4570.1 REV CHG 2

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CHAPTER 1. BASIC ELIGIBILITY REQUIREMENTS AND

ADMINISTRATIVE PROCESSING PROCEDURES

1-1. NATURE AND PURPOSE OF SECTION 231. Mortgage insurance under

Section 231 of the National Housing Act provides a program for

\* relieving the shortage of housing for elderly and/or handicapped \*

persons. A project shall comprise eight or more new or rehabilitated

units designed for use and occupancy by elderly persons

and handicapped persons. In processing an application under this

Section, outstanding instructions for the basic Section 207

program shall be followed except as modified herein.

a\. Sponsorship - The program will involve the following types

of mortgagors:

\* (1) Public;

\(2\) Public Non-Profit Organizations;

\(3\) Private Non-Profit Organizations; and

\(4\) Private Profit-Motivated Organizations. \*

b\. There is no substitute for a strong and capable sponsorship

primarily concerned with the continuing operation of a project

for the elderly and/or handicapped rather than just its

initiation. Sponsors of profit-motivated projects should be

interested in long-term investment, with profits from

construction as a secondary consideration. Both profit-motivated

and non-profit sponsorships must be financially capable and

willing to provide funds as may be necessary in the completion

and operation of a project.

c\. Section 231 projects sponsored by private nonprofit mortgagors

are eligible for participation in the rent supplement program.

Up to five percent of the total contract authority authorized

in appropriation acts may be used in Section 231 and Section

202 senior citizens and/or handicapped projects. Current

regulations permit up to 100 percent of the units in a

Section 231 project to be occupied by families in the rent

supplement program, but administratively, an increase over

the limits established will be permitted only on a case-by-case

basis. Participating projects shall meet the maximum

\* gross monthly rentals established by HUD for the program. \*

d\. The Handbooks listed in References (1) and (2) of the Foreword

contain further detailed information on the rent supplement

program.

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Page 1-1 1/80

HUD-Wash., D. C.

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4570.1 REV

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1-2. DEFINITION AND EXPLANATION OF TERMS.

a\. Elderly Person. A person 62 or older.

b\. Handicapped Person. A person who has a physical impairment

which:

\(a\) Is expected to be of a long-continued and indefinite

duration;

\(b\) Substantially impedes his/her ability to live independently;

and

\(c\) Is of such a nature that his/her ability to live

indepenently could be improved by more suitable housing

conditions.

c\. Occupancy Preference. Sponsoring nonprofit organizations

such as labor unions, professional groups, and fraternal or

civic organizations, may give preference to their members,

provided membership in the organization is open without regard

to race, color, creed, or national origin. However, sponsors

cannot restrict occupancy to their members.

1-3. REAL ESTATE TAX ABATEMENT OR EXEMPTION. If the sponsor claims

that the project will receive abatement or exemption from real

estate taxes, the Regional Counsel must concur in the validity

of the claim before it may be accepted in determining the

feasibility of the proposed project. The Field Office Manager/

Supervisor, therefore, must receive such concurrence before

issuing a conditional or firm commitment. In the Manager\'s/

Supervisor\'s memorandum to the Regional Counsel, transmitting

the sponsor\'s claim and supporting document, he/she to include

any information he/she has regarding similar projects in the

jurisdiction where abatement or exemption was requested and

whether it was allowed. Copies of the transmittal memorandum are

to be sent to the Director, Technical Support Division in Washington,

and the Director, Office of Regional Housing. Outlined below

are the following procedures to be followed:

a\. Sponsor Submission. The sponsor must submit a full statement

of the facts, including a copy of the application for the

abatement or exemption which has been, or will be, presented to

the local authorities. The statement of facts and application

must correctly describe the project and its proposed operation

on which the claim is based. Also to be submitted is an

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9/75 Page 1-2 GPO 864-743

HUD-Wash., D. C.

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4570.1 REV

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(1-3) opinion letter from the prospective mortgagor\'s attorney

making reference to the statement of facts and application,

advising the basis and extent of the claimed exemption or

abatement, and stating that, except for a future change in the

statute or material change in the facts, the project will be

entitled to the exemption or abatement claimed. The letter

must cite the State statute involved and must attach any other

material supporting the claim, i.e., local administrative rulings

or court decisions, opinions of local private or public

counsel or the State Attorney General.

b\. Exemptions Based on Special Legislation. In some states,

special legislation has been passed granting tax exemption to

particular types of housing, e.g., housing located in urban

renewal areas or housing for low or moderate income groups or

for other social needs. Generally, tax exemption pursuant to

such legislation may be safely assumed. If, after review, the

Regional Counsel determines that the proposed project meets

the special criteria of the legislation, the Field Office

Director will be advised that the project may be processed on

a tax exempt basis without guaranty.

c\. Exemptions Based on General Charitable and Eleemosynary

Statutes. Exemption under a general statute exempting projects

for charitable or eleemosynary purposes may not be assumed.

Processing requires different treatment than under paragraph

(1-3) b. above. Even though an exemption may be obtained

initially, it is not safe to assume that it will continue

throughout the life of the mortgage. Therefore, it is

necessary that adequate safeguards be adopted. After review

of the proposal and the appropriate statute, the determination

of the Regional Counsel will result in either:

\(1\) Exemption assured: If there is assurance that the tax

exemption will be initially granted, the Field Office

Director will be advised that the project may be processed

on a tax exempt basis. The sponsor however will be

required to execute a guaranty agreement on FHA Form 1708

assuring the payment of taxes in the event the project

loses its exemption in the future.

\(a\) The amount of the guarantee to be inserted in Item

1\. of the form will be determined by the Field Office

Director and will be sufficient to reduce the

mortgage to an amount which would permit the mortgage

to be carried by the mortgagor on a tax paying basis.

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Page 1-3 9/75

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4570.1 REV

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\(b\) Under the agreement, the sponsor will either pay

taxes as they become due or make a lump sum

prepayment of the mortgage in the guaranteed amount

and have the mortgage recast.

\(c\) In addition to the guarantee requirement, the

Director must determine: that the credit reputation

of the guarantor is acceptable; that analysis of

a current financial and operating statement indicates

clearly its financial ability to perform under

the guarantee; and that the sponsor has presented

legal assurance satisfactory to the Regional Attorney

that it has the legal capacity to execute the

guarantee agreement.

\(2\) Exemption not assured: If it is determined that there

is no assurance of tax exemption, the Director will be so

advised and the project will be processed solely on a tax

paying basis. Sponsors will not be permitted to obtain

tax exempt processing on the basis of offering to execute

the guarantee agreement.

1-4. DETERMINING ELIGIBILITY OF NONPROFIT SPONSOR. The eligibility of

a sponsor will be determined by review of the information submitted

with FHA Form 3433, Request for Preliminary Determination of

Eligibility as Nonprofit Sponsor or Mortgagor. This form is to

be submitted in triplicate and will be completed and reviewed in

accordance with the instruction sheet. In addition to other

required information, if the sponsoring group is part of a regional

or national organization which maintains an office specializing

in housing, or services for the elderly, the Field Office Director

shall ask whether that office has been notified of the proposed

project, and if so, their reply. The Field Office Director will

notify the sponsor of his determination of eligibility.

1-5. FOUNDER\'S FEES AND PROHIBITION. \"Founders\' Fees,\" \"admission
fees,\"

or similar types of payments are prohibited in connection with a

Section 231 proposal.

1-6. CONTROLS AND SPECIAL REQUIREMENTS FOR NONPROFIT SPONSORS.

a\. Assistant Secretary-FHA Commissioner\'s Control over Mortgagor:

The mortgagor must be a \"Private Mortgagor Nonprofit\" or a

\"Public Mortgagor\" as defined in Section 231.2 of the FHA

Regulations. If a corporate mortgagor, the Model Form of

charter, FHA Form 1732, should be used for corporations to

be formed.

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9/75 Page 1-4

HUD-Wash., D. C.

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4570.1 REV

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(1-6) Existing corporations must amend their charters, as required

to permit them to own and operate this type of project. All

nonprofit mortgagors, corporate or other, must execute a

Regulatory Agreement, FHA Form 2466e.

b\. Occupancy Charges: Occupancy (rental) charges are controlled

by the Commissioner, as in other programs. Charges will be

based on a budget presented by the mortgagor and reviewed by

the field office for accuracy. Income must be budgeted in a

sufficient amount to cover debt service and replacements

reserve requirements, estimated maintenance and operating

expenses, taxes, and a reasonable allowance for vacancies.

\(1\) The mortgagor\'s Regulatory Agreement provides that

occupancy charges (rental schedule) for the project are

subject to HUD-FHA approval. Consequently, the mortgagor

must obtain approval of these charges before the time

of first occupancy. The Field Office Director, at a time

sufficiently in advance of first occupancy to permit

evaluation and possible necessary adjustments, will

require the mortgagor to submit a proposed operating

budget and the occupancy charges based thereon, in

triplicate, on FHA Form 2458-A, Schedule of Charges and

Project Information - Housing for the Elderly (Nonprofit).

In presenting the proposed budget, the mortgagor must

indicate that it has been passed upon and approved by

the Board of Directors, by appropriate resolution.

\(2\) The budget will be evaluated and, if adequate, the Field

Office Director will approve a schedule of charges based

on it. In the absence of a budget, or in a situation

where the one submitted is inadequate, a provisional

approval of the proposed charges may be given pending

the submission of a satisfactory budget.

\(3\) The original FHA Form 2458-A will be returned to the

mortgagor with the letter of approval and a copy of each

forwarded to the Director, Office of Loan Management.

In the approval letter, the Field Office Director shall

advise the mortgagor that FHA Form 2458-A will be

required to be submitted annually at least 30 days

before the end of each fiscal year in order that HUD-FHA

may pass upon the adequacy of the coming year\'s budget

whether or not an increase in occupancy charges is

contemplated.

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Page 1-5 9/75

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4570.1 REV

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(1-6) (4) If, during the course of construction, there has been an

increase in replacement cost over the estimated replacement

cost shown in the applicable FHA Form 2264; or if

after preparation of the form, it has been determined

that an increase in the estimate of operating cost or

taxes is justified, such increase or increases may be

considered and reflected in the rental schedule only if

they are substantiated by relevant, pertinent, and

convincing evidence satisfactory to the Field Office

Director, concurred in by the Director of HPMC or

Chief Underwriter and on file in the Washington Docket.

\(5\) In approving initial rental schedules, Field Office

Directors may approve rates lower than the permissible

maximums. The approval letter shall, nevertheless, include

a statement of the maximums allowable and advise that

increases up to the maximums may be made without prior

approval of HUD-FHA, provided revised rental schedules

are submitted in duplicate to the Field Office.

c\. Donated Labor: Where there is a possibility of the use of

donated labor in construction of the project, the sponsor

must be informed of the requirements and procedures for \"Use

and Control of Donated Labor.\"

d\. Management: A copy of the proposed management contract together

with a resume of the background and experience of the management

agent shall be submitted for evaluation and approval by

HUD-FHA.

e\. Type of Construction Contract

\(1\) A cost-plus construction contract will be required in all

cases. An incentive clause may be included.

\(2\) The only deviation from the use of a cost-plus contract

is provided for in the FHA Regulations. A lump-sum

contract may be used if it is established to the Assistant

Secretary-FHA Commissioner\'s satisfaction that a cost-plus

form of contract is not required to protect his interests

and the interests of the mortgagor. If the use of a

lump-sum contract is requested by the mortgagor, the Field

Office Director will determine if it meets the requirements

of the Regulations.

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9/75 Page 1-6

HUD-Wash., D. C.

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4570.1 REV

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(1-6) f. Allowance for Making Project Operational (AMPO): In lieu of

a working capital deposit, there will be enclosed in the

estimated replacement cost, an allowance equal to 2% of the

mortgage amount. For a complete discussion on AMPO see

Reference 4 of the Foreword.

g\. Special Financing Provisions. It is permissible for nonprofit

mortgagors to borrow funds required for project purposes

subject to the conditions set forth below:

\(1\) Loans from the Contractor or Other Parties Involved with

Project: It is permissible for nonprofit mortgagors to

borrow funds from the contractor or other parties

furnishing supplies or services only for the costs of items

to be covered by the insured mortgage. Any such loan must

be paid in full at the time mortgage proceeds are advanced

for the item for which the loan was made. In the case of

insurance upon completion, any such loan must be paid in

full at the time the note is endorsed for insurance.

\(2\) Loans from the Sponsor or from Parties in no way connected

with Project: It is permissible for nonprofit mortgagors

to borrow funds required for any project purpose from the

sponsors. Also, mortgagors may borrow from persons or

firms in no way connected with the project provided that

the indebtedness will in no way create a situation where

the person of firm can exercise any direction or control

over the mortgagor. If funds are to be borrowed for

project purposes not to be included in the mortgage, the

total amount of the debt must be secured by a promissory

note executed by the mortgagor on FHA Form 1710. The form

provides for the prior written approval of the Assistant

Secretary-FHA Commissioner of payment of the loan.

However, for Section 231 nonprofit mortgagors, the notes

may be endorsed as follows:

\"Approval to make repayment of this loan from

Residual Receipts is hereby granted this \_\_\_\_\_\_\_ day of

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_, 19\_\_.

\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Assistant Secretary-FHA Commissioner

By Authorized Agent\"

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Page 1-7 9/75

HUD-Wash., D. C.

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4570.1 REV

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\(3\) Donations to the Mortgagor by Parties Other than the

Sponsor: A proposal which contemplates gifts or donations

to the mortgagor from the general contractor, a

subcontractor, the architect, or other parties furnishing

supplies or services will not be acceptable. If such

gifts or donations come to the attention of the Field

Office Director subsequent to the date of initial

endorsement (start of construction in insurance upon

completion cases) the amount of such gifts or donations

must be deducted by the mortgagor in cost certification.

h\. Cost Certification Requirements: In all cases, the general

contractor will be required to file FHA Form 2330-A, supported

by an accountant\'s certification as described in Reference (3)

of the Foreword, unless prior approval has been given to the

use of a lump-sum contract.

i\. Special Provisions Applicable to Rehabilitation Projects

\- The provisions in the sub-paragraphs below are

applicable to rehabilitation projects under this program:

\(1\) Cases involving Identity of Interest Between Seller and

Sponsor: Same as instructions for Section 207.

\(2\) Escrow for Delayed Replacement Items: Same as

instructions for Section 207, and

\(3\) Disposition of Balance in Existing Reserve for Replacement

Account: All of the provisions contained in the

instructions under Section 207 are applicable except that

any balance remaining in the reserve account at the time

of final endorsement will be transferred to the cash

account and will be available only for project purposes.

1-7. DETERMINING MARKET. Because of the many factors involved in the

determination of market for a housing project for the elderly,

it is desirable for all new proposals to have a current HUD

Housing market analysis. Experience has clearly shown that

letters of interest from people residing in other localities are

an unreliable indication of the market for a project for the

elderly, even in areas traditionally considered attractive to

retired people. The marketability of a proposed project should,

therefore, be judged on the basis of demand expected to be

generated primarily within the market area where the project is

to be located.

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9/75 Page 1-8

HUD-Wash., D. C.

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4570.1 REV

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1-8. MULTI-PURPOSE ROOM. A multi-purpose room may be used on occasion

for religious services. The room must be available for use by all

religious groups comprising the tenancy. Religious articles or

equipment may not be permanently installed and should be removed

promptly at the conclusion of services.

1-9. USE OF HOUSING CONSULTANTS BY NONPROFIT SPONSORS. Some nonprofit

organizations sincerely interested in providing multifamily housing

under HUD-FHA programs lack the staff and other facilities to

develop a project. HUD-FHA recognizes the need for these

organizations to use the services of housing consultants to expedite

development, improve the quality of proposals and to lower costs.

For a more complete discussion on the use of consultants, see

Reference (4) of the Foreword.

1-10. PROFIT MOTIVATED SPONSORS.

a\. Requirements and Restrictions of Mortgagor - the requirements

and restrictions applicable to a Section 207 mortgagor will

apply to a Section 231, Profit Motivated Mortgagor.

b\. Occupancy - In selecting tenants, the mortgagor shall be bound

by the provisions of Regulatory Agreement, FHA Form 2466e, to

give absolute priority of occupancy of 100% of the total

number of dwelling units to elderly and handicapped persons.

The provisions regarding occupancy requirements are set out

in Article 5 of the model form of the Regulatory Agreement,

and are to be specifically brought to the attention of the

sponsor.

c\. Room Composition, Design and Special Amenities - Particular

attention is to be given to room composition to assure

it is consistent with the needs of the elderly market.

All units must be designed for use and occupancy by elderly

or handicapped persons. In projects of sufficient units to

support them, auxiliary facilities such as a lounge, central

dining facilities, infirmary facilities or multipurpose rooms

are to be encouraged to the extent consistent with the needs

of the occupants. The auxiliary facilities must be considered

in processing in accordance with outstanding Section 207

underwriting and administrative instructions.

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Page 1-9 9/75

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4570.1 REV

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d\. Determining Market - See Paragraph 1-7. Also note that no

project should be approved unless it merits at least minimum

related facilities. Otherwise the project would be an ordinary

multifamily housing project and should not be processed under

Section 231.

1-11. STATE OR LOCAL APPROVAL - If approval of the project is required

by State or local law, the sponsor must furnish evidence

that the appropriate authorities have approved the proposal.

1-12. REQUIRED COMMITMENT CONDITIONS FOR NONPROFIT SPONSORS - Each

commitment shall carry the additional conditions listed below:

a\. Submission of FHA Form 3434 and 3435: Prior to initial

endorsement in the case of insurance of advances (beginning of

construction in the case of insurance upon completion), the

Sponsor and Mortgagor shall certify to the Assistant Secretary

\- FHA Commissioner on FHA Form 3434 as to their relationships

with persons, parties or firms furnishing land and services.

Such persons, parties or firms furnishing land and services

shall certify to the Assistant Secretary-FHA Commissioner on

FHA Form 3435 as to their relationship with the Sponsor and

Mortgagor. Subsequent to such certifications, if there is a

change in the certified relationship, the Sponsor, Mortgagor

and the other parties must furnish the Assistant Secretary-FHA

Commissioner additional certifications with respect to each

change. All relationships are subject to approval of the

Assistant Secretary-FHA Commissioner and he reserves the right

to refuse endorsement of the note for insurance and to cancel

the commitment if such relationships do not meet with his

approval.

b\. Management Contract: With the sponsor\'s request for conditional

commitment, a copy of the proposed management contract together

with a resume of the background and experience of the management

agent shall be submitted for evaluation and approval by

HUD-FHA.

c\. Sponsor\'s Certification: At the time of initial endorsement,

an executed Sponsor\'s Certification, FHA Form 3437, must be

furnished.

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9/75 Page 1-10

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4570.1 REV

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d\. Donated Labor. Any contract or subcontract executed for the

construction of a project insured under Section 231 of the

National Housing Act, as amended, shall contain a provision

that the amount of such contract will be subject to appropriate

reduction prior to final endorsement for mortgage insurance

by the value of donated labor. In each case, amendments must

be made prior to final endorsement to FHA Forms 2482,

Contractor\'s Certification of Labor Standards and Prevailing

Wage Requirements, and the Construction Contract, FHA Form

2442 or 2442A, to reflect the reduction of any contract by

the value of donated labor.

1-13. NONPROFIT PROJECTS INVOLVING INSURANCE UPON COMPLETION. Processing

will conform to basic Section 207 instructions modified as follows:

a\. Cost Certifications:

\(1\) Donated Labor: See Paragraph 1-12 d.

\(2\) Net Income Prior to Beginning of Amortization: Nonprofit

housing for the elderly mortgagors are not subject to

advance amortization requirements.

\(3\) Ground Rent: Ground rents during the construction period

may be paid out of mortgage proceeds and included in cost

certification.

b\. Allowance for Making Project Operational (AMPO): For

insurance upon completion cases, the mortgagor must include

in his certification of actual costs an itemized statement

reflecting all expenditures for the items covered by AMPO.

Mortgage proceeds equal to the amount of the expenditures

approved will be released to the mortgagor. The remaining

AMPO balance shall be escrowed in the reserve for replacements

account. See Paragraph 1-6. f.

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