4580.1

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CHAPTER 2. GENERAL REQUIREMENTS

2-1. GENERAL. The project Phase of a condominium is developed

procedurally in the same manner as a project developed under other

multifamily programs with certain exceptions set forth below.

Chapters 6, 7, 8, and 9 of this Handbook contain underwriting

instructions relating to condominium project mortgages. The

complete processing steps from initial contact with a sponsor

through final endorsement of the project mortgage for insurance

are as follows:

a\. The Grantor/Sponsor makes the first contact with the HUD-FHA

Field Office on the proposal.

b\. The Grantor/Sponsor prepares the application for Mortgage

Insurance (FHA Form 3201 or in conversion cases FHA Form 3280)

with related exhibits which outline his proposal. (An annual

operating budget is required.)

c\. HUD-FHA makes a feasibility analysis of the proposal.

d\. The Feasibility Conference is held and if HUD-FHA and the

Grantor/Sponsor are in agreement at the conclusion of the

conference, a Feasibility Letter is issued to the sponsor.

e\. The Grantor/Sponsor prepares forms, exhibits, schematic

drawings, and brief specifications and pays his application

fee if he files an Application for conditional commitment.

A master plan for the condominium is also required.)

f\. HUD-FHA reviews the Grantor\'s/Sponsor\'s exhibits and issues

a conditional commitment to the mortgagee.

g\. The Grantor\'s/ Sponsor\'s architect prepares complete

architectural drawings and specifications on the project,

including a proper delineation of the unit areas.

h\. The mortgagee makes application for firm commitment and pays

the application fee (unless already paid) and the commitment

fee. HUD-FHA reviews the contract drawings and documents and

issues the firm commitment. (The fees cannot be less than

the per unit fees under the home mortgage program.)

i\. Initial closing is held and the original credit instrument is

endorsed. (Except in insurance upon completion cases, wherein

there is a combination initial/final closing.)

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Page 2-1 6/73

HUD-Wash., D. C.

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4580.1

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j\. The Pre-Construction Conference is held.

k\. The project is constructed.

l\. Cost Certification is made. (As modified by different program

approaches.)

m\. Final closing is held.

n\. Figure 1 - The Figure on the following page is self explanatory

in illustrating some important considerations in developing a

condominium.

2-2. FEASIBILITY CONSIDERATIONS.

a\. Request for Feasibility Analysis. The procedure in the

feasibility stage is basically the same for either proposed

or existing projects. At the first contact with the HUD-FHA

Field Office, the personnel of that office shall fully inform

the grantor/sponsor of HUD-FHA processing requirements and

procedures, including the grantor\'s/sponsor\'s responsibilities

in this regard. It must be emphasized to the grantor/sponsor

that at the feasibility stage HUD-FHA desires only exhibits

that are already in existence or easily obtainable by the

grantor/sponsor and that the grantor/sponsor is not to incur

any additional costs at this stage of processing. At the

conclusion of the interview, the HUD Field Office shall advise

the grantor/sponsor as to the exact nature of exhibits necessary

for feasibility stage processing of the proposal; and the

grantor/sponsor shall be furnished with a kit containing all

necessary written instructions and required forms, including

Application for Mortgage Insurance. (FHA Form 3201) This

application form is used in all stages.

\(1\) Upon making application for feasibility, the grantor/

sponsor need only be prepared to furnish that information

not marked with solid triangles on the FHA Form 3201.

The required information is only necessary to identify

access to site, number of units, expected income in terms

of assessments, a rough estimate as to costs and requested

loan amount. Any additional information the sponsor has

should be furnished as well.

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6/73

Page 2-2

HUD-Wash., D. C.

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4580.1

CHAPTER 2, FIGURE 1

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

Page 2-3 6/73

HUD-Wash., D. C.

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4580.1

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(2-2) (2) The grantor/sponsor must have reliable market information

regarding the demand for housing of the type proposed in

the area of his project, the extent of competition with

which he will be confronted, and the price of comparable

living units. He should also know the garage

accommodations, equipment and services included in

competing structures. Other essential information includes

knowledge of whether his site location is acceptable to the

type of inhabitants he wishes to attract to his project

and whether zoning for his site is permissive for the

proposed project. At this point it is also desirable

that the grantor/sponsor have an indication of the total

construction and land improvement costs for the proposed

project.

b\. Applicability: Section 234(d)/Section 236. Applications for

project mortgage insurance to finance the construction or

rehabilitation of multifamily projects to be sold as

condominiums must be filed under Section 234(d) or under

Section 236 if the project occupants require assistance prior

to its conversion to individual mortgages.

c\. Minimum Number of Units Required for Project Insurance.

There must be a minimum of four units to qualify for project

insurance under Section 234(d).

d\. Conversion of Existing HUD-FHA Projects Insured Under Other

Sections of the Act.

\(1\) As to proposals for the conversion of projects which were

covered by HUD-FHA insured mortgages (other than Section

213 management or sales type) to the condominium program

under Section 234(c), the Field Office files will reflect

much of the information relating to the project. However,

it is possible that changes in the physical characteristics

of the project may have occurred, especially when the

HUD-FHA mortgage insurance has been terminated previously.

Accordingly it is necessary to obtain current information

regarding the physical and financial condition of the

project before an intelligent review of the proposal can

be completed. Title must not be conveyed to individual

owners until the insuring office is satisfied that the

project is physically sound.

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6/73

Page 2-4

HUD-Wash., D. C.

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4580.1

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(2-2) (2) Plot plans, sketches, or site details may not be necessary

in every case, but the submission should include update

information which may not be contained in the original

project files. If improvements alterations or other

changes are required, the cost thereof may be financed,

under appropriate circumstances, as a rehabilitation loan

under Section 234(d). In some instances, it may be

possible for the grantors/sponsors to finance such

improvements with independent funds. If the latter is

the case the form used for conversion, Blanket Commitment

for Insurance of Individual Mortgages, (FHA Form 3275-A)

will be conditioned with the requirements for repair or

rehabilitation.

e\. Conversion from the Project Phase to the Individual Unit Phase.

Whether construction has been effected through Section 234(d)

or some other Section of the Act, the same basic requirements

will apply to the insurance of mortgages on the individual

units under Section 234(c). A minimum of four units is

necessary to make the undertaking eligible. The units may be

located in one or in several structures within a common estate.

\(1\) However, the project, if it consists of 12 or more units,

must have been covered by a mortgage insured under some

multifamily Section of the Act (other than Section 213,

management or sales type). A conventionally financed

condominium would, therefore, have to be rehabilitated

under Section 234(d) to be eligible.

\(2\) Section 213, Investor-Sponsor type projects are eligible

for conversion to condominiums as long as the project was

previously insured. It is not required that the structure

be presently encumbered by the insured mortgage or by any

mortgage.

\(3\) Except where a release of units from a project mortgage

is permitted, it is required that the HUD-FHA project

insured mortgage be paid in full or the insurance

contract terminated before the family unit mortgages may

be insured.

\(4\) In insurance upon completion cases, evidence must be

shown that the construction or project indebtedness,

regardless of its form, is paid off and all units are

free and clear of liens. All construction or

rehabilitation work must be completed, except for minor

items, before title is conveyed to any individual owner.

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Page 2-5 6/73

HUD-Wash., D. C.

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4580.1

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(2-2) (5) The project phase will be closed out in accordance with

the FHA Closing Requirements (Initial Endorsement, FHA

Form 3257 and Final Endorsement, 3257-G in insurance of

advances cases) to accomplish Initial/Final Endorsement.

In standard Insurance upon completion cases and in

conversions from other Sections of the Act, under a Blanket

Commitment for Insurance of Individual Mortgage (FHA Form

3275-A), use FHA Closing Requirements Form 3257-D after

the individual Section 234(c) or 235(i) mortgages have

been processed in accordance with the instructions in

Reference (1) of the Foreword. The FHA Form 3257-H

instructions are used only when the insurance is to be

terminated immediately after endorsement.

f\. State Securities Requirements. Sponsors of condominium

housing projects must ascertain what State requirements, if

any, must be complied with prior to solicitation of prospective

purchasers. The States of California and New York, for

example, have specialized requirements on this subject.

g\. Testing the Market. It is HUD-FHA policy not to permit

solicitation prior to the issuance of the HUD-FHA commitment

and HUD-FHA approval of the condominium organizational

documents. The purpose of this limitation is to avoid

involvement of the consumer\'s down payments until such time as

there has been a thorough study of the proposal by HUD-FHA and

it appears reasonably likely that the project will in fact go

forward and that adequate consumer safeguards have been

established. However, there is no intention to preclude

interested parties from ascertaining the number of people in the

area who would be interested in the development of a particular

housing project, provided that individuals do not obligate

themselves at that point to purchase units in the condominium

when and if it is formed. A grantor/sponsor must not collect

down payments at the time he is thus testing the market,

although upon delivery of an information bulletin acceptable to

HUD-FHA to the prospective purchaser, he may collect a small

amount (not exceeding \$200) to evidence sincerity. This sum

must be refundable in the event the undertaking does not

materialize within a reasonable time. If the undertaking does

materialize, the amounts collected must be applied to the

respective purchasers\' down payments. In such instances,

the grantor/sponsor must be admonished not to make any

representations, oral or written, that there have been any

HUD-FHA approvals in connection with the project and must be

advised that all deposits are to be escrowed in such manner as

to fully protect the depositors.

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6/73

Page 2-6

HUD-Wash., D. C.

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4580.1

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(2-2) h. Solicitation of Condominium Purchasers. Solicitation for

condominium purchasers can be made before or during the course

of construction assuming the parties have obtained blanket

commitments for insurance and follow solicitation procedures

approved by HUD-FHA. Commitments will be conditioned so as to

restrict the conveyance of title until construction has been

completed and until the required percentage of condominium

purchasers has been obtained; Pending transfer of title

pursuant to the condominium plan, the grantor/sponsor may

permit occupancy by the condominium subscribers who, until the

passage of title, will have the status of rental tenants.

i\. Property Insurance. The HUD-FHA model form for establishing

a condominium gives to the mortgagees the right to require

insurance coverage in a manner satisfactory to them.

\(1\) In the individual unit phase, the type and/or form of

insurance coverage is not a matter for decision by

HUD-FHA. At the time a mortgagee submits its claim for

payment under the mortgage insurance contract the family

unit and the common elements must be undamaged by fire,

earthquake, tornado or boiler explosion. Such damage,

if any, must be repaired prior to conveyance to the

Secretary or the amount of the claim will be decreased

(by the amount of HUD-FHA estimate of the decrease in

value or the mortgagee\'s fire and hazard insurance

recovery, whichever is the greater) unless the case meets

the requirements of Section 234.270(b) of the HUD-FHA

Regulations. Accordingly, it is likely that a prudent

lender will require insurance coverage. it should be

noted, however, that unlike Section 203, damage due to

flood has been eliminated from these considerations.

\(2\) The Association of Owners presumably will wish to be

covered by fire and liability insurance to provide

protection against damage suits arising from injuries

sustained on the premises. If there is a steam boiler

or boilers in operation in connection with the condominium,

specific Boiler Explosion Insurance may be desired

in an adequate amount. Whether this coverage should take

the form of a Multi-Peril policy is a matter for the

Association of Owners to decide.

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Page 2-7 6/73

HUD-Wash., D. C.

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4580.1

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(2-2) (3) Representatives of the insurance industry have suggested

that the most practical method of handling the problem

will be a Multi-Peril type of policy covering the

replacement cost of the entire building (or buildings)

rather than individual policies on each family unit. The

policy would be issued to the Association of Owners as

Trustee, or as required by the lenders and set forth in the

Declaration for all the unit owners as their respective

interests shall appear. (Individual owners would not be

precluded from obtaining additional insurance should they

so desire.) The loss payable clause would provide that

losses under the policy shall be adjusted with and be

payable to the trustee for the benefit of all individual

unit owners and mortgagees as their interests may appear.

In the foregoing case, the property insurance premium

may be made a common expense payable as part of the

monthly assessments due the Association of Owners.

j\. Properties That Were Not Previously Covered by a HUD-FHA

Insured Mortgage. As a result of the 1968 legislation, a

mortgage covering a condominium unit located in a project

composed of 11 or less units is eligible for insurance even

though the project has not been covered by a HUD-FHA insured

project mortgage. Such cases will be processed pursuant to

the underwriting provisions of Chapter 6 of this Handbook and

Reference (1) of the Foreword.

If the project consists of 12 or more units, the individual

units therein are not eligible for HUD-FHA insured financing

under Section 234(c) unless the project had been covered by

a HUD-FHA insured Multifamily mortgage (other than Section

213 Management or Sales Type), or is rehabilitated under

Section 234(d). A distinction is made between a project where

construction was commenced prior to August 1, 1968 (the

effective date of the Housing and Urban Development Act of

1968), and those where construction was commenced after such

date, as discussed below:

\(1\) Projects where Construction was Commenced Prior to

August 1, 1968. In the case of a project comprising in

excess of 11 units where construction was commenced

prior to August 1, 1968, without HUD-FHA insured

financing, a proposal to convert 11 or less of the units

to a

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6/73

Page 2-8

HUD-Wash., D. C.

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4580.1

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(2-2) condominium form of ownership is acceptable where the

units are so constructed as to permit such a separation

into condominium ownership to be logically and feasibly

made. Subsequent condominium of 11 or less units will

likewise be acceptable even though they may be a part of

the same over-all housing development.

\(2\) Projects where Construction was Commenced on or After

August 1, 1968. Where a builder contemplates from the

start the construction of a condominium development

consisting of more than 11 units, but proposes to develop

it on a piecemeal basis (composed of small projects of

11 or less units) he will be required to proceed in a

multifamily basis under Section 234(d). He would

otherwise be improperly avoiding the usual HUD-FHA project

conditions, such as prevailing wage requirements, cost

certification, HUD-FHA construction inspections, etc.

In other words, the processing will be on the basis of

12 units or more.

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Page 2-9 (and 10) 6/73

HUD-Wash., D. C.