U.S. Department of Housing and Urban Development

H O U S I N G

Notice H 96-63 (HUD)

Special Attention of:

Directors of Housing;

Directors of Multifamily Housing;

Asset Management Chiefs; Issued: July 29, 1996

Production Chiefs; Expires: July 31, 1997

Mortgage Credit Examiners;

Cost Analysts and Valuation Cross References:

Processors

Subject: Nonprofit Services and Fees in New Construction and

Substantial Rehabilitation Projects Financed with Multifamily

Mortgage Insurance

The Department has changed the way we deal with nonprofit

mortgagors of insured projects. For years we talked about a business

relationship in which we expected the nonprofit to act independently of

HUD while we dictated everything they did, thereby, depriving them of a

sense of independence. Therefore, for all future nonprofit mortgagors

doing business with the Department and those nonprofit entities

currently doing business with the Department and wishing to convert to

the new way of doing things, we offer the following policy changes.

I. Nonprofit mortgagors are allowed to use the lump sum

construction contract when no identity of interest exists with

the general contractor. Note that the competitive bid process

is not required. This will free the nonidentity interest

contractor from the cost certification audit burdens of a cost

plus contract. It is our hope that new general contractors

will be encouraged to bid on affordable housing projects. In

turn, the increased competition and reduced reporting burdens

should over time lead to reduced construction costs.

II\. HUD will no longer include in the estimated replacement cost

of a project:

A. An Allowance to Make Nonprofit Projects Operational,

AMPO, and

B. An amount for Housing Consultant services.

III\. HUD will include in the estimated replacement cost of a

project a nonprofit developer\'s fee. This fee is in addition

to the legal, organizational and audit fees normally included

in the estimated replacement cost of a project.

HMDE1: Distribution: W-3-1,R-1,R-3-1(H)(RC),R-3-2,R-3-3,R-6,R-6-2,R-7,

R-7-2,R-8

A. The fee will be based on a sliding scale.

1\. Eight percent of the mortgage, but not less than

\$40,000 nor more than \$400,000.

2\. Exceptions.

a\. For mortgages in excess of \$5,000,000 increase

the maximum fee to provide an additional 2

percent based on that portion of the mortgage

that is in excess of \$5,000,000.

b\. At the option of the nonprofit

sponsor/mortgagor, the fee included in the

replacement cost may be reduced.

B. Part or all of the fee may be used to pay for

transactional costs associated with developing the

subject project including but not limited to:

o Reduction of the estimated closing costs of the

project;

o Staff salaries;

o Nonprofit working capital deposit;

o Relocation expenses;

o Operating deficit escrow;

o Financing fees over and above the 3.5 percent

included in the estimated replacement cost of the

project;

o Environmental studies; and

o Housing Consultant services provided by either in-

house staff or contractor.

C. Funds not used to meet the estimated cash requirements of

the project will be released to the nonprofit based on a

percentage of completion method.

IV\. Housing Consultant. HUD will no longer review and approve

housing consultant contracts nor set compensation limits.

A. Selection of a housing consultant(s) is the

responsibility of the nonprofit sponsor/mortgagor.

B. A housing consultant is not required for participation in

HUD programs. The nonprofit sponsor/mortgagor may

perform these services with in-house staff.

C. Where a housing consultant is used, its efforts must be

directed exclusively toward serving the nonprofit sponsor

and the tenants. The consultant certifies on Form HUD-

92531 that no payment has been or will be received either

in the form of stock, options to buy stock, or

compensatory professional

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or financial services from any parties to the

transaction. The prohibited identity of interest will

include, but not be limited to the seller of the land,

attorney, architect, mortgagee, surety, title company,

general contractor, and any subcontractor or materialman

other than the consultant\'s fee specified in the contract

with the nonprofit sponsor.

1\. The certification assures the complete independence

of the consultant and precludes any other party,

including the builder, the architect, and the

mortgagee from receiving payment for consultant

services.

2\. Exception to this requirement may be granted at the

discretion of the Director of Multifamily Housing

in the case of management services and legal

services actually performed where:

a\. The consultant is highly qualified in the area

of management or law; and

b\. A benefit will accrue to the project through

increased efficiency and/or lower costs.

D. No individual or entity having an identity of interest

with the sponsor/mortgagor may earn a fee beyond their

normal compensation for providing services that would

otherwise be provided on a fee basis by a housing

consultant (for example, an Executive Director or other

employee of the sponsor/mortgagor)

E. We will only look at the required Form HUD-2530, Previous

Participation and the housing consultant\'s resume as part

of our determination of eligibility of the nonprofit

sponsor. Mortgage Credit will review the Form HUD-2530

and resume:

1\. Initiate the Form HUD-2530 review process and a

credit investigation on the consultant.

a\. Order a credit report on the consultant.

b\. Consider the Field Office\'s working experience

with a potential consultant;

c\. Review the:

\(1\) Qualifications and suitability of any

proposed housing consultant.

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\(2\) Quality and the adequacy of the proposed

services.

d\. Determine if:

\(1\) Conflicts of interest or identities of

interest exist.

\(2\) Services proposed are sufficient to

permit development, completion and

successful operation of the project.

2\. Make recommendations to the nonprofit

sponsor/mortgagor on the strengths and weakness of

this development team member.

F. Suggest to the nonprofit sponsor/mortgagor to release the

funds using the following schedule:

1\. At Initial Endorsement - up to 50 percent of the

consultant\'s fee.

2\. During the construction period - up to 65 percent

less any previous payments. This represents an

additional 15 percent to be paid during the

construction period.

3\. At Final Endorsement - up to 85 percent less any

previous payments.

4\. One year after final endorsement release the

remaining balance if the project is not having any

financial difficulties.

V. At initial endorsement, the nonprofit mortgagor must post a 2

percent nonprofit working capital deposit, which should be

funded from the nonprofit developer\'s fee.

A. Purpose of the deposit is to:

1\. Defray cost of initial marketing and rent-up. This

includes: sales and advertising, model furnishing,

and equipment and supplies essential to initial

rent-up, etc.

2\. Set up accruals for items due during the first

operating year that project income is not expected

to cover, including real estate taxes, permanent

property insurance premiums, mortgage insurance

premium, ground rents and assessments.

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3\. Cover shortfalls in interest, taxes, property

insurance premiums, mortgage insurance premiums,

ground rents and assessments during construction

after funds available under the Building Loan

Agreement are exhausted.

B. The mortgagee will hold these funds but release of said

funds will be under the Department\'s control.

C. Any remaining funds will not be released upon completion

of the project but will be held for future project needs.

VI\. At cost certification, recognize the nonprofit developer\'s fee

included in firm commitment processing as an allowance.

VII\. The nonprofit mortgagor will be permitted a 6 percent return

on its initial equity as computed on Form HUD-2580, Maximum

Insurable Mortgage.

A. It is determined as follows:

1\. New Construction: Line 6, Form FHA-2580, minus

finally endorsed mortgage determined in line 10 of

the Form.

2\. Rehabilitation - Property Owned: Reduce the sum of

line 4, Form FHA-2580, plus HUD\'s estimate of the

\"as is value\" of the existing land and improvements

before rehabilitation, by the finally endorsed

mortgage determined in line 10 of the Form.

3\. Rehabilitation - Property Acquired: Reduce the sum

of line 4, Form FHA-2580, plus the lesser of HUD\'s

estimate of the \"as is value,\" of the existing land

and improvements before rehabilitation or the

acquisition cost of the property, by the finally

endorsed mortgage determined in line 10 of the

Form.

4\. Rehabilitation under Sections 220 and 221(d): Use

the New Construction formula in 1. above.

B. The base equity computed in A. above may be increased by:

1\. The cost of furnishings, equipment or other

betterments essential to the operation of the

project.

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2\. The nonprofit developer\'s fee used to reduce the

estimated closing costs of the project.

3\. Grants from national, regional and local community

service organizations (nongovernment source) ,

e.g., Ford Foundation, Rockefeller Foundation, etc.

4\. Sponsor\'s cash contribution for the cost of land

over and above what HUD has allowed.

C. Modify the Regulatory Agreement to require the return on

equity be used for:

1\. Continued affordable housing initiatives or;

2\. Pledged to the repayment of surplus cash or

residual receipts notes given in favor of secondary

financing permitted in Section VIII below.

D. Asset Management will monitor the nonprofit mortgagors to

be certain that the return on equity is used only for

permissible purposes.

E. The return on equity is paid from surplus cash/residual

receipts. Any shortfall in return may be made up from

surplus project funds in future years.

VIII.Secondary financing from either: Federal, State or local

governmental entities; or national, regional or local

nonprofit foundations; or for-profit entities may be secured

by a lien against the mortgaged property.

A. Mortgagee consent must be secured for inferior liens

given in favor of national, regional or local nonprofit

foundations; or for-profit entities.

B. The amount of the liens and the mortgage may exceed the

estimated replacement cost of the project but cannot

exceed the total cost of developing the project.

Therefore, require the nonprofit sponsor/mortgagor to

submit a detailed sources and uses statement on the

proposed project.

C. The repayment of said lien is limited to the 6 percent

return on equity and 50 percent of the annual residual

receipts once all escrows and reserves are fully funded.

D. No default under the second mortgage is declared without

HUD\'s approval.

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E. HUD\'s approval of a Transfer of Physical Assets (TPA)

constitutes approval of the TPA by the second mortgage

holder.

F. Apply all other requirements detailed in Chapter 16 of

HUD Handbook 4470.1 REV-2, Mortgage Credit Analysis for

Project Mortgage Insurance, Section 207.

Nicolas P. Retsinas

Assistant Secretary for Housing-

Federal Housing Commissioner

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