CHAPTER 7. PROJECTS IN OLDER, DECLINING URBAN AREAS

7-1. DETERMINATION OF OLDER, DECLINING URBAN AREAS. On all

multifamily applications under Section 223(f) the Chief,

Real Estate and Valuation/Chief Appraiser, shall determine

whether the project is in an older, declining urban area.

In making this determination, the following criteria shall

be considered:

a\. Population Density. The resident population density

in the area and the proximity of the project to

commercial and industrial buildings;

b\. Age of Buildings. The age of residential and

commercial buildings in the area;

c\. Changes in Values. The changes in the past five

years in value of properties in the area where the

subject project is located in comparison to changes

in value of properties in other parts of the city or

community;

d\. Percentage of Old Buildings. The location of the

project in a neighborhood which is comprised

predominantly (50% or more) of dwellings built prior

to 1940; and

e\. Excessive Decline. If the neighborhood where the

project is located has declined to the extent that

the appraiser would normally recommend insurance

under Section 223(e), the project must be considered

infeasible.

7-2. PROJECTS BEING SOLD. Where the mortgage is being obtained

to finance a purchase and the project is located in an

older, declining area, there is no change from the

valuation principles and procedures and other standards

contained in Chapters 1 through 6 of this Handbook.

7-3. PROJECTS BEING REFINANCED. Projects in an older,

declining area which are being refinanced are subject to

the valuation principles and procedures and other

standards contained in Chapters 1-6 of this Handbook as

well as the following additional provisions:

a\. Lowering the Debt Service. Refinancing may not be

used to lower the debt service except as necessary to

assure the economic viability of the project. (See

paragraph 7-4.)

b\. Rental Increases. During the mortgage term, no

rental increases shall be made except those which are

necessary to offset actual and reasonable operating

expense increases or other necessary expense

increases approved by the Assistant Secretary for

Housing Management. (See paragraph 7-5.)

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7-4. LIMITATION ON LOWERING DEBT SERVICE. To prevent lowering

the debt service an unreasonable amount in the case of

refinancing transactions in older, declining urban areas,

the mortgage credit examiner will take the following

actions:

a\. Maximum Mortgage Amount for Maximum Term. First,

using the maximum mortgage term for subject project

(limited to 35 years, or three-fourths of the

estimated remaining economic life) the mortgage

credit examiner determines the mortgage amount which

may be insured in the refinancing transaction in

accord with Chapter 6 of this Handbook.

b\. Finding Debt Service As a Percentage of Net Income.

The examiner computes the annual payment to debt

service (interest, principal and MIP) for the maximum

mortgage amount and term referred to in 7-4a above.

This debt service is divided by the Annual Net Income

to Project (from Line F-34 of Form 2264) to show debt

service as a percentage of net income.

c\. Reduction of Mortgage Term. If debt service is 65%

of net income or a higher percentage, no further

action is necessary; the mortgage amount and term

referred to in paragraph 7-4a are used in the

commitment. If debt service is less than 65% of net

income at the term referred to in 7-4a, the mortgage

term shall be reduced to such shorter term as will

have a debt service equal to or slightly exceeding

65% of net income, and the larger debt service and

shorter mortgage term shall be used in the

commitment. The shorter term is determined as in the

following example. Assume that a ten year old

project to be refinanced is located in a declining

urban area; and that processing reveals that net

income is \$11,000 and that the mortgage amount will

be \$68,000. The maximum mortgage term is 25 years,

based on an estimated remaining economic life of 34

years. Debt service at 8-1/2% interest rate for 25

years on the \$68,000 mortgage would be \$6,910.65.

Test the need for a shorter term and determine the

length of that term by the following steps:

\(1\) Determine 65% of the net income by multiplying

\$11,000 x .65 = \$7,150. Compare the result,

\$7,150, with debt service on the mortgage

(\$68,000) for 25 years at 8-l/2% (\$6,910.65).

Since 65% of net income (\$7,150) is larger than

debt service at the maximum term (\$6,910.65),

this indicates a need for a shorter mortgage

term.

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\(2\) Determine the approximate debt service rate for

this shorter term by dividing 65% of net income

(\$7,150) by the mortgage amount (\$68,000).

\$7,150/\$68,000 = .105147 or 10.5147%

\(3\) Use the debt service tables in Exhibit 8 to find

the mortgage term which has a debt service rate

equal to, or slightly more than, the debt

service rate derived from 65% of net income in

step 2 (10.514%). The debt service rates at

8.5% interest for 24 years (10.29%) and 23 years

(10.42%) are too small; but the debt service

rate for 22 years (10.57% slightly exceeds the

rate from step 2 (10.5147%). The reduced term

is thus found to be 22 years. The reduced term

of 22 years and its debt service are used in the

firm commitment.

7-5. LIMITATION OF RENTAL INCREASES. For projects being

refinanced in an older, declining urban area, rent

increases during the mortgage term shall be limited to

those necessary to offset operating expense increases, or

other necessary expense increases approved by the

Assistant Secretary for Housing Management. This is done

by omitting the override of .5% from Lines 6a and 6b of

the Rent Formula For Existing Rental Housing Under Section

223(f). As time passes, increases may be made in Line 14

of the Rent Formula, only in amounts commensurate with the

increase in total annual expense and ground rent

applicable to living units, shown in Line 8 of the Rent

Formula. If the term of the mortgage is reduced under the

provisions of paragraph 7-4 above, the Rent Formula must

be recomputed, using the debt service rate applicable to

the reduced mortgage term (without the over-ride) in Line

6a of the Rent Formula.

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