# U.S. Department of Housing and Urban Development

# Office of Housing

## OMB Approval No. 2502-0086

**Special Attention of: NOTICE: H** 01-07 (HUD)

Multifamily Hub Directors

Multifamily Program Center

###  Directors Issued: 7-27-01

Project Managers

### Secretary\'s Representatives Expires: 7-31-02

Senior Community Builders

Section 236 Owners, Management Agents

Contract Administrators and Housing

Finance Agencies

Cross References:

> Subject: GUIDELINES FOR CALCULATING AND RETAINING SECTION 236 EXCESS
> INCOME

**APPLICABILITY:** This Notice applies to all Section 236 projects with
assistance through the Section 236 Interest Reduction Payments Program.

**[TABLE OF CONTENTS]{.underline}**

**[SECTION]{.underline} [PAGE]{.underline}**

**I** **PURPOSE** **2**

**II** **POLICY** **2**

**III** **RETAINING SECTION 236 EXCESS INCOME** **3**

**IV** **USAGE OF EXCESS INCOME** **5**

**V** **REQUESTING APPROVAL** **6**

**VI** **TREATMENT OF EXCESS INCOME PREVIOUSLY COLLECTED** **9**

**VII** **REPORTING REQUIREMENTS** **10**

**I.** **[PURPOSE]{.underline}**

> This Notice supersedes Notice H 00-17 and provides guidelines for
> implementation of Section 216 of the Department\'s Fiscal Year 2001
> Appropriations Act, P.L. 106377 and Section 861 of the American
> Homeownership and Economic Opportunity Act of 2000, P.L. 106-569.
> Section 861 of the American Homeownership and Economic Opportunity Act
> of 2000 amends Section 236(g) of the National Housing Act, and
> provides an extension of the authority to retain Excess Income. It
> also provides, in relevant part, that any Excess Income that a project
> owner has collected and that such owner has not remitted to the
> Secretary of HUD may be retained by such owner unless the Secretary
> otherwise provides. Instructions are provided for an owner\'s
> participating in retention of Excess Income for projects with
> assistance through the Section 236 Interest Reduction Payments
> Program.
>
> There is presently a Regulation at 24 CFR 236.60 (Rev. April 1, 1995)
> which has been saved by 24 CFR 236.1(c) of the current CFR. Such
> Regulation, in general, provides that Excess Income is to be remitted
> to HUD. HUD is in the process of updating the Regulations to reflect
> Sections 216, 861 and other statutory changes made after 1995.
>
> One of the objectives of this Notice and the ones heretofore issued
> permitting owners to retain Excess Income has been for the Department
> to obtain practical case by case experience in connection with
> recently expanded statutory authority in this area. The Department\'s
> intention is to utilize experience gained through this and previous
> Notices to promulgate a new regulation. The Assistant Secretary has
> issued a waiver of the current regulation to cover these Notices
> pending promulgation of this replacement regulation.

**NOTE: Any Excess Income that a project owner may retain that has been
generated since October 1, 2000 and that the owner has not remitted to
the Secretary may be retained by the owner provided the owner is in
compliance with the requirements of this Notice.**

**II. [POLICY]{.underline}**

A. All Section 236 projects, where the owner is current with respect to
the mortgage obligation, are eligible for consideration to retain Excess
Income generated on or after October 1, 2000 for project and non-project
use.

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> B. Prior HUD approval is needed.

C. HUD will not withhold approval of an owner\'s request to retain
Excess Income because of the existence of unpaid Excess Income charges,
if such income is being repaid over a period of time in accordance with
a Workout or Repayment Agreement with the Secretary unless the owner is
in violation of such Agreement.

D. All owners must immediately remit to HUD all Excess Income unless
they were approved for retention of Excess Income under Notice H 00-17
or an approved Preservation Plan of Action (POA) or Notices H 9810 or H
99-28.

E. If an owner fails to remit to HUD all Excess Income that was not
approved under Notice H 00-17 or a POA or predecessor Notice, the Excess
Income will then be considered unpaid.

**III. [RETAINING SECTION 236 EXCESS INCOME]{.underline}**

A. [Definition:]{.underline} Excess Income consists of cash collected as
rent from the residents by the owner, on a unit-by-unit basis, that is
in excess of either the HUD-approved unassisted Basic Rent or the New
Authorized Rent under the Section 8 mark-up-to-market program. The
unit-by-unit requirement necessitates that, if a unit has Excess Income,
it must be returned to HUD. It is not permissible to do an aggregate
calculation of the Excess Income for all occupied rent-paying units, and
then to offset or subtract from that figure any unpaid rent from
occupied or vacant units, before remitting Excess Income to HUD. Offsets
are statutorily not permitted.

**NOTE: There is no Excess Income associated with units where Section 8
is available or utilized.**

B. Who May Participate and Retain Excess Income.

1\. [For Project Use]{.underline}: Effective October 1, 2000 all owners
of projects receiving Section 236 Interest Reduction Payments are
eligible for consideration to retain Excess Income for project use under
the terms of this Notice unless the owner owes HUD Excess Income from
prior periods. In such a case, the owner is no longer eligible for
retention of Excess Income unless it has a Workout or Repayment
Agreement acceptable to HUD and is current in payments under such
Agreement. All past due unpaid Excess Income must be paid in full to HUD

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before future Excess Income may be retained, with the exception of those
owners who are remitting Excess Income over a period of time in
accordance with, and current in, payments under a Workout Agreement with
the Secretary.

2\. [For Non-Project]{.underline} Use: Effective October 1, 2000 all
owners of projects receiving Section 236 Interest Reduction Payments are
eligible for consideration to retain Excess Income for non-project use
unless they owe prior Excess Income and are not current in payments
under a HUD-approved Workout or Repayment Agreement or they fall within
any of the categories below:

a\. The Reserve for Replacement is not fully funded.

b\. The project under the statute is not \"well maintained housing in
good condition\" which the Department interprets to mean the owner has
failed to maintain the property in decent, safe, and sanitary condition
and in good repair in accordance with HUD\'s Uniform Physical Conditions
Standards described in 24 CFR Part 5, Subpart G and the State/local
Code. A score of 60 or above on the Real Estate Assessment Center (REAC)
physical inspection can support a finding that the property is in the
required \"good\" condition. A Comprehensive Needs Assessment that finds
there are no significant current repair or maintenance needs can also
support a finding that the property is in the required \"good\"
condition.

c\. The owners have engaged in any one of the material adverse financial
or managerial actions or omissions listed below:

1\) materially violated any Federal, State, or local law or regulation
with regard to their project or any other federally assisted project,
after receipt of notice and an opportunity to cure;

2\) materially breached a contract for assistance under Section 8 of the
United States Housing Act of 1937, after receipt of notice and an
opportunity to cure;

3\) materially violated any applicable regulatory or other agreement
with the Secretary or a participating administrative entity, after
receipt of notice and an opportunity to cure;

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> 4\) repeatedly and materially violated any Federal, State, or local
> law or regulation with regard to the project or any other federally
> assisted project\';

5\) repeatedly and materially breached a contract for assistance under
Section 8 of the United States Housing Act of 1937;

6\) repeatedly and materially violated any applicable regulatory or
other agreement with the Secretary or a participating administrative
entity;

7\) repeatedly failed to make mortgage payments at times when project
income was sufficient to maintain and operate the property;

8\) materially failed to maintain the property in decent, safe and
sanitary condition and good repair after receipt of notice and a
reasonable opportunity to cure; and

9\) committed any actions or omissions that would warrant suspension or
debarment by the Secretary.

**IV.** **[USAGE OF EXCESS INCOME]{.underline}**

[For Project Use:]{.underline} Excess Income may be used for any project
purpose. Examples are:

1\. Project operating shortfalls, including repair costs;

2\. Repair costs identified such as in the Comprehensive Needs
Assessment, including increasing deposits to the Reserve Fund for
Replacements to a limit necessary to adequately fund the reserve,

3\. Service Coordinators;

4\. Neighborhood networks located at the project for project residents;
and

5\. Enhanced supportive services for the residents.

> NOTE: Nonprofit entities are not permitted to derive profit or gain
> from the project. Therefore, Excess Income retained for non-project
> use is limited to those activities that carry out an entity\'s
> nonprofit purpose.

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**V. [REQUESTING HUD'S APPROVAL TO RETAIN EXCESS INCOME]{.underline}**

A. [For project use:]{.underline}

1\. Submit a written request to the local Field Office; and

2\. Briefly describe the proposed use of Excess Income, the period for
which the Excess Income is being retained and amount or percentage of
Excess Income requested.

B. [For non-project use:]{.underline}

Submit a written request to the local Field Office.

C. When the Field Office approves the request to retain Excess Income,
prepare and mail a revised Form HUD-93104, Monthly Report of Excess
Income, to Excess Rental Income, P.O. Box 360333M, Pittsburgh, PA, 15250
and send a copy to the Field Office.

**NOTE: Owners in the above category, who have not submitted updated
reports to the above address and a copy to the Field Office must do so
promptly.**

D. Owners who wish to retain Excess Income generated in Fiscal Year 2001
should immediately submit a request to the local Field Office. For each
subsequent fiscal year, owners must submit a request at least 90 days
prior to the beginning of each fiscal year, or 90 days prior to any
other time during a fiscal year that they wish to begin retaining Excess
Income for that fiscal year.

E. Owners who may have been holding their Excess Income generated on or
after October 1, 2000, while awaiting further instructions from HUD
must:

1\. **Immediately** return all Excess Income prior to the date of this
Notice\'s issuance **if, upon review of the provisions of this Notice,
they will not be applying to retain Excess Income generated on or after
October 1, 2000.**

2\. Immediately submit a written request to the HUD Field Office to
retain any Fiscal Year 2001 Excess Income generated on or after October
1, 2000, if the owner is interested in retaining such Excess Income. The
request must contain the same information as required in Sections V. A.
or B. above. When the Field office approves the request to retain Excess
Income, prepare and mail a revised Form HUD-93104, Monthly Report of

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Excess Income to: Excess Rental Income, P.O. Box 360333M, Pittsburgh, PA
15250 with a copy to the Field Office.

F. [Owners who have been remitting Excess Income to HUD on a continual
basis]{.underline} can submit a written request to the Field office for
the retention of Excess Income generated after the date of this
Notice\'s issuance. The request must contain the same information as
required in Sections V. A. or B. above.

> NOTE: When the owner proposes to use Excess Income in a manner
> different from what was approved, HUD\'s written approval is required.

G. [HUD Field Office response]{.underline}: HUD staff will review the
owner\'s request and issue a letter of permission or denial.

1\. The approval letter from HUD permitting the owner to retain Excess
Income must, at a minimum, expressly assert:

a\. Retention rights are for the time specified in the approval letter,
but cannot extend beyond the current Fiscal Year;

b\. Failure of the owner to maintain the Reserve for Replacement
account, at all times, in a fully funded amount, is grounds for HUD to
rescind the approval (See Section III.B.2.a);

c\. Failure of the owner to maintain the property at all times in a
condition that is \"decent, safe and sanitary, and in good repair\" is
grounds for HUD to rescind the approval (See Section III.B.2.b);

d\. If Excess Income is not used for the proposed purpose that the owner
described in its application (See Section. V.A.2.), such income must be
returned to HUD unless the owner has obtained prior HUD approval for an
alternate use;

e\. If the owner does not return the Excess Income that it received as a
result of assurances provided (but not lived up to), the retention of
that income is a violation of the Regulatory Agreement for which there
are enforcement remedies since the Regulatory Agreement requires that
Excess Income be remitted to the Commissioner.

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> 2\. **A denial letter** from HUD must cite the specific reasons for
> denial and state what would be required of the owner to receive HUD\'s
> permission to retain Excess Income.

**NOTE: When the owner has corrected the conditions to HUD\'s
satisfaction, the Field Office is authorized to advise the owner in
writing to begin to retain Excess Income on a prospective basis for the
period requested by the owner but for no longer than the remainder of
the fiscal year.**

H. [Update Real Estate Management System (REMS)]{.underline}: Project
managers in the Field Office should update the Excess Income Section in
the Loan Information Detail Screen in REMS. For information on accessing
and using the Loan Information Detail Screen refer to Chapter 5 of the
REMS User Guide.

**[NOTE]{.underline}:** **This does not apply to non-insured State
Agency projects whose mortgages are assisted under the Section 236
program.**

I. [HUD\'s Withdrawal of Approval to Retain Excess Income:]{.underline}

1\. The retention of Excess Income by owners is a privilege, not a
right, extended by the Department to responsible owners.

2\. HUD may withdraw approval:

a\. If at any time an owner fails to meet basic eligibility enumerated
in Section III. B.;

b\. For not using the Excess Income for purposes the owners had
committed;

c\. Where the owner has been approved for retention of Excess Income for
non-project use, if at any time during the fiscal year-that -such
approval is operative the owner fails to maintain the property in
decent, safe and sanitary condition and in good repair, or if it fails
to maintain full funding of the required reserves. A REAC physical
inspection score of below 60 can support a finding that the housing is
no longer in decent, safe and sanitary condition and in good repair.

3\. Any Excess Income inappropriately used must be repaid to HUD and
will be considered for enforcement purposes as a misuse of Government
funds.

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> a\. The HUD Field Office will notify the owner via certified mail that
> the authorization to retain Excess Income is withdrawn. The letter
> must state:

1\) The effective termination date which should be the date HUD
determined that the owner is not in compliance with HUD\'s requirements;

2\) Specific reasons for HUD\'s withdrawal of approval;

3\) What actions are needed to restore receiving Excess Income; and

4\) Request a return of such income to HUD in the amount that was not
properly used.

b\. An owner may appeal HUD\'s decision by submitting a letter stating
the basis for reconsideration. The letter should include documentation
supporting a review of the denial and should be addressed to the
Hub/Program Center Director.

c\. Upon receipt of the information, the Hub/Program Center Director
will have 30 days to make a final determination and respond in writing
back to the owner. The Hub/Program Center Director can either:

1\) Affirm the withdrawal of the right to retain Excess Income;

2\) Reverse that decision; or,

3\) Where appropriate, request additional information from the owner.

**VI. [TREATMENT OF EXCESS INCOME PREVIOUSLY COLLECTED]{.underline}**

A. Owners who were authorized to retain Excess Income pursuant to
Section 227 of the Department\'s Fiscal Year 1999 Appropriations Act,
P.L. 105-276 effective October 21, 1998 but who remitted the Excess
Income to the Secretary may request a refund of the Excess Income
effective October 21, 1998 provided the owner is in compliance with the
requirements of Notices 99-28 and 00-17.

B. Owners should submit their request for a refund to their local HUD
office. The request should include documentation that the owner is in
compliance with Notices 99-28 and 00-17.Once a determination is made by
the local HUD office

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that the owner is in compliance with the previous Notices, a copy of the
owner\'s request along with a recommendation from the Hub/Program Center
Director should be forwarded to the office of the Assistant Chief
Financial Officer for Accounting; attention: Wallace Garner, Director,
Accounting, Monitoring and Analysis Division in Headquarters.

C. Refunds of Excess Income previously remitted to the Secretary will be
made from amounts in the Rental Housing Assistance Fund and/or the
Flexible Subsidy Fund in accordance with Section 861(b) of the American
Homeownership and Economic Opportunity Act of 2000, P.L. 106-569
effective December 27, 2000.

**VII. [REPORTING REQUIREMENTS]{.underline}**

A. [Remitting Excess Income to HUD]{.underline}: All Excess Income that
owners are not authorized to keep is the property of the Federal
Government.

1\. It must be remitted to HUD monthly without any delay for any reason.

2\. Multifamily Housing will turn over to the Enforcement Center, for
appropriate action, all cases where owners, their managing agents, or
others have improperly retained Excess Income.

B. [Accounting]{.underline}

1\. The collection and retention of Excess Income by the owners of
eligible projects shall be treated as follows in the required annual
audited financial statements.

a\. Retained Excess Income considered Rent Revenue should be booked
using Account No. 5194, \"Retained Excess Income.\"

b\. Excess Income remitted to HUD must be disclosed by the auditor in
Account No. 5191, \"Excess Rent\".

c\. Nonprofit owners subject to the Single Audit Act and OMB Circular
A-133 need to include retained Excess Income in the formula used to
calculate expended federal assistance.

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> d\. If an owner retains Excess Income without prior authorization from
> HUD, or uses Excess Income for unauthorized purposes, it should be
> reported as a finding in the annual audited financial statements.

**[NOTE]{.underline}: Funds that the owners are authorized to retain for
non-project use are not considered distributions to the owners. These
funds should not be shown on the computation of surplus cash.**

2\. The above accounting procedures do not apply to non-insured State
Agency projects whose mortgages are assisted under the Section 236
program.

C. [Other Reporting Requirements]{.underline}: Within the deadlines as
may be established by HUD for the submission of the annual audited
financial statements, the owners of eligible projects shall provide the
local HUD Office, on an annual basis, two copies of a brief narrative
description of the amount of Excess Income retained during the prior
Fiscal Year of the project and the uses made of that retained Excess
Income. On a case-by-case basis, HUD may require more detailed
information.

**The narrative report should be one page in length and must contain the
following certification:**

> \"I certify that: (1) the amount of Excess Income retained and used
> was for the purpose approved by HUD; (2) all eligibility requirements
> for retaining Excess Income were satisfied for the entire reporting
> period; and (3) all the facts and data on which this report is based
> are true and accurate. **Warning:** HUD will prosecute false claims
> and statements. Conviction may result in criminal and/or civil
> penalties (18 U.S.C. Sections 1001, 1010, 1012, 31 U.S.C. Sections
> 3729, 3802).\"

Failure to submit this narrative Report, or any additional information
requested by HUD, could jeopardize the privilege of retaining future
Excess Income.

D. [Local HUD Office Actions]{.underline}: The local HUD offices should
review the annual descriptions for general compliance with the owner\'s
intended uses of Excess Income and ask owners for clarification as
necessary.

E. [Effective Date]{.underline}: This policy is effective on the date of
the Notice\'s issuance but applies retroactively to cover Excess Income
generated by owners since October 1, 2000 and for Excess Income remitted
after October 21, 1998.

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Public reporting burden for this collection of information is estimated
to average 15 minutes per response, including the time for reviewing
instructions, searching existing data sources, gathering and maintaining
the data needed, and completing and reviewing the collection of
information. This agency may not collect this information, and you are
not required to complete this form, unless it displays a currently valid
OMB control number.

This information is collected to obtain full benefits authorized by the
amended Section 236(g) of the National Housing Act. The information will
enable HUD to ensure that project owners carry out their statutory
obligations to remit to HUD all Excess Income that HUD has not
authorized them to retain. Responses are required to obtain and retain
the benefits authorized and mandated by Section 236 of the Act. The
information is considered nonsensitive, and there are no assurances of
confidentiality.

**Privacy Act Statement:** The Department of Housing and Urban
Development (HUD) is authorized to collect this information by Section
236 of the National Housing Act, as amended, and the Employer
Identification Number (EIN) by the Housing & Community Development Act
of 1987, 42 U.S.C. 3543. The information concerning the monthly
reporting of Excess Income is being collected by HUD to: (1) ensure
project owners comply with the program requirements to accumulate,
safeguard and pay HUD all rental charges collected in excess of the
basic rental charges, (2) recover and enforce collection actions through
repayment plans and/or offset of future subsidy billings in accordance
with 24 CFR 17, administrative claims, and assess civil money penalties
pursuant to Section 416 of the 1987 Housing and Community Development
Act, as well as, (3) automate financial reporting needs. The EIN is used
as a unique identifier for closer monitoring of owners and agents. HUD
may disclose this information to Federal, State and local agencies when
relevant to civil, criminal, or regulatory investigations and
prosecutions. It will not be otherwise disclosed or released outside of
HUD, except as required and permitted by law. Failure to provide the
information could affect your future participation in HUD programs.

#### John C. Weicher, Assistant Secretary for

> Housing-Federal Housing Commissioner

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