.

4\. Demonstrate Its Ability to Manage the

Project, if Necessary.

a\. HUD may approve either the nonprofit

organization or the RC to manage the

project if one or the other can

demonstrate that it has effectively

managed an eligible property for at

least three years;

b\. If the nonprofit organization

manages the project, it must:

i\. Meet the requirements for

experience cited in HUD

Handbook 4381.5, Management

Documents, Agents and Fees,

Chapter 2, Section I; and

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3/94 9-12

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4350.6-CHG.3

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ii\. In accordance with HUD Handbook

4381.5, Chapter 2, Paragraph

2-4, certify in the Management

Certification that it has

obtained fidelity bond or

employee dishonesty coverage;

and

c\. Nonprofit organizations or the RC

are not precluded from arms length

subcontracting with for-profit

organizations to provide management

services.

C. If the nonprofit organization is to be paid

for its activities, the Loan Management Branch

must determine that the nonprofit organization

working with tenants, meets the requirements

specified in Paragraph B. above. The tenants

involved with the establishment of the RC

should submit information about the nonprofit

organization or public agency to the Chief,

Loan Management Branch, as early in the

prepayment process as possible so that the RC

and the nonprofit organization will not incur

expenses that HUD later determines are not

eligible for reimbursement under an approved

RHP. Log when information is received from

the RC about the nonprofit organization

D. GRANTS

1\. Technical assistance planning grants are

available to qualified Community Based

Nonprofit Organizations (CBOs) or RCs

under Notices of Fund Availability

(NOFAs). The Preservation Division will

provide guidance and information to Field

Office staff by way of HUD Notices that

provide instructions for processing grant

applications received in response to the

NOFA. The Preservation Division will

also work directly with the Resident

Initiatives Specialist (RIS) to make

grant information available to eligible

applicants. The planning grants provide

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9-13 3/94

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4350.6-CHG.3

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funding to facilitate the: (1)

organization of a RC or CBO, (2)

acquisition of a project, or (3)

preparation of an RHP, Plan of Action

(POA), or Limited Equity Cooperative Plan

of Action (LEP). The operative NOFAs for

these grants will vary each year. In

general, if the owner of an eligible

project has submitted an Initial Notice

of Intent (NOI) to sell the project, or

if the Initial NOI is to extend

affordability but the owner has been

working with a resident group which

wishes to purchase the project, a

qualified applicant may be able to apply

for a planning grant under the NOFA. The

specific qualifications for receiving a

grant may differ in each NOFA. In some

cases, intermediaries will be selected by

HUD to administer the grants. Potential

applicants may obtain copies of NOFAs and

application packages from either the RIS

in the local HUD Field Office or from the

administering intermediary. The RIS will

make available names of those

intermediaries.

2\. Other Grants will be made available

through NOFA publication to State and

local government agencies, nonprofit

intermediaries (as defined in Paragraph

1-15), community-based nonprofit housing

developers, and experienced resident

organizations and CBOs to carry out

resident capacity building,

predevelopment activity, community

outreach, training programs, and

organizational activities.

E. Ineligibility of Grants under the

Homeownership and Opportunity for People

Everywhere (HOPE 2) Programs. HOPE 2 Planning

Grants are not available to RCs of any project

for which an owner has submitted an Initial

Notice of Intent (NOI). If Loan Management

staff receives an Initial NOI for a project

that has a HOPE 2 grant in process, the loan

servicer must return the Initial NOI in

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3/94 9-14

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4350.6-CHG.3

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accordance with HUD Notice 92-32, Processing

Instructions for the Fiscal Year 1992 for

Homeownership of Multifamily Units Program

(HOPE 2) - Applications for Grants, Paragraph

9\.

9-5. The RC is responsible for:

A. Electing a Board of Directors and/or creating

a Homeowners Association, Condominium

Association, or Cooperative to exercise the

legal control over the project. The

organization of this entity must be done in

accordance with State and local laws. The

decision must be made whether the entity will

operate in conjunction with the RC or will

assume all responsibilities of the RC after

the required number of units are sold. If the

entity is to manage the project, the

determinations specified in Paragraph 9-4.B.4.

must also be made;

B. Submitting an expression of interest (EOI) and

bona fide offer to purchase the project in

accordance with Chapter 7, and executing all

other agreements;

C. Developing and submitting the RHP in

accordance with Section B or a LEP in

accordance with Section C;

D. Executing a grant agreement and/or other

agreements with HUD;

E. Providing, or contracting for, counseling

services that will help residents gain the

skill, build the organizational capacity, and

acquire the confidence to carry out the

Resident Homeownership Program, including

developing the ability to identify and obtain

the financial resources needed to purchase and

manage the project;

F. Administering the Resident-Homeownership

Program by:

1\. Maintaining or contracting for

maintenance of the project in accordance

with the housing standards in Chapter 11,

Paragraph 11-13.

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9-15 3/94

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4350.6-CHG.3

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2\. Managing or contracting for the

management of the Resident Homeownership

Program in accordance with the RHP. This

responsibility includes submitting all

forms and reports required by the RHP to

HUD in a timely manner;

G. The overall administration and policy making

decisions for the project regardless of

whether it contracts with a nonprofit

organization to manage it;

H. Arranging for financing of units by individual

homeowners and maintaining relations with

lenders and other entities who may provide

grant funds. In some jurisdictions

participating in locally administered HOME

Investment Partnerships programs, the RC may

be able to negotiate to \"recycle\"

homeownership funds paid in accordance with

Paragraph 9-36. Current homeowners may then

use these funds to finance rehabilitation of

units. Subsequent homeowners may use the

funds to purchase units; and

I. Submitting required reports in accordance with

a RHP or LEP.

9-6. Offer to Purchase. Tenants who wish to form or

have already formed a RC to purchase the project in

which they live must follow the process outlined

below. This process describes the timeframe in

which an owner may accept a bona fide offer from a

RC, the requirements for submission of an

Expression of Interest (EOI), the components of a

bona fide offer, acceptance or rejection of the

offer, and what actions must be taken next. For

additional guidance, please refer to Paragraphs 7-4

through 7-12.

A. For the first six-month period beginning on

the date that HUD receives a complete and

accurate Second NOI reflecting the owner\'s

intention to sell the project, the tenants and

RC control the selection of the purchaser.

This situation exists because the purchaser

must have the RC and tenant support in order

to purchase the project.

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3/94 9-16

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4350.6-CHG.3

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1\. Residents should understand that if they

sign a statement signifying that they

wish to form a RC to purchase the

project, they should not also sign a

statement giving support to another

organization to purchase the project.

Since CBOs may also purchase the project

during this period if they can

demonstrate support of a majority of the

tenants, a tenant who signs more than one

statement could create competition for

the purchase.

2\. Although a RC may offer to buy a project

at any time during the 15-month offering

period, it should proceed as quickly as

possible, to preclude the possibility of

the owner accepting another offer after

the initial six-month period.

B. Expression of Interest (EOI). As soon as the

owner submits a Second Notice of Intent (NOI)

to HUD, a RC may begin the purchase process by

submitting a written EOI to the Chief, Loan

Management Branch, in accordance with

Paragraph 7-5.

C. Information from HUD and the Owner. Within 30

days of receipt of an EOI, Loan Management

staff will determine the eligibility of the RC

to purchase the project under a Resident

Homeownership Program, notify it in writing of

its eligibility and provide the information

identified in Paragraph 7-6. Upon

notification from HUD of the RC\'s EOI, the

owner also will provide the RC with any

relevant information necessary to complete the

sale.

D. Bona Fide Offer. An eligible RC may submit a

bona fide offer to the owner with a copy to

the Chief, Loan Management Branch. The

components of a bona fide offer are identified

in Paragraph 7-7. The requirements include

the following provisions:

1\. The RC must demonstrate that tenants

representing at least 50 percent of all

units and 75 percent of the occupied

units have expressed an interest in

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9-17 3/94

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4350.6-CHG.3

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participating in the Resident

Homeownership Program to be developed by

the RC; and

2\. While an owner may not waive an earnest

money deposit for a RC, it may, if the

tenants agree, and if allowed by State

and local law, accept an assignment of

any portion of the tenants\' security

deposits in lieu of the earnest money

deposit. The amount of the earnest money

or assigned security deposit must be at

least \$200 from each prospective

purchasing tenant representing at least

75 percent of the occupied units. This

deposit will represent a firm commitment

on the part of the tenant to purchase

(unless released from the commitment by

the RC for emergency reasons) and must be

applied to the tenant\'s downpayment for

the unit or membership.

E. Acceptance or Rejection of Offer. The owner

must accept or reject the offer within 30 days

of receipt. If an owner rejects the offer, it

must return any cash earnest money deposit to

the RC. Where pledges of security deposits

were used as the earnest money deposit, they

must be returned to the tenants\' security

deposit accounts. Any acceptance must be

contingent upon HUD\'s approval of the offer

and of a RHP. Within ten days of notification

from HUD that the offer is acceptable, the

owner must issue a final acceptance to the RC

contingent upon satisfactory completion of a

RHP.

F. Additional Conditions. Guidance provided in

Paragraphs 7-9, 7-10, 7-12, and 7-13, dealing

with acceptance of the offer and procedures to

follow if the sale is not consummated also

apply to the implementation of a Resident

Homeownership Program.

G. Submission of a Resident Homeownership Plan or

Limited Equity Plan of Action. The

requirements and the conditions for approval

for a RHP and LEP are in Sections B and C,

respectively. The RC must submit a RHP or LEP

to the Loan Management Branch within the

following timeframes LOG date POA received :

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3/94 9-18

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4350.6-CHG.3

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1\. In the case of a voluntary sale, within

six months of the owner\'s acceptance of

an offer which contains a contingency

clause requiring HUD\'s approval; and

2\. In the case of a mandatory sale, within

six months of the owner\'s receipt of the

offer.

9-7. Seller Financing is permitted for RCs on a case by

case basis. The Loan Management staff must check

with the Preservation Division to determine the

acceptability of a specific proposal.

9-8. Notification to New Tenants. Any tenant who moves

into the project after the submission of the RHP

must sign a certification, before occupancy,

indicating that it has been informed by the owner

of the pending change in ownership of the project

and is aware that a Resident Homeownership Program

is being established. The notification should

further indicate:

A. The tenant\'s option to purchase its unit;

B. The length of time that the tenant will likely

be allowed to remain in the project as a

renter and that the tenant must move at the

end of a period clearly specified in the lease

if it does not purchase the unit;

C. The possibility of rent increases;

D. That the tenant may be eligible for Section 8

rental assistance if it remains in the project

as a tenant after approval of the RHP; and

E. That relocation assistance will not be

available.

9-9. Financial Assistance.

A. From HUD. A RC may receive financial

assistance to pay for the expenses shown in

Paragraph D. below if the Loan Management

staff determines that the RHP submission meets

the requirements of Section B of this Chapter

and Appendix 9-2, Evaluation of a Resident

Homeownership Plan. The financial assistance

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9-19 3/94

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4350.6-CHG.3

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provided by HUD must be the least costly

alternative to the Federal government

consistent with establishing a viable Resident

Homeownership Program. In most cases, this

financial assistance will take the form of a

grant from HUD.

B. From State or Local Government Agencies or

Other Sources. This assistance may come in

whole or in part from these sources as

described in Paragraph 8-17.E.

C. Total Maximum Assistance. HUD will subtract

any funds that the RC, or the nonprofit

organization working with the RC, receives

from other sources if it duplicates HUD

funding for the same purpose.

D. Types of Assistance.

1\. The purchase price, not to exceed

Transfer Preservation Value;

2\. Transaction expenses as outlined in

Paragraph 8-21(A)(1)(c);

3\. Reimbursement for the costs of all items

listed in Paragraph a. through c. below.

The expenses and amount of funds

requested for such items must be

necessary and documented. The funding

level will be limited to the lower of

\$500 per unit or \$200,000 per project.

a\. Training for the RC;

b\. Homeownership counseling and

training; and

c\. Fees for the HUD-approved nonprofit

organization or public agency

working with the RC;

4\. Eligible relocation expenses for tenants

who elect to move, rather than lease or

purchase a unit, as described in

Paragraph 9-34.E.;

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3/94 9-20

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4350.6-CHG.3

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5\. The documented cost of rehabilitation

identified by the Capital Needs

Assessment plus any other rehabilitation

costs justified and documented in the

RHP;

6\. The establishment of an adequate initial

reserve for replacement account; and

7\. The establishment of an operating reserve

escrow account, including contingencies

against unexpected increases in expenses

or shortfalls in homeowners\' payments, if

the RC documents the need.

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9-21 3/94

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4350.6-CHG.3

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Section B. Resident Homeownership Plan of Action

9-10. Submission of the Resident Homeownership Plan of

Action (RHP). The RHP serves the same purpose as

the Plan of Action (POA) submitted by other types

of purchasers and must contain all of the elements,

documentation, and information required by this

Section and the checklist contained in Appendix

9-1, Resident Homeownership Plan Checklist. The

Loan Management staff should follow the guidance in

Paragraphs 8-3 through 8-5 when processing the

submission of a RHP. NOTE: The required

conditions of a POA for a Limited Equity

Cooperative (LEC) which assumes the mortgage are

described in Section C and will be called a Limited

Equity Plan of Action (LEP). While any Cooperative

which is not an LEC which assumes the mortgage

submits an RHP in accordance with this Section,

terminology for such RHPs will be in accordance

with that specified in Section C. The Resident

Council (RC) must submit six copies of a complete

RHP to the Chief, Loan Management Branch within the

following time frames: LOG date received whether

complete or not

A. Under the voluntary sales process, within six

months of acceptance of a bona fide offer by

the owner; and

B. Under the mandatory sales process, within six

months of the owner receiving an offer from

the RC.

9-11. Required Review of the RHP. The Loan Management

staff must review the RHP and respond to the owner

and RC in the same manner and within the same

time frames as required for reviewing POAs in

Paragraphs 8-6 through 8-10. The staff should use

Form HUD-91110, Evaluation of a Resident

Homeownership Plan, Form HUD 91110-A, Worksheet for

Individual Resident Homeownership Feasibility, and

Form HUD 91l10-B, Summary Worksheet for Resident

Homeownership Feasibility to evaluate the RHP.

9-12. Required Conditions of a Resident Homeownership

Plan. The RHP must spell out all the duties and

responsibilities of the RC and the Homeowners or

Condominium Association, meet all of the conditions

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3/94 9-22

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4350.6-CHG.3

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listed in this Paragraph and fully address all of

the elements listed in Paragraph 9-13. This

chapter assumes that the RC will continue to

operate in conjunction with a Homeowners or

Condominium Association. However, the RHP must

specify whether these duties will be retained by

the RC or will be turned over to the successor

entity at a certain time.

A. Unit values.

1\. At the time of sale of the unit to the

initial homeowner, the RC should

determine the unit values so that the

total of all values equals the project\'s

Transfer Preservation Value (TPV) or

purchase price, if lower than the TPV.

The RC must develop the unit values

proportionately and describe the method

in the RHP.

2\. At the time of sale of the unit to a

subsequent homeowner:

a\. If the promissory note that the

homeowner signs with HUD is still in

effect in accordance with Paragraph

9-37, the RC must determine the

value of the unit by means of an

appraisal. If an appraisal is

required by the lender for mortgage

purposes, the subsequent homeowner

must submit a copy of the appraisal

to the RC. If the lender does not

require an appraisal or the RC is

the lender, the RC must contract for

it.

b\. If the promissory note that the

homeowner signs with HUD is no

longer in effect and if resale

restrictions still exist, the RC

will determine the value of the unit

using the method described in its

RHP.

B. Limits on Homeowner Expenses.

1\. An initial homeowner\'s monthly expenses

must not exceed 35 percent of its

adjusted monthly income.

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9-23 3/94

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4350.6-CHG.3

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a\. An initial homeowner will not

qualify to purchase a unit if,

during the first year of

homeownership, it must spend more

than 35 percent of its adjusted

monthly income (AMI) on debt service

(principal and interest), utility

costs, taxes, insurance and

homeownership fees.

b\. Depending on the RHP and the form of

homeownership desired, these costs

may be allocated in different ways

between those expenses paid directly

by the homeowner and those paid by

the RC from project funds. At a

minimum, the total homeownership

fees must be sufficient to cover all

operating and administrative costs

of the Resident Homeownership

Program and maintenance of the

common areas. However, a

homeowner\'s maximum total

out-of-pocket monthly payments may not

exceed 35 percent of its AMI,

regardless of how the costs are

allocated between those paid by the

homeowner and those paid by the RC.

2\. For subsequent homeowners, the RC, at its

option, may limit the amount of monthly

income which can be used to cover housing

expenses. The RC also, at its option,

may use funds from the general operating

reserve account (GOR), established in

accordance with Paragraph 9-26.I., to

provide subsidies to subsequent

homeowners to reduce housing costs. Use

of funds from the GOR account, must meet

the guidelines developed in the RHP.

C. Unit purchase price.

1\. For Initial Homeowners.

a\. The unit purchase price must never

exceed the unit value. The unit

purchase price, established

individually for each initial

homeowner, must be set so that the

debt service on the mortgage for the

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3/94 9-24

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4350.6-CHG.3

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unit can be supported by the

difference between 35 percent of the

homeowner\'s AMI and all other

ongoing expenses connected with

homeownership in accordance with

Paragraph B. above.

b\. For purposes of determining the unit

purchase price, the RC must

determine both 35 percent of the

homeowners AMI and the expenses

connected with homeownership as of

the date it transfers the unit to

the homeowner. However, for

purposes of RHP approval, the RC

should use information concerning

prospective homeowners as of the

date it submits the RHP.

c\. The minimum purchase price for

initial homeowners may never be less

than the down payment made in the

form of the earnest money deposit

paid in cash or pledge of security

deposit by the tenant. The RHP may

set a higher minimum purchase price,

and apply it to other initial

purchasers, based on unit type, thus

limiting eligibility of some

prospective initial homeowners.

However, the total number of initial

homeowners must meet the criteria

set forth in the RHP in accordance

with Paragraphs D.2. and E. below.

2\. For Subsequent Homeowners.

a\. When the Unit Purchase Price and the

Unit Selling Price are the Same.

The unit purchase price is the

amount the subsequent homeowner pays

for the unit. Ordinarily, the

selling price for which the current

homeowner sells the unit and the

purchase price for which the

subsequent homeowner buys the unit

will be the same.

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9-25 3/94

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4350.6-CHG.3

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b\. When the Unit Purchase Price and the

Unit Selling Price Differ. When the

unit selling price and the unit

purchase price differ, (e.g., when

the current homeowner sells the unit

to the RC for one amount but the

subsequent homeowner purchases the

unit from the RC for another amount

or if the RHP requires that the

selling price be set at the unit

value for the current homeowner and

the purchase price be computed as 35

percent of the AMI for the

subsequent homeowner), the Handbook

will use the term selling price when

referring to the seller and purchase

price when referring to the

purchaser.

D. The RC must transfer ownership of all units

which are to be sold to the initial homeowners

no later than four years from the date of its

purchase of the project. However, the

transfer of ownership will begin when the RC

purchases the project. It is anticipated that

only units to be sold to non-residents and to

residents who need time to escrow down

payments prior to purchase, will require the

maximum allowable time for transfer. The RC

must ensure, to the greatest extent

practicable, that a sufficient number of

tenants residing in the project on the date it

submitted its RHP, intend and can afford to

purchase their unit by:

1\. Performing a financial analysis of each

prospective tenant\'s income and assets to

ensure that the tenant can afford to

purchase the unit and meet the applicable

required conditions of the RHP.

2\. Seeking and using financing programs that

enable a sufficient percentage of current

tenants who reside in the project at RHP

submission to purchase their units within

that four-year period.

a\. We recommend that the RHP contain

documentation that a minimum of 65

percent of current tenants, in the

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3/94 9-26

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4350.6-CHG.3

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same proportion of very low-,

low- and moderate-income families that

resided in the project at the time

of RHP submission, are purchasing

their units.

b\. For example, if on the date of

submission of the RHP, a fully

occupied 100-unit project contains

50 very low-income, 40 low-income,

and 10 moderate-income tenants, the

RHP would contain evidence that at

least 33 very-low income, 26

additional very low- or low-income,

and at least six additional current

tenants will be able to purchase

their units. There would be no

restrictions on the income category

of the additional six or more

current tenants who will purchase.

Suggestions for ensuring the

tenant\'s ability to meet this

requirement are in Paragraphs I. and

J. below.

3\. Requiring a written expression of

interest, from all tenants who are

potential homeowners in at least the

proportions required by the RHP,

certifying the tenants\' intent to

purchase their units and not rent it to

another family for 15 years.

E. Tenant Income Profile. The RHP must include

tenant income profiles submitted in accordance

with Paragraph 8-17.F. Initial purchasers who

do not reside at the project on the date the

RC submitted its RHP must be selected in a

manner that ensures that the total number of

initial homeowners that are very low-, low-,

and moderate-income meets the requirements for

tenant selection described in Paragraph

8-18.A.3. The RHP should specify any

restrictions on above moderate-income

purchasers with the following limitations:

1\. Above moderate-income tenants who live at

the project at the time of RHP approval

may purchase a unit and become initial

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9-27 3/94

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4350.6-CHG.3

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homeowners, if allowed by the RHP.

(PLEASE NOTE: They may also continue to

rent a unit at the project as tenants.)

2\. Non-resident above moderate-income

families may not become initial

homeowners.

3\. However, above moderate-income families

may purchase units and become subsequent

homeowners if allowed by the RHP.

F. Use of Project Income.

1\. Immediately upon receipt or annually, at

the RC\'s option, the RC must remit to HUD

50 percent of the proceeds from the sale

of units to initial homeowners.

Depending upon the method of financing

used, this will be paid in different

stages:

a\. If the RC receives cash from the

sale of a unit because the homebuyer

received a loan from a conventional

lender, the RC must return half the

purchase price to HUD at the time of

sale.

b\. If the RC carries back the mortgage,

it must remit half the principal to

HUD as it is collected.

c\. If a unit is sold by the initial

homeowner and the initial homeowner

pays the RC the total debt, the RC

must pay HUD 50 percent of the

amount received. (NOTE: If a

subsequent homeowner assumes the

initial homeowner\'s remaining debt,

the RC would have to continue to

remit to HUD 50 percent of all

amount it receives in payment of

principal, as it is collected.)

2\. The RC may use any initial sales proceeds

not required to be paid to HUD, along

with any interest charged for financing

the debt on the units, for costs of the

homeownership program, including

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3/94 9-28

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4350.6-CHG.3

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improvements to the project, operating

and replacement reserves, additional

homeownership opportunities in the

project, and other project related

activities approved by HUD. Other

project related activities will include

expenses other than normal operating

expenses for the project. For example,

the RC may use such funds for purchasing

units which homeowners are selling,

subsidizing homeowner interest payments,

or training subsequent purchasers.

3\. The RC should use proceeds retained from

any subsequent sales proceeds, for costs

of the homeownership program, including

purchasing units which homeowners are

selling, subsidizing homeowner interest

payments, training subsequent purchasers,

or other HUD approved project-related

activities.

4\. Monthly homeowners fees should be used

for expenses for project maintenance,

operating and replacement reserves, and

RC-paid taxes, insurance, and utility

bills, and other expenses typical of all

rental and homeownership projects.

G. Promissory Note.

1\. Each initial homeowner must sign a

promissory note, payable to HUD, agreeing

to repay the difference between the value

of the unit and the purchase price.

These values are established in

accordance with Paragraphs A. and C.

above. Subsequent homeowners may have to

sign a promissory note in accordance with

Paragraph 9-37.

2\. The promissory note bears no interest, is

not amortized, is non-recourse, and must

be secured by a mortgage.

3\. The requirements of a promissory note,

including the requirements for repayment

by both the initial and any subsequent

purchasers, are contained in Paragraphs

9-36 and 9-37, respectively.

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9-29 3/94

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4350.6-CHG.3

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H. Restrictions on Equity and Resale.

1\. RCs should specify in contracts with

homeowners and in the RHP whether they

have the first right to purchase the unit

from the initial homeowner for a

specified amount before any other

prospective buyer. The RHP must specify

the maximum length of time the RC may own

the units prior to their sale to an

eligible family. The period established

must be reasonable, e.g., a period of two

years.

2\. The RC may place reasonable restrictions,

beyond those required by statute and

approved by HUD, on the amount of equity

appreciation a homeowner may retain. If

restrictions are placed, the RC must, at

the time of initial sale, enter into an

agreement with the family to establish

such a maximum.

I. RCs may develop and offer any method or

combination of methods of loan repayment to

homeowners to purchase their units. At the

RC\'s option, these methods may differ for

initial and subsequent homeowners. The RC

should ensure, however, that the financing

method selected by the purchasers does not

result in violation of the requirements of

Paragraphs B. through E. Possible methods of

financing include but are not limited to:

1\. Arranging with a bank or other lending

institution for mortgage financing for

individual tenants;

2\. Helping tenants qualify for State and

local homeownership programs;

3\. Arranging for State-supported mortgages

for the potential homeowners;

4\. Arranging with a bank to finance all

units through the RC with the RC

collecting payments from individual

homeowners and then making the bank

payments;

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3/94 9-30

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4350.6-CHG.3

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5\. Using proceeds and interest payments from

previous sale of units to provide RC

financing of all homeowner mortgages;

6\. Use of Federal Agency programs for which

the homeowner and property are eligible,

such as HUD mortgage insurance, the

Department of Veterans Affairs loan

guarantees, or Farmers Home

Administration financing. If the RC

plans to use any of these programs, it

should be certain that the discretionary

aspects of their RHP do not conflict with

the requirements for the specific

program. For instance, if any

homeowner\'s mortgage is to be insured by

HUD under Section 203 or Section 234, the

RHP must state that legal restrictions on

conveyance (e.g. prohibition against the

homeowner renting the unit, restrictions

on sales proceeds retained by the owner,

and the right of first refusal by the RC)

may have to be terminated if:

a\. The mortgage is transferred by

foreclosure;

b\. The mortgage is transferred by deed

in lieu of foreclosure; or

c\. The mortgage to the property is

assigned to HUD.

7\. Using other methods of financing

depending upon the income level of the

tenant or other financial criteria.

J. RCs may use any homeowner loan repayment

method or combination of methods to enable as

many residents as possible to purchase units.

At the RC\'s option, these methods may also be

used for subsequent purchasers. Some

suggested methods include but are not limited

to:

1\. Subsidizing the lending institution\'s

interest rate. The amount of subsidy

would be based on the amount the

homeowner may spend in accordance with

Paragraph B. above. The RC should

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9-31 3/94

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4350.6-CHG.3

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specify whether there is a floor (e.g.

one percent) below which it would not

subsidize the interest rate.

2\. Determining rates and terms for loans

payable to the RC to bring the

homeowner\'s payments to the level

determined in accordance with Paragraph

B. above. It is advisable that the RC

not reduce the interest rate that the

homeowner pays on the loan to less than

one percent nor extend the amortization

period beyond 40 years.

3\. While the purchase price is determined at

the time of closing the sale on the unit,

the RC may, at its option, adjust

interest rates based on certifications of

the homeowner\'s income at periods

specified in the RHP. If the RHP allows

it, the RC may also accelerate an

extended payment period if the

homeowner\'s income increases.

4\. The RC may provide for homeowner

repayment of interest subsidized in

accordance with Paragraphs 1. through 3.,

upon sale of the unit, if there are any

funds remaining after repayment of the

promissory note to HUD.

5\. It is advisable that the RHP not allow

mortgages which contain negative

amortizations, balloon payments, or any

other requirement which could act to the

homeowner\'s long-term financial

detriment.

K. In the case of loans made by the RC to initial

homeowners, it is recommended that the RHP

establish the down payment and closing cost

requirements so that they do not exceed ten

percent of the homeowner\'s adjusted annual

income, with a minimum of the \$200 earnest

money deposit for initial homeowners who are

current tenants. The homeowner should have

the option to contribute a greater downpayment

in order to increase its equity. The RC, at

its option, may set the down payment and

closing cost guidelines for subsequent

purchasers.

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3/94 9-32

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4350.6-CHG.3

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L. All initial homeowners must sign a certified

statement that the unit will be used as their

principal residence. At the RCs option, the

RHP may require a similar certification from

subsequent purchasers.

M. Restrictions on Renting the Unit.

1\. Initial Homeowner. The property must be

occupied by the initial homeowner for at

least 15 years from the date of purchase

or until the initial homeowner sells the

unit, whichever comes first. The unit

may not be leased or otherwise made

available to other families during this

period. A family is exempted from this

rule if it temporarily moves outside the

market area for employment or because of

an emergency. The exemption will end

when the emergency ceases to exist. The

RC has the option to extend the 15-year

period by establishing such a policy in

the RHP.

2\. Subsequent Homeowners. At its option,

the RC may restrict the rental of units

by subsequent homeowners in the RHP.

N. The RC must develop a method to keep residents

informed of their rights and to make sure that

they have the opportunity to participate in

the decision making process.

O. The RC must determine whether they will pay

moving expenses for tenants who choose to move

rather than purchase or continue to lease a

unit. If they do, the RHP should specify

whether they will pay actual and reasonable

expenses for such tenants or develop a

schedule of relocation allowances in

accordance with Paragraph 9-34.E.

P. The RC must comply with any State and local

government laws about cooperative housing or

Resident Homeownership Programs. This

includes any requirement that a minimum number

of residents participate in the housing

program where the requirement is more

stringent than HUD\'s.

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9-33 3/94

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4350.6-CHG.3

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Q. The RC must specify whether all

responsibilities for the project will be

turned over to a successor entity, and if so,

the sales conditions which must be met prior

to this event, or if the RC will continue to

operate in conjunction with the Homeowners

Association or other applicable entity.

9-13. Required Elements of a Resident Homeownership Plan

(RHP). The RC must use the RHP to describe the

major elements of and schedules for the development

of the Resident Homeownership Program and show how

each criteria will be met. Loan Management staff

may use Appendix 9-1, Resident Homeownership Plan

Checklist, to ensure that the RHP submission is

complete and Appendices 9-2, 9-2A, and 9-2B, Forms

HUD-91110, 91110-A, and 91110-B to evaluate it.

The RHP must include, at a minimum:

A. Information About the Sale of Units to Tenants

Who Reside in the Project at the Time the RC

Submits Its RHP. All issues described below

must be addressed:

1\. The type of homeownership contemplated

(e.g., condominium or fee simple) along

with methods and a schedule for

conversion to homeownership;

2\. The financing arrangements for the units,

including the underwriting standards and

rates and terms for loans available for

tenants in the various income categories;

3\. The methods by which eligibility for

purchase and credit, other than income,

will be determined;

4\. The down payment (with a minimum of the

earnest money deposit paid by initial

homeowners) and other costs to be paid by

the homeowner at closing, including

whether sweat equity may be used for all

or part of the downpayment and how the

sweat equity would be valued;

5\. A statement describing the monthly

homeownership fees and estimates of

utility costs, taxes, and insurance for

each unit size;

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3/94 9-34

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4350.6-CHG.3

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6\. An analysis of the unit purchase price

for each potential initial homeowner,

given anticipated fees in accordance with

Paragraph 5. above and methods of

financing, underwriting standards, and

other considerations, in accordance with

Paragraphs 2. through 4. above;

7\. The number of existing residents who wish

and are eligible to purchase;

8\. Documentation that current tenants who

wish to purchase units will be able to

purchase in the proportions required by

the RHP in accordance with Paragraph

9-12.D.2.; and

9\. Identification of the actual proportions

of initial homeowners in the three income

categories intending to purchase units

consistent with Paragraph 9-12.E.

B. Information about Marketing Unsold Units.

1\. How vacant units will be marketed to

achieve the required tenant income

profile in accordance with Paragraph

9-12.E.;

2\. A workable sales schedule;

3\. An Affirmative Fair Housing Marketing

Plan;

4\. Credit and income requirements potential

purchasers must meet in order to qualify

for a loan;

5\. Any preferences other than those required

by Paragraph 9-12.D.2. and E.; and

6\. Whether financing and other factors

described in Paragraph A. above will be

the same or different for non-resident

initial purchasers.

C. Considerations for Non-purchasing tenants.

1\. Anticipated number of tenants requesting

relocation assistance;

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9-35 3/94

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4350.6-CHG.3

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2\. What relocation expenses will be provided

in accordance with Paragraph 9-34.E.;

3\. Determination of rents in the project if

non-purchasing tenants do not relocate in

accordance with Paragraph 9-34.C. and D.;

4\. Developing phased-in rents for

non-purchasing tenants in accordance with

guidelines in Chapter 8, Paragraph

8-18.A.7.;

5\. Eligibility of non-purchasing tenants for

Section 8 rental assistance, whether they

remain or relocate; and

6\. Nondiscrimination counseling to

familiarize non-purchasing tenants with

opportunities to select replacement

dwellings from a full range of

neighborhoods within the housing market

area; their rights under the Fair Housing

Act and other applicable Civil Rights

laws; and how to search for suitable

replacement housing.

D. Financial Considerations:

1\. The amount of grant funds requested from

HUD;

2\. The amount of funds requested from State

and local governments or other sources;

3\. The anticipated waivers or abatements in

taxes or other charges;

4\. The provision of free or reduced price

services to be provided by local

organizations or other anticipated means

of saving expenses. All such funding,

abated expenses or the provision of free

services, must be documented and

guaranteed for a minimum of five years;

5\. Funds, received as technical assistance

grants by either the RC or nonprofit

organization, which may be used to offset

eligible expenses;

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3/94 9-36

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4350.6-CHG.3

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6\. The anticipated use of:

a\. HUD grant funds;

b\. Funds from State and local

governments;

c\. Proceeds from the sales price and

interest payments of units to

initial purchasers consistent with

Paragraph 9-12.F.;

d\. Technical assistance grants; and

e\. Any other funds received pursuant to

Paragraphs 3, 4, and 5 above.

7\. Organizational costs;

8\. Documented costs for training and other

technical assistance;

9\. The RC\'s acquisition costs for the

project;

10\. A summary of cost estimates for major

rehabilitation activities to be carried

out, including repairs, replacements and

improvements as well as any costs for

temporary relocation activities;

11\. Anticipated homeownership fees, what the

fees pay for, a description of how they

are allocated to various unit types, and

estimates, with documentation, of other

costs to be paid by homeowners;

12\. A statement as to responsibility for

payment of taxes, insurance, and utility

bills for the individual units; and

13\. Proforma cash flow analyses for the four

years after RHP approval. This proforma

must reflect the financial feasibility

and viability of the Resident

Homeownership Program, taking into

account any rental activity resulting

from non-purchasing tenants of the

project.

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9-37 3/94

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4350.6-CHG.3

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a\. Homeownership Activities.

i\. Project Operation.

\(a\) Income from homeownership

fees, laundry and any

other sources;

\(b\) Expenses for operating the

project including

maintenance,

administrative costs,

utilities, taxes,

insurance, deposits to a

reserve for replacement

account;

ii\. Unit Purchases and Sales.

\(a\) Income from the sale of

units;

\(b\) Payment to HUD of 50

percent of the net

proceeds from the sale of

units to initial

purchasers, in accordance

with Paragraph 9-12.F.1.;

and

\(c\) Expenses for purchase of

units, homebuyer interest

subsidies, orientation of

new homeowners, and other

expenses which are unique

to a Resident

Homeownership Program;

b\. Rental Income and Expenses.

i\. Proportionate share of income

and expenses from the rental

portions of the operating

budget. The budgets should

show decreases in the rental

portion and increases in the

homeownership portion over the

four-year period in accordance

with the anticipated sales

schedule; and

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3/94 9-38

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4350.6-CHG.3

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c\. Any anticipated relocation costs for

non-purchasing tenants.

E. Relocation Information.

1\. An estimate of the number of tenants who

plan to relocate and, if the RHP provides

for relocation assistance, the estimated

cost for such relocation determined in

accordance with Paragraph 9-34.

2\. An estimate of the number of

nonpurchasing tenants who plan to remain

as renters but who must temporarily

relocate during the rehabilitation work,

the estimated cost of temporary

relocation, and the availability of

temporary relocation resources.

F. Rehabilitation Information.

1\. Expected scope of rehabilitation with

justification for any rehabilitation over

and above that required by the

Preservation Capital Needs Assessment;

and

2\. Details on how the rehabilitation will be

accomplished.

G. The expected scope of technical assistance,

training and counseling for the RCs,

homebuyers, and nonpurchasing tenants.

H. Requirements for Resale of Units.

1\. Any restrictions on resale by homeowners

over and above those specified in

Paragraph 9-35 and any restrictions on

homeowners\' equity, over and above those

specified for the first six years of

homeownership in Paragraph 9-36.A.1.c.

2\. Any differences in other parameters

between those established for initial

homeowners and subsequent homeowners,

e.g., establishment of purchase price,

downpayments, and financing. If the RC

is not establishing a condition for any

of the parameters for subsequent

homeowners, that fact must be stated.

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9-39 3/94

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4350.6-CHG.3

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I. A tenant income profile representing the

tenants who resided in the project on the date

of RHP submission and pursuant to Paragraph

9-12.E. This profile will be used for two

purposes:

1\. To designate the percentage of initial

homeowners who must fall into each income

category;

2\. To designate the percentage of tenants

who must fall into each income category

in accordance with the requirements of

Paragraph 8-18.A.3. For the remaining

useful life of the project, any new

tenants must be selected to fulfill the

tenant profile requirements.

J. Copies of all forms, guidelines, worksheets,

and contracts developed to implement the

Resident Homeownership Program and all other

documents required to justify elements of the

RHP.

K. A proposed method for submitting any

applicable forms, annual reports, and audits

to HUD to demonstrate compliance with Federal

regulations.

L. Information about the Management of the

Project.

1\. A Management Plan detailing all aspects

of management including:

a\. Whether the project will have a

resident manager and, if so, the

resident manager\'s duties and

remuneration; and

b\. The different methods that will be

used to manage the homeownership and

rental components of the project;

2\. Management Agent

a\. If the RC is the management agent,

the RHP must contain evidence that

it has managed the property

effectively and efficiently for at

least three years; or

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3/94 9-40

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4350.6-CHG.3

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b\. If a nonprofit organization is the

management agent, the RHP must

contain:

i\. The name and address of the

nonprofit organization or

public agent selected to manage

the property and support

documents that reflect the

qualifying experience it has to

meet the standards in HUD

Handbook 4381.5, Management

Documents, Agent and Fees,

Chapter 2, Section I;

ii\. An executed contract between

the RC and the management

agent, contingent upon HUD\'s

approval; and

iii\. A statement confirming that the

RC will retain primary

responsibility to handle and

resolve problems such as

regaining control of a unit if

the homeowner moves or if the

unit becomes uninhabitable.

c\. If the nonprofit organization

contracts with a profit-motivated

management agent, the RHP must

contain:

i\. The name and address of the

profit-motivated management

agent selected to manage the

property and support documents

that reflect the qualifying

experience it has to meet the

standards in HUD Handbook

4381.5, Management Documents,

Agent and Fees, Chapter 2,

Section I;

ii\. An executed contract between

the nonprofit organization, RC

and the profit-motivated

management agent, contingent

upon HUD\'s approval; and

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9-41 3/94

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4350.6-CHG.3

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iii\. A statement confirming that the

RC will retain primary

responsibility to handle and

resolve problems such as

regaining control of a unit if

the homeowner moves or if the

unit becomes uninhabitable.

M. The Policy for Repurchasing and Sale of Units.

1\. The RC may pursue several options when

purchasing units from homeowners who wish

to sell, including purchasing all units

and reselling them, serving as the buyer

of last resort for unsold units, or

maintaining the right of first refusal

for the purchase of units. If the last

option is chosen, the RC must describe

the guidelines it will use to make the

decision to purchase or not.

2\. The RC must describe the method by which

it will establish the purchase and

selling price for units which it

purchases.

3\. The RC must describe guidelines for

future marketing of such units to ensure

that any units it buys are resold to an

eligible family, in accordance with the

RHP.

N. Information about any limitations on

subsequent purchasers, including income and

other requirements. This information should

include an underwriting analysis showing that

restrictions on eligible subsequent

purchasers, as defined in Paragraph 9-35,

would not jeopardize the operating feasibility

of the project.

O. A certification that the RC will comply with

the provisions of:

1\. The Fair Housing Act;

2\. Title VI of the Civil Rights Act of 1964;

3\. Executive Order 11063;

4\. Age Discrimination Act of 1975;

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3/94 9-42

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4350.6-CHG.3

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5\. Section 504 of the Rehabilitation Act of

1973;

6\. Section 3 of the Housing and Urban

Development Act of 1968, as amended;

7\. All regulations promulgated under such

statutes and authorities cited in

Paragraphs 1 through 6 above; and

P. A Complete Transfer of Physical Assets (TPA)

package.

Q. A description of the interaction of the RC and

other entity formed by the homeowners and/or

the schedule by which the RC will be

supplanted by the successor entity.

9-14. Approval of a Resident Homeownership Plan. In

order to approve the RHP, Loan Management staff

must determine that it meets all of the

requirements contained in this Section and on Form

HUD-91110, 91110-A, and 91110-B, is financially

feasible and is the least costly alternative to HUD

that is consistent with establishing a viable

Resident Homeownership Program.

9-15. Headquarter\'s Review of the Required Conditions of

a RHP. Within 30 days of their approval of the

RHP, the Loan Management Branch must submit to the

Preservation Division a request for grant funds,

Section 8, and the preparation of required

documents. LOG date request made The request

should include the information and certifications

shown below, along with a copy of the approved RHP,

to ensure that the RHP meets all required

conditions. Any conditions clearly specified in

the RHP need not be repeated.

A. RC name, project name, number and location and

amount of grant required;

B. The projected number of initial homeowners

that are very low-, low-, and moderate-income

families to meet the requirements outlined in

Paragraph 9-12.D. and E.;

C. An analysis showing that projected debt

service payments, occupancy charges (taxes,

insurance, homeownership fees) and utilities

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9-43 3/94

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4350.6-CHG.3

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payable by the initial homeowners will not

exceed 35 percent of their AMI;

D. An analysis showing that the aggregate incomes

of initial homeowners and other sources of

funds are sufficient to allow occupancy

charges that cover the full operating costs of

the project and any debt service while

permitting the RC to comply with all

requirements of this Chapter and the RHP;

E. Certifications showing that homeowners will

occupy their projects for a minimum of fifteen

years or such longer period as required by the

RHP;

F. Evidence that potential homeowners are aware

that at closing of their individual loans,

they must execute a nonrecourse promissory

note for a term of 20 years in accordance with

Paragraph 9-36;

G. All other elements and conditions required for

a Resident Homeownership Program including

minimum purchase price of units, period of

transfer and financing method for the

potential initial and subsequent homeowners;

H. The proposed schedule and methodology for

release of grant funds and methods for

monitoring the release;

I. The proposed method of monitoring the Use and

Grant Agreements for their full term along

with all reporting requirements with which the

project must comply;

J. Any terms or conditions unique to the project

or RHP or Special Conditions which Loan

Management staff believer should be met which

should be included in the Grant Agreement; and

K. Other relevant required conditions for POAs as

prescribed in Chapter 8, Sections C and E.

9-16. Grant and Use Agreements. Within 15 days of

receipt of the request, the Preservation Division

must examine the information for accuracy and

completeness and, if acceptable, forward the

documents to the Office of General Counsel (OGC).

LOG

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3/94 9-44

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4350.6-CHG.3

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A. Within 30 days of receipt of the request to

prepare documents, the OGC will prepare and

send the Grant and Use Agreements to the

Preservation Division, which will forward them

to the Chief, Loan Management Branch. LOG

date received The agreements will cover:

1\. The funding described in Paragraph

9-9.D.;

2\. The RHP conditions cited in Paragraph

9-15;

3\. Procedures governing the drawdown of

funds and remedies for noncompliance with

the requirements of the program; and

4\. Remedies for noncompliance with the

requirements of the program including

possible cancellation of the Grant

Agreement, withholding of further

disbursements, repayment of Grant amounts

already disbursed including those held in

escrow accounts funded through the Grant.

B. Within 30 days of receipt of the grant

agreement, Loan Management staff must meet

with the RC LOG date of meeting to review

the grant agreement, including repayment

penalties for noncompliance, and any other

issues relevant to the conversion to and

operation of the Resident Homeownership

Program.

C. Relinquishing Duties to the Successor Entity.

The Homeowners Association, Condominium

Association, or Cooperative must be

established by receipt of the Grant and

transfer of the project. The duties of the RC

must be transferred to the successor entity in

accordance with the approved RHP.

9-17. Phase-In Period for Sales.

A. Timely Homeownership.

1\. Transfer to RC. The RC must acquire

ownership of the project no later than 90

days after approval of the RHP unless the

RC and the owner agree to extend this

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9-45 3/94

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4350.6-CHG.3

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date and the owner waives its right, in

writing, to prepay during this extension.

LOG date transferred

2\. Sale of Units. The RC must transfer

ownership of all designated units in the

project (other than units occupied by

nonpurchasing tenants) to the initial

homeowners within a reasonable time

thereafter. This will be an on-going

process, but in no event may take longer

than four years from the date of transfer

of the project to the RC. LOG number of

units transferred quarterly HUD may seek

contractual remedies, in accordance with

the grant agreement, against any RC which

fails to appropriately transfer ownership

of all designated units within the

four-year period.

B. Tenant Selection.

1\. The RC must submit a written tenant

selection plan in accordance with Chapter

2 of HUD Handbook 4350.3, Occupancy

Requirements of Subsidized Multifamily

Housing Programs, and the tenant profile

requirements in accordance with Paragraph

8-17.F. It also must submit a statement

of the rules it will use for tenant

selection and occupancy during the sales

period when it continues to operate and

manage the project partially as rental

housing. Tenant selection procedures,

rental payments, and other occupancy

requirements must conform to those for

preservation projects in accordance with

Chapter 11. The RC must meet all

Affirmative Fair Housing Marketing

standards and must inform rejected

tenants, in writing, of the reasons for

rejection.

2\. Loan Management staff must evaluate, or

send to other appropriate Divisions to

evaluate, these criteria for approval

based on the RCs ability to continue to

provide housing for very low-income

families during this interim period.

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3/94 9-46

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4350.6-CHG.3

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3\. Before occupancy, the RC must advise all

new tenants, by a signed statement, of

its policy for new tenants as prescribed

in Paragraph 9-8.

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9-47 3/94

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4350.6-CHG.3

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Section C. Limited Equity Cooperatives

9-18. Introduction. This Section addresses the

requirements for a Resident Council (RC) which

acquires a project under a Resident Homeownership

Program by assuming the federally-insured mortgage

and converts the form of homeownership to a Limited

Equity Cooperative (LEC). A LEC is a cooperative

form of housing as described in Paragraph 9-2.C.,

with a limited equity formula in its by-laws which

restricts the profits the members can receive when

they resell their interests. Model Forms of

Articles of Incorporation, By-Laws, Subscription

Agreements, and Occupancy Agreements are in HUD

Handbook 4550.1, Basic Cooperative Housing

Insurance Handbook, and should be modified as

appropriate.

A. A LEC is established as a nonprofit

corporation whose specific purpose is to

provide low-income housing for its residents,

referred to as members, who are stockholders

in the corporation.

B. A LEC will be required to follow the

procedures and requirements applicable to the

purchase and operation of projects with

mortgages insured under the applicable HUD

program with continued low-income

affordability restrictions.

9-19. The Resident Initiatives Specialist (RIS) will

provide assistance to LECs in the same manner as it

does to other RCs in accordance with Paragraph 9-3.

9-20. Organization and Responsibilities of a LEC.

Tenants interested in organizing a RC and forming a

LEC form of homeownership are subject to the

requirements of the Resident Homeownership Program

specified in Paragraphs 9-2 C and D, 9-4, and 9-5,

with the following exceptions and suggestions:

A. A LEC must:

1\. Develop a Limited Equity Plan of Action

(LEP) which will include applicable

elements of a Resident Homeownership Plan

(RHP) and Plan of Action (POA) in

accordance with Chapter 8, Sections C and

E;

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3/94 9-48

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4350.6-CHG.3

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2\. Administer the Cooperative Housing

Program through a Board of Directors in

accordance with the legal documents

specified in Paragraph B.4. below; and

3\. Establish the minimum number or

percentage of participants for the

pre-sale threshold. In accordance with HUD

Handbook 4350.1, Paragraph 29-4 D, we

recommend this participation be set at a

minimum of 90 percent of units, but it

may be as low as the 75 percent of

current tenants who contributed to the

Earnest Money Deposit. The 90 percent

threshold helps to ensure that the IRS

Code requirement of 80 percent of project

income be derived from members\' carrying

charges be met. Initial participation

must be in proportion to the current

tenant profile.

B. Formation of a LEC.

1\. Members of the LEC will buy a share of

the housing corporation, usually called a

membership certificate, which entitles

the purchaser to occupy the unit through

an occupancy agreement;

2\. The Members will elect a Board of

Directors which has the major

responsibility to administer the LEC.

3\. Membership Agreements. These are legally

binding documents that establish the

rights and obligations of the members of

the LEC and of the Board of Directors:

a\. A subscription agreement is the

document that allows prospective

members to demonstrate their intent

to join the LEC and requires a

membership fee.

b\. An occupancy agreement that lasts as

long as the member owns its stock in

the LEC, describes the terms and

conditions and gives the purchaser

the exclusive right to occupy a unit

in the project and participate as a

member in the operation of the LEC.

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9-49 3/94

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4350.6-CHG.3

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c\. State and local requirements may

supplant or supplement the

agreements shown in Paragraphs a.

and b. above. In these cases, State

and local requirements should be

followed, unless they have been

preempted by HUD requirements.

4\. Other Principal Legal Documents include:

a\. The Articles of Incorporation which

sets forth the authority for the LEC

to operate the corporation;

b\. The By-Laws which establishes the

method of operation of the LEC;

c\. The HUD Use Agreement which restrict

the operation of the LEC to certain

FHA requirements; and

d\. The Limited Equity Cooperative Plan

of Action.

C. Other questions and issues suggested by HUD

Handbook 4350.1, Chapter 29 should be reviewed.

9-21. Offer to Purchase. A LEC is subject to the process

outlined in Paragraph 9-6 which includes

information about the time frames in which an owner

may accept a bona fide offer from a RC, the

requirements for submission of an expression of

interest (EOI) and the components of a bona fide

offer.

9-22. Receipt and Acceptance of an Offer. Loan

Management staff should follow the guidance in

Paragraph 7-8 in making a determination about the

owner\'s receipt and acceptance of an offer from a

LEC and about how to determine the level of

incentives. The term Preservation Project Income

will be substituted for the term Preservation

Project Rent referred to in Paragraph 7-8.

A. Acceptance of Offer. In the case of a LEC,

the owner may issue an acceptance of a bona

fide offer contingent upon the satisfactory

completion of a LEP.

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3/94 9-50

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4350.6-CHG.3

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B. Guidance provided in Paragraphs 7-9, 7-10,

7-12, 7-13, and 7-15 for RCs also apply to

LECs implementing a cooperative housing

program.

9-23. Notification to New Tenants. New tenants must be

notified by the LEC of its intention to purchase

the project in the same manner required of other

RCs in Paragraph 9-8.

9-24. Submission and Review of a Limited Equity

Cooperative Plan of Action (LEP). In the case of a

voluntary sale, the LEC will submit a LEP within

six months of acceptance of an offer by the owner.

In the case of a mandatory sale, the LEC must

submit a LEP within six months of the owner\'s

receipt of the offer. The LEC must submit six

copies of the LEP to the Loan Management Branch in

the same manner described in Paragraphs 8-3 and

8-4. Log date received whether complete or not

A checklist of items required for a complete LEP is

in Appendix 9-3, Checklist for a Complete Limited

Equity Cooperative Plan of Action. Because a LEP

is a combination of an RHP and POA, Loan Management

staff should follow guidance in this Chapter and

Chapter 8, Sections C and, E when reviewing a LEP

submission. Loan Management staff will use Form

HUD-50007, Appendix 9-4, Evaluation of a Limited

Equity Plan of Action, to review a LEP.

9-25. Requests for Incentives. The LEC must submit

requests for incentives as part of the LEP.

Requirements for the requests are the same as those

for priority purchasers submitting a POA in

accordance with Chapter 8, Sections C and E except:

A. A LEC may not budget an annual authorized

return which is provided to other purchasers

in Paragraph 8-21.A.1.b. except to pay debt

service on a non-Federal loan to acquire the

project;

B. LECs may receive a grant for specific Resident

Homeownership purposes pursuant to Paragraph

8-21.D. and as outlined in Paragraphs 9-9.C.

and D.2. through 4.;

C. An organization receiving Low-income Housing

Tax Credits (LIHTC) is not eligible to be a

LEC because it is not eligible to become a

priority purchaser;

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9-51 3/94

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4350.6-CHG.3

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D. The LEC may request project oversight charges

but the charges must be based solely on the

project\'s Gross Income Potential. The

oversight charges may not be based on income

that is unique to the operation of a LEC which

is placed in the Cooperative Reserve Account

as defined in Paragraph 9-26.I. below.

E. The following changes in terminology will

apply:

1\. \"Member\" will be used in lieu of

\"tenant.\"

2\. \"Carrying charges\" will be used in lieu

of \"rent.\"

3\. \"Aggregate Basic Carrying Charge\" and

\"Aggregate Market Carrying Charge\" will

be used in lieu of \"Aggregate Basic Rent\"

and \"Aggregate Market Rent.

4\. \"Minimum carrying charge\" will be used in

lieu of \"minimum rent.\"

5\. Total Member Payment (TMP) will be used

in lieu of Total tenant payments (TTPs)

for those who purchase memberships. TMPs

are the monthly carrying charges paid by

members to meet the financial and

operating costs of the LEC plus the

utility allowance, if any. They will be

phased in the same way as TTPs.

6\. \"Section 8 Contract Payments\" will be

used in lieu of \"Section 8 Contract

Rents.\" They will be established in

proportion to the established FMR for the

unit.

7\. \"Preservation Project Income\" (PPI) will

be used in lieu of \"Preservation Project

Rent\" (PPR). The PPI is the amount of

income the LEC needs to fund all approved

assistance. The PPI may not exceed the

Federal Cost Limit (FCL). The PPI will

not include income unique to a LEC such

as membership fees. Further, it may not

be used to pay expenses unique to a LEC

such as the repurchase of memberships.

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3/94 9-52

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4350.6-CHG.3

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8\. \"Gross Income Potential\" (GIP) will be

used in lieu of \"Gross Rent Potential\"

(GRP). It will include member carrying

charges and all other project income

including the rental payments from

non-members. The GIP may not include income

nor be used to pay expenses unique to a

LEC, such as repurchasing of memberships.

9\. Increases in PPI will be calculated via

an Operating Cost Adjustment Factor

(OCAF) in the same manner as described in

Paragraph 11-7.

9-26. Components of a Resident Homeownership Program

which are relevant to LECs pursuant to Paragraphs

9-12 and 9-13, must be submitted as part of the

LEP. The following list identifies exceptions and

requirements for LECs.

A. The following terms will be used for LECs in

lieu of those used for other Resident

Homeownership Programs:

1\. The term \"member\" will be used in lieu of

\"homeowner.\"

2\. The term \"occupancy agreement\" will be

used in lieu of \"lease.\"

3\. The term \"membership fee\" will be used in

lieu of \"downpayment.\"

B. Section 8 subsidies are available for LECs.

Therefore, TMP will be set in accordance with

Paragraph 8-18.A.6. Phase-in of TMP will be

done in accordance with Paragraphs

8-18.A.7. and A.8.

C. The units in a LEC project are not sold.

Instead, \"memberships\" are sold for an amount

which represents the purchase price. The

amount of the membership fee is established in

accordance with Paragraph 9-27 for initial

members and Paragraph 9-30 for subsequent

members.

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3/94 9-53

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4350.6-CHG.3

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D. Memberships.

1\. There is no requirement that all

memberships be sold within any specific

timeframe. However, the LEP should

specify a period of time in which all

initial sales are anticipated to be

complete.

2\. The requirements for proportionality of

initial members, established in Paragraph

9-12.E., are applicable to members of

LECs.

3\. Current tenants who are prospective

members but can not pay the membership

fee in cash, may pay it in a variety of

ways, such as through loans and/or by

assigning a portion of their security

deposits, subject to State and local law.

If the RC makes the loan for the

downpayment, a non-amortizing promissory

note specifying the requirements

contained in Paragraph 9-27 should be

signed by the prospective member.

4\. All prospective members must sign a

Subscription Agreement or similar

document in accordance with State and

local law.

5\. The tenant income profile requirements

established in Paragraph 8-18.A.3. is

applicable for all initial and subsequent

members.

E. The LEC holds title to the property and

executes the mortgage. The individual member

does not sign a note nor mortgage and does not

have a personal obligation thereunder.

Therefore, individual financing is not

necessary for members of a LEC.

F. (Reserved)

G. The transfer value of memberships is

established in Paragraph 9-29 and the equity

limitation requirements specified therein

apply to members of LECs.

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3/94 9-54

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4350.6-CHG.3

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H. A LEC must specify in its By-Laws whether it

will purchase memberships and resell them. A

suggested method for handling this is

described in Paragraph 9-28.

I. It is advisable that the LEC establish a

Cooperative Reserve account to which it will

deposit all membership fees and credit any

interest or equity accrued. This account

should be used to accrue enough funds to allow

the LEC to purchase and resell memberships.

J. The LEC occupancy agreement must restrict the

ability of members to rent, lease, or sublet

their units without written permission of the

Board of Directors.

K. A four-year cash flow analysis must be

submitted instead of a three-year analysis as

required for rental projects. If a

Cooperative Account has been established in

accordance with Paragraph I, the LEC must

include a four year projection of income and

expenses for the account.

L. All considerations of Paragraph 9-13.C. for

nonpurchasing tenants apply, including

provision for payment of relocation expenses.

M. All requirements of Paragraph 9-12.E. for

tenant selection and tenant profiles are

applicable.

N. All State and local laws regarding LECs are

applicable, except those which have been

preempted by HUD.

O. Copies of all forms, guidelines, worksheets,

and contracts developed to implement the LEC

Program and all other documents required to

justify elements of the LEP.

9-27. Membership Fees from Initial Members will be

required in order to obtain a commitment from

tenants to participate in the LEC.

A. The amount of the membership fees will be set

in accordance with the approved budget for the

Cooperative Reserve Account and the need to

identify sufficient numbers of residents who

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9-55 3/94

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4350.6-CHG.3

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will become members of the LEC. The following

guidelines apply:

1\. The minimum membership fees will be

allocated to unit size and type in

proportion to the FMR for the unit.

2\. The LEP must specify how membership fees

will be established. They should be high

enough to show tenant commitment to

purchase the membership and low enough to

allow all interested members to purchase

memberships. For instance, the

membership fees for individual units may

be set so that each member pays a minimum

of the higher of 25 percent of FMR or 60

percent of Adjusted Monthly Income (AMI).

However, no LEC should set the membership

fee for any unit lower than the amount of

the earnest money deposit required by

Paragraph 7-7.C.2. The RC, at its

option, may also set membership fee and

closing cost guidelines for subsequent

purchasers.

B. Method of Payment. Where the membership fee

is paid through a loan from the LEC, the LEC

must establish guidelines to determine how a

prospective member will pay its membership

fee. This method must be clearly specified in

the Subscription Agreement. The following

method is recommended:

1\. The prospective member\'s existing

security deposit minus any charges

against it should be assigned to the

membership fee if permitted by State and

local law.

2\. It is generally desirable that no more

than half the membership fee be financed

by the LEC. The prospective member may

pay the financed portion of the

membership fee in installments.

3\. The prospective member remains a tenant

throughout the period when the membership

fee is being paid. It becomes a member

at whatever time the total membership fee

has been paid.

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3/94 9-56

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4350.6-CHG.3

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9-28. Resale of Memberships. The LEP must specify

whether the LEC will purchase all memberships sold

by members and resell them to new members. If this

option is chosen, it is recommended that the LEC

purchase all memberships for its Transfer Value, as

determined in Paragraph 9-29. The LEC would then

either resell the units using Transfer Value as the

required membership fee or another method, approved

with the LEP, to determine the membership fee. If

the LEC resells the membership for less than its

Transfer Value (or the purchase price), then the

residual equity must accrue to the LEC. The

appreciation will be credited to the Cooperative

Reserve Account. Membership fees for subsequent

members would be financed in accordance with

Paragraph 9-30.

9-29. Transfer Value is the amount of equity a member has

accrued as its share of the cooperative.

Memberships may be sold at no more than the

transfer value which will be calculated as the sum

of:

A. The membership fee paid by the initial member;

B. The value of any improvements installed at the

family\'s expense during its tenure as owner.

The LEC will make this determination using

documentation of the amounts the family spent

on the improvements, including records that

reflect the cost of materials and labor, and

estimates of the value the improvement added

to the unit;

C. The amount of amortized principal paid by the

selling member in the following manner:

1\. The unit\'s proportionate share of the

project mortgage payment will be

determined by the same ratio method as

the Section 8 Contract Payment is

determined. An amortization schedule

based on the proportionate share will be

established;

2\. First, each member\'s TMP will be used to

pay for member-paid utilities to the

extent of the utility allowance. Then,

the remainder of the payment will be

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9-57 3/94

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4350.6-CHG.3

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credited to the amortized interest and

principal, in that order, regardless of

whether or not the member receives

Section 8 subsidy.

3\. Examples: The amortization schedule for

a specific month shows the amortized

principal payment as \$50 and interest as

\$150. The utility allowance for the unit

is \$45 for a total of \$245. Under the

Section 8 formula:

a\. Member A has a TMP of \$250. \$45 is

applied to the utility allowance and

\$150 is applied to interest. \$50 is

credited toward the principal

payment. The remaining \$5 is

credited toward the carrying charge.

b\. Member B has a TMP of \$200. \$195 is

applied to the utility allowance and

interest payment and \$5 is credited

toward the principal payment.

c\. Other members have TMPs of \$195 or

below. The first \$45 for each

member is to the utility allowance.

The remainder is paid as interest.

Nothing is credited to the principal

payment; and

D. If approved as part of the LEP, an amount

corresponding to the appreciated value,

determined by applying the Consumer Price

Index (urban consumers) to the contribution to

equity under Paragraphs A, B and C. Be

certain the Consumer Price Index, for any

year, is only applied to the portion of equity

already established in that year.

9-30. Subsequent Members Payment of Membership Fees. The

LEC should indicate in the LEP how membership fees

will be assessed for subsequent members. The

Subscription Agreement must clearly specify the

method for determining the amount and payment

schedule of the membership fee. Following is one

possible method the LEC may use to assess

membership fees:

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3/94 9-58

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4350.6-CHG.3

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A. Require a subsequent member to pay cash or

finance up to three months of TMP (90 percent

of AMI) prior to becoming a member.

B. Require the member to initially pay a minimum

of five percent of its AMI toward the

membership fee, or more if the member chooses.

C. The remainder of the membership fee, if any,

would be made in monthly payments of a maximum

of five percent of AMI.

D. As the membership fee is paid, it will be used

as the beginning equity for the subsequent

member with additional amortized principal

added, as in Paragraph 9-29.C., to determine

such member\'s Transfer Value upon sale of its

membership.

9-31. Final Actions and Implementation of a LEP. LECs

are subject to all of the provisions of Chapter 8,

Sections F and G for the determination of final

actions and the implementation of a LEP.

9-32. Other Requirements. The Loan Management staff must

review the LEC\'s compliance with any sales phase-in

schedule established in the LEP. The Relocation

staff in the Office of Community Planning and

Development (CPD) is responsible for monitoring

compliance with certain tenant assistance,

relocation, and real property acquisition

requirements. The Loan Management staff will

consult with the Relocation staff with respect to

technical assistance needs and monitoring to ensure

that there is no duplication of effort.

9-33. Monitoring. A LEC is subject to the housing

standards, audit, and reporting requirements of the

HUD program under which it is insured. Loan

Management staff must follow the guidance in

applicable sections of Chapter 11 when monitoring a

project owned by a LEC in addition to the

applicable portions of Section F of this Chapter.

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9-59 3/94

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4350.6-CHG.3

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Section D. Nonpurchasing Tenants

9-34. Protection of Nonpurchasing Families.

Nonpurchasing families who continue to reside in a

project subject to a Resident Homeownership Program

must be protected as follows:

A. Notification to Tenants by Loan Management

Staff. Upon approval of a bona fide offer

from a Resident Council (RC), the Loan

Management staff must send each tenant in the

project a letter in the form of Appendix 9-5,

Notification to Non-Purchasing Tenants of

Available Protections. The Loan Management

staff also must send this letter to the RC and

owner instructing the owner to post a copy in

the project. The letter advises the tenants

that the owner is transferring the project to

the RC or LEC which will develop a Resident

Homeownership Program. It further advises

tenants of the percentage of the units which

must be transferred to current tenants in

accordance with the RHP, in at least the same

proportions of very low- and low-income as are

currently residing at the project.

B. Displacement prohibited. Tenants residing in

a project may not be displaced (forced to move

permanently) as a result of a Resident

Homeownership Program. The tenants who do not

purchase their units may reside at the project

for as long as they choose. This does not,

however, preclude termination of tenancy for

serious or repeated violation of the terms and

conditions of the lease, violation of

applicable Federal, State or local law, or

other good cause. Displacement of any tenant

in violation of this policy will trigger the

Uniform Relocation Assistance and Real

Property Acquisitions Act of 1970, as amended,

because Federal financial assistance is used

in the project.

C. Section 8 Rental Assistance.

1\. HUD will make Section 8 certificates or

vouchers available to each Section 8

eligible tenant who does not purchase a

unit. Eligible tenants may use the

Section 8 rental assistance to rent its

current unit or a unit elsewhere.

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3/94 9-60

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4350.6-CHG.3

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2\. HUD will provide Section 8 LMSA to the

LEC for each very low- and low-income

tenant living at the project at LEP

approval who does not purchase a

membership.

3\. Federal Preference. The requirement for

giving Federal preference to certain

categories of eligible families does not

apply in the provision of Section 8

rental assistance to protected tenants

living in a project operating under a

Resident Homeownership Program.

D. Rent Increases for Nonpurchasing Tenants.

Total tenant payment (TTP) for tenants living

in the project at RHP approval, who do not

purchase a unit and are ineligible for Section

8 rental assistance under Paragraph 9-34.C.

may be increased to a level consistent with

Paragraph 8-18.A.6. Rent increases must be

phased-in in accordance with Paragraph

8-18.A.7. and form HUD-90010, Owner\'s

Calculation of Tenant Rent Phase-In Due to

Approval of POA. These rent limitations would

continue in effect until the tenant moves.

Therefore, nonpurchasing tenants will receive

the same level of protection against rent

increases as those provided to tenants

residing in a project at POA approval that is

not transferred under a Resident Homeownership

Program.

E. Relocation Assistance. The LEP or RHP must

specify the amount of relocation assistance it

will grant to non-purchasing tenants who move.

At the RC\'s option, this assistance may be up

to 100 percent of relocation costs. The RC or

LEC must inform each tenant who resided in the

project at RHP or LEP submission, how much it,

as owner of the project, will pay for

relocation expenses for any tenant who chooses

to move. This protection does not apply to

new tenants who were told of the Resident

Homeownership or Limited Equity Program. The

RCs and LECs must inform new tenants at the

time they apply for occupancy in the project,

that they will not be eligible for relocation

assistance. The RC or LEC may limit payment

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9-61 3/94

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4350.6-CHG.3

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of moving expenses to the cost of moving a

reasonable distance, based on the availability

of other suitable housing in the area.

Disabilities and other special needs must be

considered when determining if suitable

housing is available. The RC or LEC may

determine payment in either of the following

ways, and must specify the method in the RHP

or LEP.

1\. Payment of Actual Reasonable and Related

Expenses. A tenant who elects to

relocate may receive payment based on

actual moving and related costs for up to

four years after the RC or LEC purchases

the project. The RC or LEC has the

authority to determine which relocation

costs are reasonable and necessary,

including expenses for:

a\. Transportation of the person and

personal property for a reasonable

distance;

b\. Packing, crating, uncrating and

unpacking of the personal property;

c\. Disconnecting, dismantling,

removing, reassembling, and

reinstalling relocated household

appliances, and other personal

property;

d\. Utility hook-ups, including

reinstallation of telephone and

cable television service;

e\. Insurance for the replacement value

of the property in connection with

the move and necessary storage;

f\. Credit checks; and

g\. Other moving-related expenses, as

the RC or LEC determines to be

reasonable and necessary.

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3/94 9-62

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4350.6-CHG.3

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2\. Moving Expense and Dislocation Allowance.

The RC may offer tenants who elect to

relocate a moving expense and dislocation

allowance as an alternative to a payment

for actual reasonable moving and related

expenses described in Paragraph 1 above.

The amount of the allowance will be

determined in accordance with a schedule

of allowances, established by the RC,

which takes into account the number of

rooms in the person\'s present dwelling

unit and whether the person owns and must

move the furniture.

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9-63 3/94

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4350.6-CHG.3

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Section E. Resale of Units

9-35. Restrictions on Resale by Homeowners. A member of

a LEC is bound by the rules restricting the

transfer of membership under the LEC program in

Section C. Homeowners under other types of

homeownership programs may sell their interests in

a unit. The RC may limit the homeowner\'s right by

placing certain restrictions on such a resale. If

the RC imposes resale restrictions, the

restrictions must be specified in the RHP.

A. Permitted Transfers. A homeowner may transfer

its ownership interest in the unit subject to

the right of the RC to purchase the unit in

accordance with the RHP. If the RC exercises

this option:

1\. It must determine the purchase price and

conditions for purchase by the subsequent

purchaser in accordance with the method

established in the RHP and specified in a

firm contract at initial sale between the

RC and the homeowner. The price at which

the RC purchases the unit may never be

less than the amount specified in a firm

contract between the homeowner and a

prospective buyer;

2\. It must resell the unit to an eligible

family within the timeframe established

in the RHP or LEP in accordance with

Paragraph 9-13.M.

B. Execution and Repayment of a Promissory Note.

1\. An initial homeowner is required to

execute a promissory note and mortgage in

accordance with Paragraph 9-36.

2\. A subsequent homeowner may be required to

execute a promissory note and mortgage,

as specified in Paragraph 9-37, if it

purchases the unit during the initial

20-year period of homeownership.

3\. The repayment of the promissory note must

be made in accordance with either

Paragraph 9-36 or 9-37.

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3/94 9-64

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4350.6-CHG.3

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C. Resale restrictions established by the RC

should not jeopardize the operating

feasibility of the project nor unreasonably

restrict the sellers by limiting the pool of

purchasers or the resale prices.

9-36. Initial Homeowner\'s Promissory Note. At closing,

the RC will require the initial homeowner to

execute a nonrecourse promissory note for a term of

20 years with no interest. This promissory note,

made payable to HUD, must equal the difference

between the value of the unit as established in

Paragraph 9-12.A. and the purchase price

established for the purchaser in accordance with

Paragraph 9-12.C. The promissory note will

accompany the mortgage securing the obligation of

the note. When the initial homeowner sells the

unit, whether to the RC or a subsequent homeowner,

it will repay the promissory note to the extent

determined in Paragraphs B.1. and B.2. below. The

initial homeowner will use the net sales proceeds,

calculated in the manner described in Paragraphs

A.1. and A.2. below, to repay the promissory note.

If there are insufficient net sales proceeds to

repay the amount due on the promissory note, the

subsequent purchaser may be required to execute a

promissory note in accordance with Paragraph 9-37.

Any residual proceeds remaining after the amount

due on the promissory note is repaid, will be

handled in accordance with Paragraph C. below.

(PLEASE NOTE: For FHA single-family insurance

purposes, the Department has determined that

LIHPRHA\'s calculation of homeowner\'s equity is

acceptable.)

A. Net Sales Proceeds. The net sales proceeds is

the amount of money available to the homeowner

to repay the promissory note. It is

determined by subtracting from the owner\'s

gross sales proceeds (or the selling price),

the owner\'s retained proceeds calculated in

accordance with Paragraph 1. below.

1\. Initial Homeowner Sells Unit Within First

Six Years. When an initial homeowner

sells its unit during the first six years

after acquisition, it must pay the

amounts computed in accordance with

Paragraphs a. and b. below and may keep

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9-65 3/94

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4350.6-CHG.3

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the owner\'s retained proceeds which the

RC computes in accordance with Paragraph

c\. below. The homeowner must repay the

entire amount of its net sales proceeds

in accordance with Paragraphs B and C

below. To calculate the net sales

proceeds, the RC must subtract from gross

sales proceeds:

a\. Any outstanding debt which was

incurred in connection with the

purchase of the property and which

must be repaid at closing as shown

on Line 101 of Form HUD-1,

Settlement Statement;

b\. Any other costs incurred in

connection with the sale, including

closing costs and transfer taxes,

which must be repaid at closing as

shown on Line 103 of Form HUD-1,

Settlement Statement; and

c\. The homeowner\'s share of the equity,

or retained proceeds, computed as

the sum of the following:

i\. The contribution to equity paid

by the family, if any,

including any down payment and

any amount paid towards

principal on a mortgage loan

during the period of ownership.

This will be calculated as the

original purchase price minus

the outstanding debt;

ii\. The cost of any improvements

installed at the family\'s

expense during its tenure as

owner. The RC will make this

determination using

documentation of the amounts

the family spent on the

improvements, including records

that reflect the cost of

materials and labor. If the

homeowner does not have a

mortgage insured by HUD under

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3/94 9-66

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4350.6-CHG.3

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Section 203 or 234 of the

National Housing Act, the RHP

may specify that the value of

any improvements will be

substituted for cost;

iii\. The lower of the results

obtained in Paragraph (a) or

\(b\) below:

\(a\) The appreciated value,

determined by applying the

Consumer Price Index

(urban consumers) against

the contribution to equity

determined in Paragraphs i

and ii, excluding the

value of any sweat equity

or volunteer labor used to

make improvements to the

unit. (Be certain the CPI

is only applied to the

portion of equity

established in any one

year. That is, if

additional equity is paid

in the form of principal

payments in any one year,

the CPI would be applied

to increasing amounts for

each year).

\(b\) Any limits on equity

appreciation the RC

established in the RHP.

In order to use the RHP to

limit equity at the time

of initial sale, the RC

must have entered into a

written agreement with the

family to limit the amount

of appreciation at the

time of purchase.

2\. Initial Homeowner Sells Unit Between the

Seventh and Twentieth Year. When the

initial homeowner sells its unit seven to

20 years after acquisition, there are no

retained proceeds calculated. The

homeowner must pay the amounts which the

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9-67 3/94

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4350.6-CHG.3

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RC computes in accordance with Paragraphs

1.a. and 1.b. above. The amounts

determined in accordance with Paragraph

1.c. are not applicable. The homeowner

must repay the amount of the net sales

proceeds but no more than the amount

required by the promissory note in

accordance with Paragraph B. below.

3\. Initial Homeowner Sells Unit After the

Twentieth Year. When the initial

homeowner sells its unit after the

twentieth year of acquisition, it must

pay all costs in accordance with

Paragraphs 1 a. and 1 b. above, and may

retain all net sales proceeds.

B. Payment Due Under the Promissory Note. The

homeowner must repay the amount of the net

sales proceeds in the amounts shown below. To

the extent the amount due on the promissory

note exceeds the net sales proceeds, the

subsequent homeowner may be required to sign a

Promissory Note in accordance with Paragraph

9-37.

1\. Initial Homeowner Sells Unit Within First

Six Years. When an initial homeowner

sells its unit during the first six years

after acquisition, the entire amount of

the Promissory Note is due and payable to

HUD.

2\. Initial Homeowner Sells Unit Between

Seventh and Twentieth Year. When an

initial homeowner sells its unit seven to

20 years after acquisition, the amount

payable under the promissory note will be

reduced by 1/168th of the principal

amount for each month before the

subsequent homeowner sells the unit.

That is, for each of the 168 months

remaining in the 14-year period, the

promissory note will be reduced

proportionate to the length of time

before the homeowner sells the unit.

3\. Initial Homeowner Sells Unit After

Twentieth Year. When the initial

homeowner sells its unit after the

twentieth year of ownership, the

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3/94 9-68

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4350.6-CHG.3

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promissory note will have been satisfied,

and no payment is required.

C. Residual Proceeds. If residual proceeds

remain after the amount due under the

promissory note is repaid, it will be

distributed as follows:

1\. Initial Homeowner Sells Unit Within the

First Six Years. All residual proceeds

must be paid to the HOME Investment Trust

Fund in accordance with Paragraph 9-38.A.

The homeowner may not retain any residual

proceeds.

2\. Initial Homeowner Sells Unit Between the

Seventh and Twentieth Year. The initial

homeowner retains all residual proceeds.

D. Examples:

1\. Initial Homeowner Sells Unit Within First

Six Years: Assume the initial homeowner

purchases a unit valued at \$50,000. The

purchase price to the homeowner is

\$25,000. The homeowner, therefore, signs

a \$25,000 promissory note. The homeowner

sells the unit in the fifth year of

homeownership for \$40,000. First, the

owner\'s costs and retained proceeds would

be determined as in Paragraph A.l.a.

through c. and would be subtracted from

the gross sales proceeds to yield net

sales proceeds.

a\. For this example, we will assume

that the amount needed to repay debt

and any closing costs is \$9,000 and

retained proceeds is \$1,000 for a

total of \$10,000. Therefore \$30,000

(\$40,000 - \$10,000) is available to

repay the promissory note.

b\. The homeowner must use the \$30,000

in net sales proceeds to repay the

entire amount of the \$25,000

promissory note to HUD and the

remaining \$5,000 to pay the HOME

Investment Trust Fund. The

subsequent purchaser of the unit

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9-69 3/94

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4350.6-CHG.3

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would not have to sign a promissory

note since the entire promissory

note was repaid.

c\. If the net sales proceeds was under

\$25,000, the initial homeowner would

only repay the amount of the net

sales proceeds and the subsequent

homeowner may be required to sign a

promissory note as described in

Paragraph 9-37.

2\. Initial Homeowner Sells Unit Between

Seventh and Twentieth Year: In the

example in Paragraph 1. above, assume the

homeowner sells the unit at the end of

the 14th year of homeownership. This is

exactly 8 years or 96 months after the

end of the sixth year.

a\. The RC would first determine the

homeowner\'s net sales proceeds as in

Paragraph B.2. above. Using the

same amounts as in the above

example, this amount is \$31,000

(\$1,000 greater than in the example

in Paragraph 1. above, since there

are no retained proceeds).

b\. 96/168 = 57 percent. This

percentage is applied to the amount

of the promissory note to determine

the amount by which it is to be

reduced. \$25,000 x .57 = \$15,750.

\$25,000 - \$15,750 = \$9250.

c\. The homeowner would repay \$9,250

from the net sales proceeds. The

homeowner could retain all remaining

\$21,750 in proceeds and the

subsequent homeowner would not have

to sign a Promissory Note.

d\. If the net sales proceeds was under

\$9,250, the initial homeowner would

only repay that amount and the

subsequent homeowner may be required

to sign a promissory note as

described in Paragraph 9-37.

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3/94 9-70

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4350.6-CHG.3

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E. If the initial homeowner retains ownership for

20 or more years, the entire amount of the

note will be satisfied.

9-37. Subsequent Homeowner\'s Promissory Note.

A. If a subsequent purchase is made during the

20-year period specified in the initial

promissory note, whether from the initial

purchaser or from the RC, a copy of the

appraisal of the unit must be submitted by the

purchaser to the RC, unless the RC contracts

for the appraisal. At closing, the subsequent

purchaser must execute a promissory note under

the conditions specified in Paragraph 1. below

and for the amounts specified in Paragraph 2.

below. The term of the subsequent promissory

note must be for the period remaining on the

original 20-year promissory note. The term on

the subsequent note ends on the date specified

in the original note.

1\. The subsequent purchaser must execute a

promissory note under the following

conditions:

a\. The appraised value of the unit

exceeds the purchase price; and

b\. The initial homeowner did not repay

the total or discounted amount due

on the promissory note.

2\. The promissory note signed by the

subsequent purchaser will be for the

lower of:

a\. The outstanding balance, if any, on

the original or discounted

promissory note; or

b\. The difference between the appraised

value of the unit and the purchase

price at the time the subsequent

homeowner purchases the unit.

B. When a subsequent homeowner sells its unit in

less than 20 years from the date of the

initial purchase, the RC will calculate the

owner\'s net sales proceeds in the same manner

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9-71 3/94

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4350.6-CHG.3

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as for the initial homeowner, in accordance

with:

1\. Paragraph 9-36.A.1., if the subsequent

homeowner sells the unit within the first

six years after the initial homeowner

purchased the unit; or

2\. Paragraph 9-36.A.2., if the subsequent

homeowner sells the unit between the

seventh and twentieth year after the

initial homeowner purchased the unit.

Please note that the date on which the

subsequent homeowner purchased the unit

is not relevant to this calculation.

C. When a subsequent homeowner sells its unit in

less than twenty years from the date of the

initial purchase, the amount due on the

promissory note will be calculated as follows:

1\. If the subsequent homeowner

purchased the unit within six years

after the initial homeowner

purchased it, the amount due on the

promissory note and the distribution

of residual proceeds will be

calculated in the same manner as for

the initial homeowner, in accordance

with:

a\. Paragraph 9-36.B.1. and C.1.,

if the subsequent homeowner

sold the unit within six years

after the initial homeowner

purchased the unit; or

b\. Paragraph 9-36.B.2. and C.2.,

if the subsequent homeowner

sold the unit between seven and

twenty years after the initial

homeowner purchased it.

2\. If the subsequent homeowner

purchased the unit between the

seventh and twentieth year after the

initial homeowner purchased it, the

amount due will be calculated in

accordance with Paragraph 9-36.B.,

except that the RC will reduce the

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3/94 9-72

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4350.6-CHG.3

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amount payable on the subsequent

promissory note by a percentage of

the principal amount of the

subsequent promissory note for each

full month of homeownership by the

subsequent homeowner. The RC will

compute the percentage to be

discounted by determining the

proportion of the term of the

subsequent promissory note that the

subsequent homeowner has owned the

property. The subsequent homeowner

may retain any residual proceeds not

payable to HUD under the promissory

note.

D. A similar process will be used for all

subsequent purchases until:

1\. The initial 20-year period has expired;

2\. The total amount due on the promissory

note has been paid; or

3\. A subsequent homeowner purchases the unit

for its full appraised value.

E. Examples:

1\. Subsequent Homeowner Does Not Sign a

Promissory Note. If the conditions

described in Paragraph a. or b. below are

applicable, the subsequent homeowner and

all additional subsequent homeowners of

the unit, need not sign a Promissory

Note.

a\. In the examples given in Paragraphs

9-36.D.1.a. and b. and 9-36.D.2.a.,

b., and c., the subsequent homeowner

would not sign a promissory note

because either the total promissory

note or the amount due on the

discounted promissory note was

repaid.

b\. In the examples given in Paragraphs

9-36.D.1.c. and 9-36.D.2.d., if the

unit is appraised for \$40,000 at the

time of sale, even though the

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9-73 3/94

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4350.6-CHG.3

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initial homeowner did not repay the

total amount due on the promissory

note, the subsequent homeowner need

not sign a promissory note. This is

because the subsequent homeowner

purchased the unit for its full

appraised value.

2\. Subsequent homeowner purchases unit in

first six years after the original

promissory note was signed and signs a

promissory note. Assume that the unit

sold at the end of the fifth year after

purchase in accordance with Paragraph

9-36.D.1., has a purchase price of \$27,000,

and the owner\'s costs at closing plus the

retained proceeds are \$15,000. Therefore

only \$12,000 (\$27,000 - \$15,000) in net

sales proceeds will be used to repay the

\$25,000 promissory note and \$13,000

remains due on the Promissory Note. We

also will assume that the appraised value

of the unit has decreased from \$40,000 to

\$38,000. The appraised value is

therefore \$11,000 greater than the

purchase price.

a\. The subsequent homeowner must

therefore sign a promissory note for

\$11,000 (the difference between the

unit value and the purchase price)

because this is lower than the

\$13,000 remaining on the initial

homeowner\'s promissory note. The

term of the promissory note is the

15 years remaining on the original

promissory note.

b\. If the purchaser sells the unit

within one year (within six years

from the date of the initial

purchase), the full amount of the

promissory note must be repaid if

sufficient funds remain in the net

sales proceeds. If any additional

residual proceeds remain, it must be

paid to the HOME Investment Trust

Fund.

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3/94 9-74

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4350.6-CHG.3

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c\. If the unit is sold at any time

between the seventh and twentieth

year after the initial promissory

note was signed, the amount due

under the subsequent promissory note

is reduced in accordance with

Paragraph C.1.b. above. Any

residual proceeds may be retained by

the homeowner.

d\. No amount is due if any conditions

specified in Paragraph D. above are

operative.

3\. Subsequent Homeowner Purchases Unit

Between the Seventh and Twentieth Year

after Initial Promissory Note was Signed

and Signs a Promissory Note.

a\. Assume the initial homeowner who

sold the unit in Paragraph 2. above

for \$27,000 (it appraised at

\$38,000) sold the unit to the

subsequent purchaser eight years

after the initial purchase.

i\. The homeowner\'s original

\$25,000 promissory note is

reduced by 24/168 (14 percent)

or 1/168 for each month past 6

years. \$25,000 x 14 percent =

\$3500. \$25,000-\$3500 =

\$21,500. \$21,500 is due on the

Promissory Note. However, the

net sales proceeds only total

\$12,000. Therefore, the

initial homeowner pays \$12,000

of the \$21,500 remaining due.

ii\. The subsequent homeowner signs

a promissory note for \$9500

(\$21,500 - \$12,000) because it

is lower than the \$11,000

difference between the purchase

price and the appraised value.

The promissory note is for the

12 years or 144 months

remaining on the original

20-year promissory note.

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9-75 3/94

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4350.6-CHG.3

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b\. The subsequent homeowner sells the

unit to a second subsequent

homeowner at the end of the 18th

year. The value of the unit is

\$60,000 and the purchase price is

\$40,000 with \$18,000 calculated as

costs to be paid at closing, leaving

\$22,000 in net sales proceeds, in

accordance with Paragraph 9-36.A.2.

c\. Since the subsequent homeowner owned

the unit for 10 years or 120 months,

the \$9,500 promissory note would be

reduced by 120/144 = 83 percent of

its original amount. The amount due

is therefore reduced by \$9500 x .83

= \$7885 and \$9500 - \$7885 = \$1615

remains due. The homeowner repays

\$1615 from the \$22,000 net sales

proceeds and keeps the \$20,385

remaining.

d\. In this case, the second subsequent

homeowner need not sign a promissory

note even though it purchased the

unit for less than its appraised

value. This is because the

discounted promissory note has been

completely repaid.

F. Resident Council Purchases and Sells the Unit.

When a homeowner sells the unit to the RC and the

RC sells the unit to a subsequent homeowner, the

purchase price to the RC and to the subsequent

homeowner may differ. In these cases:

1\. The net sales proceeds, amount paid on

the promissory note by the selling

homeowner, and residual proceeds will be

calculated based on the purchase price to

the RC.

2\. The amount of the promissory note for the

purchasing homeowner will be the lower of

the amount remaining due on the

promissory note of the selling homeowner

or the difference between the Purchase

price to the purchasing homeowner and the

appraised value of the unit.

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3/94 9-76

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4350.6-CHG.3

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3\. No promissory note will be signed if one

of the conditions specified in Paragraph

D. above are met.

9-38. Payment of Residual Proceeds.

A. Any residual proceeds remaining after the

homeowner pays the promissory note to HUD

(within six-years of initial purchase) must be

paid to the HOME Investment Trust Fund for the

unit of general local government in which the

project is located. If the project is located

in a unit of general local government that is

not a participating jurisdiction, then the

residual proceeds must be paid to the HOME

Investment Trust Fund for the State in which

the project is located.

B. With respect to any proceeds transferred to a

HOME Investment Trust Fund under this

Paragraph, HUD must ensure that the proceeds

are immediately available for eligible

activities to expand the supply of affordable

housing under the HOME Program. These

activities may include funding of activities

under the Resident Homeownership Program.

Loan Management staff will monitor the

payments made to the HOME Investment Trust

Fund for each State and unit of local

government and will require units of

government to maintain any records necessary

to calculate accurate payments due under this

Paragraph.

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9-77 3/94

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4350.6-CHG.3

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Section F. Monitoring

9-39. Housing Standards: Inspections.

A. Until the Resident Council (RC) has

transferred all units or shares in the project

(other than those occupied by nonpurchasing

current tenants) to the initial purchasers or

members, the Loan Management staff must

monitor the project to ensure that it is being

maintained in accordance with the housing

standards set forth in Paragraph 11-9.

B. Loan Management staff must inspect the project

at least annually in order to determine

compliance with the Housing Standards.

9-40. Section 8 Rental Assistance. Loan Management staff

has the responsibility to continue monitoring

existing Section 8 Housing Assistance Payment

contracts.

9-41. Promissory Note. The RC must keep, and make

available to HUD, all records and source documents

necessary to calculate that the payments due HUD

are accurate.

9-42. Audits.

A. Each RC will be subject to HUD audit

requirements in accordance with Part 45 and

must submit an annual audit to HUD in the form

prescribed by the Department in HUD Handbook

2000.4, Investigator General Audit Handbook.

The RC must keep records that are necessary to

fully disclose the amount and disposition of

the proceeds from assistance it receives from

HUD. This record keeping requirement includes

information about:

1\. Any proceeds from sales to eligible

families and/or from recaptured funds;

2\. The total cost of the Resident

Homeownership Program for which such

assistance is given or used;

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3/94 9-78

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4350.6-CHG.3

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3\. The amount and nature of that portion of

funds for the Resident Homeownership

Program supplied by other sources;

4\. Compliance with all financial

requirements of the grant agreement and

the approved Resident Homeownership Plan

(RHP) to confirm that the requirements

have been met;

5\. Any other aspects of the financial

assistance received that would facilitate

an effective audit; and

6\. The income and expense amounts for the

rental and the Resident Homeownership

components of the project in each year.

Such rental and homeownership accounts

must be maintained in separate and

distinct accounts.

B. For the purpose of an audit and examination of

records:

1\. HUD or its authorized representative will

have access to any books, documents,

papers, and records of the RC that are

pertinent to the assistance it receives

under the Resident Homeownership Program;

and

2\. The Comptroller General of the United

States, or any of its authorized

representatives, will also have access to

any books, documents, papers, and records

of the Resident Council that are

pertinent to the assistance it receives

under this program.

9-43. Reports. The RC must submit reports to HUD to

demonstrate continued compliance with the

requirements of the Resident Homeownership Program.

The RC may use forms from the existing HUD programs

for these reporting requirements. However, if such

HUD forms do not exist because the RC has unique

requirements, then the RC will describe the method

of reporting it intends to use and will develop and

provide samples of such forms. Loan Management

staff will review reports submitted to determine

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9-79 3/94

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44350.6-CHG.3

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compliance with the approved RHP or LEP. The areas

of the Resident Homeownership Program that require

reports are:

A. Annual compliance with proportionality during

the initial sales which end in four years;

B. Annual status of Section 8 eligible tenants;

C. Annual report on training and technical

assistance provided to homeowners;

D. Annual reports on the extent of participation

of minorities and women in the program (e.g.

homeownership, employment opportunities,

etc.);

E. Annual review of the operating budget,

separated into homeownership and rental

components, where applicable;

F. Semi-annual report on vacancies;

G. Semi-annual report survey of non-purchasing

tenants;

H. Semi-annual status of rehabilitation

activities;

I. Quarterly review of grant expenditures for the

term of the grant;

J. Monthly status of resales;

K. Monthly status of relocation activities, while

applicable;

L. Monthly status of sales activity until all

units have been initially sold;

M. Changes in closing costs as needed;

N. All records necessary to accurately calculate

payments due HUD pursuant to repayment of the

Promissory Note;

O. All records necessary to accurately calculate

payments due the HOME Investment Trust Fund in

repayment of homeowners\' residual proceeds;

and

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3/94 9-80

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4350.6-CHG.3

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P. Documentation that the amount turned over to

HUD or the Home Investment Trust Fund are the

amounts required; and

Q. Any other reports that Loan Management Branch

or the RC determine necessary to demonstrate

compliance with the Grant Agreement and RHP.

9-44. Tenant Selection Procedures. Tenant selection

during the period when units are being sold or for

units which are not sold must follow approved

tenant selection procedures in accordance with the

RHP or LEP. Loan Management staff should monitor

this in accordance with HUD 4350.6.

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9-81 3/94