U.S. Department of Housing and Urban Development

H O U S I N G

4350.6

APPENDIX 2-1

Special Attention of: Notice H 91-57 (HUD)

Administrators-Regional

Housing Commissioners Issued: 6/27/91

Directors, Office of Regional Housing Expires: 6/30/92

Managers, Division Directors, Loan

Management Category A, B, and C Offices Cross References:

Field office Housing Management

Division; Regional Counsel,

Chief Counsel and Chief Attorneys

Subject: Restrictions on the Sale of Subsidized Rental

Housing Imposed by Section 181(g) of the Housing

and Community Development Act of 1987

The purpose of this Notice is to discuss the applicability

and requirements of Section 203(h)(2) of the Housing and

Community Development Amendments of 1978, as amended by Section

181(g) of the Housing and Community Development Act of 1987.

This Notice amends the TPA processing instructions in Notice 84-37.

Section 203 of the 1978 Amendments sets forth the goals and

requirements applicable to the management and disposition of

HUD-owned multifamily rental projects. Section 181 of the 1987 Act

expands Section 203\'s applicability to include projects with HUD-held

mortgages that are \"delinquent, under a workout agreement or

being foreclosed upon by the Secretary.\" In addition, Section

181(g) adds requirements governing the sale of HUD-held

subsidized mortgages and transfers of physical assets (TPAs) of

subsidized projects. With respect to transfers of physical

assets, Section 203(h)(2) provides as follows:

\(2\) The Secretary may not approve the sale of any

subsidized project (A) that is subject to a mortgage

held by the Secretary; or (B) if the sale transaction

involves the provision of any additional subsidy funds

by the Secretary or the recasting of the mortgage,

unless such sale is made as part of a transaction that

will ensure that such project will continue to operate

at least until the maturity date of the loan or

mortgage in a manner that will provide rental housing

on terms at least as advantageous to existing and

future tenants as the terms required by the program

under which the loan or mortgage was made or insured

prior to the proposed sale of the project.

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TPAs subject to Section 203(h)(2). Sale transactions

covered by Section 203(h)(2) include projects undergoing a

transfer of ownership. The Office of General Counsel has

concluded that the restrictions set forth in Section 203(h)(2)

apply to TPAs requiring either a modified or full review. The

phrase \"the provision of any additional subsidy funds by the

Secretary\" includes, but is not limited to, an increase in the

number of units under a Section 8 HAP Contract and an increase in

the Section 8 contract rents based on rent increases approved in

connection with the TPA. For purposes of this Notice, the term

\"recasting\" means any mortgaged indebtedness modification which

entails a change in the principal amount, interest rate, monthly

mortgage payment, or maturity date.

Projects subject to Section 203(h)(2). The definition of

\"subsidized project\" is set forth in Section 203(i)(2) of the

1978 Amendments, as amended by Section 181(h) of the 1987 Act and

Section 1010(d) of the Stewart B. McKinney Homeless Assistance

Amendments Act of 1988, Under this definition, the term

\"subsidized project,\" for purposes of Section 203(h)(2), includes

a project receiving any of the following forms of assistance:

\(1\) a Section 221(d)(3) BMIR loan;

\(2\) Section 236 Interest Reduction Payments;

\(3\) Rent Supplement assistance;

\(4\) the Section 202 or Section 312 programs; or

\(5\) project-based assistance under Section 23 or Section 8

regardless of the number of units assisted. (Examples:

A project sold by HUD with a purchase money mortgage

and Section 8 Property Disposition Set-Aside

assistance, or a Section 221(d)(3) market rate project

with Section 8 Loan Management Set-Aside assistance.)

With respect to the TPA approval requirements of Section

203(h)(2), a project is considered \"subsidized\" even if the only

subsidy is Section 8 project-based assistance covering less than

50 percent of the units.

Restrictions imposed pursuant to Section 203(h)(2). In

cases where Section 203(h)(2) is applicable, HUD must condition

its approval of the TPA on the purchaser\'s agreement to extend

the prepayment prohibition to the maturity date of the mortgage

or execute a use agreement to maintain the project in accordance

with the tenant-related provisions of the applicable mortgage

insurance program until the maturity date of the mortgage. The

nature of the restriction required by Section 203(h)(2) is

determined by the \"program under which the loan or mortgage was

made or insured,\" and not by the requirements of the Section 8

program. Thus, for example, if the project\'s mortgage was

insured under the Section 221(d)(4) program and the owner and HUD

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4350.6

APPENDIX 2-1

agree to comply with Section 203(h)(2) through the execution of a

use agreement, the agreement would include only those tenant

protections (e.g., maintenance of rental use) which are derived

from the Section 221(d)(4) program requirements.

Implementation. Upon receiving an application for TPA

approval, the field office should take the following steps in

order to implement Section 203(h)(2):

1\. Determine whether the project is a \"subsidized project\"

for purpose of Section 203(h)(2), and if so, whether

\(a\) the mortgage is HUD-held, or (b) the sale

transaction involves the provision of any additional

subsidy funds by the Secretary or a recasting of the

mortgage.

2\. If the project is a subsidized project for purposes of

Section 203(h)(2), and either (a) the mortgage is HUD-held

or (b) the sale transaction involves the provision

of any additional subsidy funds by the Secretary or a

recasting of the mortgage, notify the applicant that

the purchaser will have to comply with Section

203(h)(2), and inquire whether the purchaser intends to

meet this requirement by extension of the prepayment

prohibition until the maturity date of the mortgage or

by execution and recordation of a use agreement that

would have priority over all liens and encumbrances

other than the HUD mortgage (except as approved by

HUD). The use agreement would not have priority over

liens and encumbrances placed on the property prior to

the TPA and approved by HUD, but would have priority

over liens and encumbrances imposed in connection with

the TPA. The use agreement would be enforceable by HUD

as well as tenants and potential tenants, and would

continue in effect until the maturity date of the

mortgage.

3\. If the purchaser elects to comply with Section

203(h)(2) by extending the prepayment prohibition, the

field office should execute a Modification of Note and

Mortgage to effect such an extension at the time of TPA

approval. For TPAs involving HUD insured mortgages,

the mortgagor must obtain consent of the mortgagee to

extend the prepayment prohibition, and the mortgagee

and mortgager, as well as HUD, must execute the

Modification of Note and Mortgage. For TPAs involving

HUD-held mortgages, the Modification is executed by the

mortgager and HUD. Prior to execution of the

Modification, the mortgagor must obtain a sample title

insurance policy endorsement from the title insurance

company and submit it to HUD for review. Once the

Modification has been executed it should be recorded,

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4350.6

APPENDIX 2-1

and Field Counsel should obtain, at the mortgagor\'s

expense, a title endorsement updating to the date of

recordation the effective date of the title policy

without adding any senior liens or other senior

encumbrances (except as approved by HUD). Should the

mortgagee withhold consent of the modification of the

mortgage or mortgage note, the owner must execute a use

agreement as described in the following paragraph.

4\. If the purchaser elects to comply with Section

203(h)(2) through the execution of a use agreement,

Field Office staff should obtain a use agreement for

the appropriate project type. The Office of the

General Counsel\'s Multifamily Mortgage Division (Loan

Management and Property Disposition Section) will be

responsible for the development of these agreements,

except in the case of Section 202 in which case the

Office of General Counsel\'s Assisted Housing Division

will be responsible for the development of a sample

agreement. Sample use agreements for each type of

project (221(d)(3), 236, 202, etc.) will be forwarded

to Field Offices. Upon execution, the use agreement

should be recorded. Field Counsel should ensure that

the use agreement has priority over all liens other

than the HUD mortgage (except as approved by HUD) and

will continue in effect until the maturity date of the

mortgage. See paragraph 2 above.

Finally, the effective date of these requirements is June

16, 1989. A memo dated June 16, 1989, from Donald Kaplan,

Director, Office of multifamily Housing management, directed

field offices not to accept, process or approve any TPA

application for any subsidized project with a HUD-held mortgage,

and to cease processing any TPAs that had already been submitted.

Likewise, in the case of any TPA application involving a

subsidized project with an insured mortgage in which the TPA

included additional HUD assistance or the recasting of the

mortgage, field offices were to inform owners that the TPA would

be held by the field office until further instructions were

received. Field Offices should not have given preliminary

approval for any TPAs falling into these categories without first

having secured a written agreement from the owner stating that

the owners would continue to manage the project under its current

program for the remaining term of the mortgage.

Field Office staff should review each TPA processed since

the effective date, in order to determine whether Section

203(h)(2) is applicable to the TPA. In cases where Section

203(h)(2) is applicable and the Field Office obtained the written

agreement described above from the owner, the Field Office Loan

Management staff should write a certified letter to the owner of

record at the address of record as soon as possible. This letter

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4350.6

APPENDIX 2-1

should explain the requirements of Section 203(h)(2) to the

owner, including the requirement that the owner must agree to

extend the prepayment prohibition by executing a Modification of

Note and Mortgage or to maintain the tenant-related provisions of

the applicable mortgage insurance program by executing a use

agreement. This letter should also have a copy of this Notice

attached. If the owner refuses to extend the prepayment

prohibition or execute a new use agreement, the Field Office

should inform the owner that the Department will not grant final

TPA approval, approve a plan of action for the project under

Title II of the Housing and Community Development Act of 1987 or

under Title VI of the Cranston-Gonzalez National Affordable

Housing Act, or otherwise approve any request by the owner for

approval of prepayment of the mortgage. In cases where

preliminary approval was granted by the Field Office without

securing the necessary agreements, the owner will not be held to

the retroactive requirements imposed by this notice.

Regional Offices will have oversight responsibility for

projects requiring retroactive review and action. The Regional

Director of Housing should designate one person to assume this

oversight responsibility. All projects calling for retroactive

review should be processed within 90 days of this Notice.

You may address specific questions concerning this Notice to

the appropriate Desk Officer, Operations Division, Office of

Multifamily Housing Management or to Harold Levy of the Office of

General Counsel, Multifamily Mortgage Division, at FTS 458-2975.

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

Assistant Secretary for

Housing Federal Housing

Commissioner

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4350.6

APPENDIX 2-2

Notice of Election

to Proceed

Title II or Title VI

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form HUD-9610(04/07/92)

ref. Handbook 4350.6

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4350.6

APPENDIX 2-2A

Instructions for Completing Form HUD-9610

NOTICE OF ELECTION TO PROCEED

1\. Fill in the project\'s official name, with complete address

2\. Fill in the address of the Local HUD Field Office which

will be processing this Notice and the Plan of Action.

3\. Fill in the FHA Project Number.

4\. Fill in the submission date of this Notice.

5\. a. Check this box if the election is for Title II

incentives without going through the Title VI

appraisal process.

b\. Check this box if the election is to proceed through

the Title VI appraisal process before making the

decision for either Title II or Title VI incentives.

c\. All owners submitting this form must check this box

to certify that they are eligible for incentives

under the Transition Rule.

6\. Fill in the owner\'s full name and complete business

address.

7\. Owner must certify the truth of the above information with

a signature and date in this box.

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