U.S. Department of Housing and Urban Development

H O U S I N G

Special Attention of: Notice H 95-4 (HUD)

All Directors of Housing Issued: January 20, 1995

All Directors of Multifamily Expires: January 31, 1996

All Economic and Market Analysts

All Senior Multifamily Appraisers Cross References:

All Senior Multifamily Mortgage Credit

Examiners

Subject: Subsidy Layering Reviews (SLRs) - Implementing Instructions

On February 25, 1994, Headquarters delegated the authority to perform

Subsidy Layering Reviews (SLRs) to HUD Field Offices (FOs) which process

multifamily assistance requests. The Interim Guidelines were published
for

effect on that date, followed by a 60 day comment period. Comments
received

were responded to in the Revised Subsidy Layering Guidelines
(RSLGs-Addendum

1, -published in the Federal Register, Thursday, December 15, 1994, Part

III).

The RSLGs also implement Section 911 of the Housing and Community

Development Act of 1992, which allows FOs to further delegate SLR
authority

to qualified Housing Credit Agencies (HCAs) if Low Income Housing Tax
Credits

(LIHTCs) are involved. Accordingly, you may anticipate receiving, or may
have

already received, HCA requests to perform Section 911 SLRs.

The attached Instructions inform FOs how to delegate section 911 SLR

authority to HCAs, and monitor for HCA compliance with the RSLGs. The

Instructions also describe what FOs should do in circumstances where HUD
must

perform a SLR in accordance with the RSLGs.

Please note: These instructions supersede our memorandum of February 2,

1988 entitled, \"Processing HUD-Insured Projects Involving Low-Income
Tax

Credits,\" and also Notice H 90-17, \"Combining Low Income Housing Tax
Credits

with HUD Programs,\" and should be read together with the RSLGs. This

represents a major revision in HUD\'s SLR procedure, and must be
reviewed by

all applicable multifamily personnel.

Assistant Secretary for Housing

Federal Housing Commissioner

HMIT: Distribution:
W-3-1,W-2(H),W-3(A)(OGC)(ZAS),W-4(H),R-1,R-2,R-3-1(H)

(RC),R-3-2,R-3-3,R-6,R-6-2,R-7,R-7-2,R-8

IMPLEMENTING IN STRUCTIONS FOR THE

REVISED SUBSIDY LAYERING GUIDELINES (RSLGs)1/

TABLE OF CONTENTS:

A. Introduction 1

1\. Purpose 1

2\. Background 1

3\. Applicability 2

B. Basic Principles Underlying SLRs 3

C. Form HUD-92013 Application Exhibits and Screening: 4

1\. Exhibits 4

2\. Screening 5

D. Basic Information About Tax Credits: 6

E. Valuation Instructions if OGA Involved: 8

1\. Land, Expense, and Cost Analyses: Similarities

Outweigh Differences 8

2\. Rental Analysis 11

a\. Unsubsidized Rents and Marketability 11

b\. Subsidized Rents 13

3\. Operating Loss Deficit Estimate 14

4\. Loan Term 16

5\. Completion of Processing: Additional Processing

Instructions 16

6\. Preservation and LIHTCs/ 911 SLRs 17

F. Mortgage Credit Instructions for SLRs 17

1\. Determination of the Maximum Insurable Mortgage 17

2\. Determination of the Total Requirements for

Settlement 17

3\. Sources of Funds 18

a\. Participating HCAs 18

b\. Non-Participating HCAs 19

4\. Pre-Cost Certification Conference and Cost

Certification 19

5\. Mortgage Increases 19

G. HUD Correspondence with and Monitoring of an HCA 19

1\. Acknowledging an HCA\'s Acceptance of Section 911

SLR and Certification Authority 20

2\. Communications 20

3\. FO Monitoring 21

1/ Supplemental instructions covering only Housing Development forms of

HUD Housing Assistance (HHA), i.e., primarily mortgage insurance. For
Housing

Management instructions see Chapter 17, Handbook 4350.1, REV-1, and
Section

III of Addendum 11 below.

H. HUD\'s Residual 102 SLR Authority; Additional Instructions

for 102 SLRs; Miscellaneous Processing Anomalies 23

1\. Valuation\'s Replacement Cost Formula (RCF) 24

2\. Tax-Exempt Bond Financing, LIHTCs, and Section 221 25

3\. Section 223 (f) 25

4\. Preservation and LIHTCs/ 102 SLRs 27

5 HOME Funds 27

6\. Section 8 Community Investment Demonstration

Program 27

7\. Risk-Sharing 27

8\. Section 223 (a) (7) 28

9\. Section 102 Certification 28

I. FO Counsel Assistance 29

1\. Reserve Escrows 29

a\. Operating Deficit Escrows 29

b\. Resident Initiative Fund Reserves 29

c\. Miscellaneous Reserve Escrows Established by

Sponsor 30

2\. Use Restrictions and Subordination 30

3\. Special Commitment Provisions 30

a\. Sponsor\'s Certified Intentions Not to Obtain

OGA 30

b\. Commitments to Project Sponsors Receiving or

Intending to Apply for LIHTCs 30

c\. Commitments to projects which receive any

form of OGA 31

4\. LIHTC Reservation Review 31

5\. Syndication and Partnership Agreements 32

Addendum 1 Administrative Guidelines:

Limitations on Combining HUD and

Other Government Assistance; \"Subsidy Layering\" 33

Addendum 2 Replacement Cost by Formula:

New Construction or Substantial Rehabilitation;

With & Without BSPRA\* 69

Addendum 3 REQUIRED FORMAT-Section 221

SOURCES AND USES STATEMENT 71

Addendum 4 REQUIRED FORMAT-Section 223(f)

SOURCES AND USES STATEMENT 76

Addendum 5 REQUIRED SOURCES AND USES FORMAT FOR

MOST OTHER HHA and OGA COMBINATIONS 78

Addendum 6 REQUIRED SOURCES AND USES FORMAT FOR

PRESERVATION PROCESSING 81

Addendum 7 Summary S & U Format Completion Instructions 83

Addendum 8 Processing HUD Insured Projects

Involving Low Income Housing Tax Credits

Using Form HUD-92264-T 84

Addendum 9 Sponsor Authorization, Acknowledgement,

Consent and Release Regarding

Multiple Assistance Requests for

a Multifamily Project 90

Addendum 10 Form HUD-2880 92

Addendum 11 Procedural and Sequential Descriptions

for Combining LIHTC-OGA with

Various Forms of HHA 93

Addendum 12 SECTION 102(d) CERTIFICATION 103

Addendum 13 ACRONYM LIST 104

A. Introduction.

1\. Purpose. These instructions:

a\. clarify for FO Housing Development (HD) staff special

procedures to follow when processing mortgage insurance

applications together with Other Government Assistance (OGA),

especially low income housing tax credits (LIHTCs) ;

b\. supplement existing handbook instructions and processing

requirements (but supersede Notice H 90-17 and applicable

Demery Memoranda relating to LIHTCs);

c\. implement FO performance of 102 SLRs;

d\. allow Housing Credit Agencies (HCAs) to accept and perform 911

SLRs in accordance with the RSLGs and these Instructions, and

FOs to monitor 911 HCAs.

Note: For the reader\'s convenience, an acronym list is supplied

as Addendum 13.

2\. Background. Section 102 of the Department of Housing and Urban

Development Reform Act of 1989 requires that for all projects

receiving HUD Housing Assistance (HHA: mortgage insurance is only

one form of HHA) combined with any form of Other Government

Assistance (OGA: LIHTCs are a substantial form of OGA which require

special attention), HUD must review that project\'s subsidy layers

and certify there is \"no more assistance than is necessary to

provide affordable housing.\" HUD initially promulgated Guidelines

in 1991 establishing a method for reducing unnecessary subsidy

layers in LIHTC cases.

HUD was in the process of revising its method of review when

Congress passed Section 911 of the Housing and Community

Development Act of 1992. This statute, amended by section 308 of

the Multifamily Housing Property Disposition Reform Act of 1994,

allows HUD to delegate subsidy layering review (SLR) authority to

HCAs where LIHTCs are involved in a transaction. HUD was charged

with establishing guidelines for this procedure, and was implicitly

authorized to monitor its implementation.

Accordingly, HUD published for public comment and finalized the

RSLGs (Addendum 1). In areas where an HCA accepts Section 911

authority, it performs the SLR and Certification subject to HUD

monitoring. If the HA with LIHTC-allocating authority in the area

where a project is located does not accept Section 911 SLR

authority, or has been revoked for non-compliance with the RSLGs,

or LIHTCs are not involved, then the applicable FO must perform a

Section 102 SLR and Certification in accordance with the RSLGs and

applicable instructions.

3\. Applicability. The terms \"subsidy\" and \"assistance,\" may be used

interchangeably in the context of SLRs, and include all assistance

offered or provided through any government Source. (See 24 CFR Part

12 for lists of HHA, and a broad definition of OGA.) \"Total Project

Sources\" and \"Sources of Funds\" include subsidies, but may also

include a Sponsor\'s up-front equity contribution to meet total

construction costs. Combining HHA and OGA triggers a SLR. The

extent of Sponsor disclosure requirements and HUD FO or HCA SLR

analysis depends upon whether HHA and OGA subsidy layering is

programmatically possible. Thus, if HHA is requested for a project

which also receives OGA- both of which are forms of \"subsidy\"- then

the next step in determining which level of SLR is required is to

query whether these Sources can programmatically provide for the

same or similar Project Uses.

For example, if LIHTCs are provided for a capital improvement Use,

but Section 8 rental assistance does not include debt service for

capital improvement loans, but instead covers only operating

expense increases or reimbursement, then \"layering\" concerns are

absent, i.e., potential Project Uses do not overlap, and a 102 or

911 Certification may be made without further review, so long as

all other applicable subsidy program limitations have been

observed. By way of disclosure, program participants are

generally only required to submit detailed Form HUD-2880s if the

HHA request involved is greater than \$200,000. (See CFR 12.32

2

\(a\) (1) and Addendum 10.) Where less than this amount of HHA is

requested, FOs and HCAs may, in lieu of Form HUD-2880, accept the

Sponsor\'s simple written attestation that all programs of

assistance involved do not produce a potential overlap in Project

Uses. (See Comment 17 of Addendum 1 for other examples.)

In contrast, for cases involving clear potential program overlap,

where HHA and OGA are both available to pay for, say, capital

improvement costs, Sponsors must demonstrate to HUD in 102 SLRs, or

to the HCA in 911 SLRs, through fully detailed Form HUD-2880s that

no actual overlap in Project Uses is proposed (capital improvement

subsidy Sources being applied for or provided do not exceed capital

improvement costs estimated), and that both subsidy Sources are

necessary to provide the affordable multifamily housing.

In summary: where there is no potential HHA and OGA program

assistance overlap, HUD does not require detailed disclosures or

SLRs; however, where there is potential overlap, the burden is on

Sponsors to demonstrate no actual overlap in Project Uses to

satisfy either a 102 or 911 SLR, i.e., Sources may not exceed Uses

without either a smaller up-front equity contribution required, or

adjustment to the HHA or OGA. Please note, the HHA and OGA periods

need not precisely overlap; but for the time during which there is

potential overlap for the same purpose, a detailed SLR is required

to avoid Source duplication, i.e., \"subsidy layering\" is

prohibited.

B. Basic Principles Underlying SLRs. Multifamily housing subsidies are

limited resources, so government agencies must administer subsidies they

control as efficiently and productively as possible. In order for

designated FO (responsible for 102 SLRs) or HCA (responsible for 911

SLRs) officials to certify that \"no more assistance than is necessary\"

is being provided to any one project, certain basic principles should be

accepted and observed:

1\. a comprehensive individual project Sources and Uses Statement (S &

U\) must serve as the basis for a SLR certification if there are

potential overlapping Uses generated by the combination of HHA and

OGA (generally, the Sponsor\'s Form HUD-2880 disclosure is required,

and one of four HUD-approved S & U Formats, may be used for

\"detailed\" SLRs; contrastingly, a Sponsor\'s Attestation will

suffice if assistance Uses cannot overlap);

3

2\. Project Uses on the S & U Statement must be limited in accordance

with the RSLGs;

3\. adjustments to project Sources must be made to balance the S & U

Statement prior to SLR Certification, i.e., available Sources may

not exceed allowable Uses. HCAs adjust LIHTCs, the Source within

their control in Section 911 SLRs; for Section 102 SLRs HUD adjusts

the Source within its control, e.g., the Insured Mortgage, Section

8 contract assistance supporting allowable Uses, etc..

C. Form HUD-92013 Application Exhibits and Screening:

1\. Exhibits.

a\. Form HUD-2880. Sponsors must submit Form HUD-2880 (Addendum

10\) with all mortgage insurance applications (SAMA,

Feasibility, or Firm), and must complete only Parts I and II

if less than \$200,000 of HHA is requested and no OGA is

involved. In most cases, a Sponsor\'s fully detailed

disclosure in Parts III, IV and V will also be required.

b\. Acknowledgement/Release. Addendum 9 must accompany all

projects receiving or applying for LIHTCs.

c\. Commitment Processing.

1\. 102 SLRs. Form HUD-2880 Update is required, especially

if LIHTCs are being applied for, or, have already been

reserved or allocated. A copy of the executed LIHTC

Reservation is required, when available, but prior to

Initial Endorsement. A copy of the HCA\'s Qualified

Allocation Plan should also be obtained. When the

Sponsor has obtained Syndicators\' Letters of Intent

describing how much equity could be raised assuming

certain mortgage (debt) and LIHTC (equity) Sources

available to meet project costs, these should be

submitted for review.

2\. 911 SLRs Fully detailed Form HUD-2880 Update is required.

Any Syndicators\' Letters of Intent should be submitted to

both the FO and HCA. If SAMA was skipped, then Addendum

9 must also be submitted. A copy of the executed LIHTC

Reservation is required, when available, but prior to

Initial Endorsement.

4

d\. Pre-Construction Conference. In 102 and 911 SLRs where LIHTCs

are involved, the Sponsor\'s 1) LIHTC Reservation, if modified,

and 2) Letter of Intent OR Syndication Agreement, and 3) draft

Partnership Agreement and 4) Financing Plan are required. In

911 jurisdictions the HCA\'s 5) S & U Statement, and 6) Section

911 SLR Certification must be obtained. These exhibits must

be received by the FO at least 20 days before the scheduled

Initial Endorsement date.

Note: Exhibits listed above supplement existing submission

requirements, and applications should not be accepted

without all required exhibits.

2\. Screening. Multifamily Housing Representatives (MHRs) must

scrutinize application packages for the additional exhibits listed

above before accepting an application for processing. Where low

income housing tax credits (LIHTCs) are involved, MHRs should:

a\. ascertain the stage of the HA\'s review- e.g., Application,

Reservation, or Allocation- by communicating with the HCA;

b\. verify that the Sponsor has executed and dated Addenda 9 and

10, and provided all additional exhibits described above if

commitment processing is involved;

c\. verify on Form HUD-2880 that the Sponsor has identified either

20%/50% or 40%/60% set aside arrangements, and has identified

which units the LIHTCs are intended to be claimed against, and

the total percentage rent-restricted set-aside (this should

match LIHTC Reservation/ Allocation Agreement assumptions);

d\. verify that the required provision allowing adjustment (See

Addendum 11), or its equivalent, appears in the HCA\'s

Reservation Agreement with the Sponsor;

e\. advise the Sponsor that they must update Form HUD-2880 if

there are any subsequent changes in the information submitted

(see Addendum 10 for the Update form, and 11 for discussion of

FO coordination with HCA);

5

f\. advise multifamily valuation and mortgage credit staff

responsible for processing SLR cases to review the RSLGs

before reading supplemental processing instructions below;

g\. note that when more than 40% of the units are set aside for

low income use, and the project does not receive project-based

Section 8 rental assistance, or comparable long-term State or

local rental assistance, Headquarters\' approval of the

completed underwriting is no longer required (The subparagraph

in HUD Handbook 4430.1, REV-1, 1-42D3 is accordingly

modified). FOs must satisfy themselves that there is adequate

market need for the proposed number of unsubsidized rent-

restricted units;

h\. coordinate the necessary joint marketability analyses and

recommendations which EMAS and Valuation staff provide to the

Director of Housing or Multifamily (DHMF). Analyses should be

comprehensive and consider the effects of varying percentage

set-aside assumptions, e.g., 40% is the minimum for technical

compliance where 40%/60% elections are made to ensure not

losing a LIHTC Allocation, but the Reservation/Allocation

Agreement may include 100% of the units in the HCA\'s estimate

of \"eligible basis,\" and therefore all of the units are set-

aside for affordable use, and are subject to compliance for

the rent-restricted period;

i\. assist the DHMF as requested in accordance with activities

discussed below in Section G, e.g., complete the applicable S

& U Statement to the extent possible pursuant to Addendum 7,

and forward it to the HCA so that it can perform its 911 SLR.

Generally, the HUD-approved Source, and the upper portion of

the Uses section of the applicable S & U Statement can be

completed by the MHR, before forwarding it to the HCA for

completion.

D. Basic Information About Tax Credits: Section 42 of the Internal
Revenue

Code provides highly detailed information about LIHTCs. HCAs can

provide information on how section 42 requirements have been

substantively and procedurally implemented in individual State and local

areas. Basically, LIHTCs are allocated (by HCAs to owners of eligible

projects) in 10-year streams for the new construction, substantial

rehabilitation, or acquisition and rehabilitation of multifamily units.

In return for LIHTC Allocations, rent restrictions are placed on set-

6

aside units for at least an initial 15-year compliance period (Property

use restrictions of at least another 15 years and affordability

compliance also generally apply to post-1989 projects). Historic Tax

Credits, by contrast, may be awarded for just one year to developers of

projects with historical significance and do not trigger rent

restrictions (unless combined with a ten-year stream of LIHTCs and

corresponding obligations). A qualified State or Local Housing Credit

Agency (HCA), or bond financing agency (for Tax-exempt proposals),

determines whether to award LIHTCs to a project and in what amount (for

Tax-exempt bond-financed projects see Section H below).

Purposes of the LIHTC form of OGA are, at the least, 1.) to attract

taxpayer-investors\' equity capital to housing uses by providing Tax
Code

incentives, thus increasing the supply and improving the quality of

affordable rental housing units; and 2.) to provide affordable units

with rent restricted use for an extended period. Multifamily housing

projects receiving LIHTCs are typically syndicated (sold) through

limited partnerships to equity investors (through both public and

private offerings), who are attracted by the benefits of owning these

properties (See \"Ownership\" in RSLG Glossary). The Sponsor typically

retains General Partnership duties of management, maintenance, and

assured compliance with rent-restrictions for at least 15 years, in

return for an annual management fee and, usually, phased Developer Fee

payments2/. The limited partners\'/investors\' (\"single-asset
mortgagor-

entity\" from HUD\'s perspective) cash contributions effectively
purchase

95-99% of the equity position from the Sponsor (at least with respect to

LIHTCs and Depreciation; division of cash flows and reversionary

interests are negotiable).

A few States have established housing tax credit assistance programs

which vary significantly from the Federal LIHTC program. FOs in 102

SLRs, and HCAs in 911s, must review this type of OGA in accordance

2/ Public placements typically fund equity needs up front in a lump sum.

But for Private placements, Syndication Agreements typically break up

the General Partner\'s earning of total equity installments in patterns

of 30%-50%-20%, or, 30%-40%-30% with the first installment payable at

signing of the Syndication Agreement or closing of the construction

loan, the second at construction completion or \"Placement in Service\",

and the final installment after \"sustaining occupancy\" is reached for
a

defined period or the permanent loan take-out is closed. The

Developer\'s Fee portion of the completed equity take-out is typically

proportionately weighted and deferred to latter installments, and based

on varying conditions.

7

with the basic principles set forth above, instructions below, and the

RSLGs. Headquarters consultation will also be available as necessary on

a case-by-case basis.

MHRs please note: In general, greater amounts of LIHTCs are allocated

for new construction and substantial rehabilitation, and even greater

amounts if located in \"qualified census tracts\". (see RSLG Glossary;
see

also Federal Register, Vol 59, No.204, Monday, October 24, 1994, page

53518.) The LIHTC definition of how much repair cost constitutes

\"rehabilitation\" varies significantly from Section 221 requirements;
but

FOs will apply HUD\'s program rules to proposals to determine

eligibility. Please also note that HUD Cost Analysts and Appraisers

will process proposals in accordance with outstanding program and

technical handbook instructions to estimate total replacement cost, or

value, as applicable. HCAs accepting 911 SLR authority must accept

HUD\'s program eligibility determinations, replacement cost and value

estimates, cost certification results (if \"back-end\" SLR required),
and

applicable S & U Statement format (See Addenda 3 through 7, and 11).

E. Valuation Instructions if OGA Involved: Appraisers will follow

outstanding Handbook procedures if non-LIHTC OGA such as grants are

involved, and also consider the following if LIHTCs are involved and a

911 SLR will be performed:

1\. Land, Expense, and Cost Analyses: Similarities Outweigh

Differences. The fact that LIHTCs are involved will not affect the

Appraiser\'s estimate of \"Warranted Price of Land\" in new

construction, or \"As Is\" value in substantial rehabilitation cases,

i.e., Line G73, Form HUD-92264. Hard and soft cost items included

in \"Total Estimated Development Cost,\" Line G72, will likewise not

be significantly affected. The expense analysis used to estimate

\"Total Project Expenses,\" Line E29, also will not be significantly

affected, but Appraisers must exercise greater care and judgment in

selecting appropriate comparables and making adjustments (See more

below). The Appraiser may complete these analyses first, noting

also the following:

a\. Property Value. The RSLGs specifically state that any value

attributable to an LIHTC award will not be recognized in the

appraisal, i.e., pretend the LIHTCs are not there when

performing the land or \"as is\" appraisal in Section 221

processing. For Section 223 (f) proposals, see Section H

below.

8

b\. Expenses. Appraisers must be careful in the Form HUD-92274

analysis not to underestimate necessary project expenses.

Because tenant income may not increase at the same rate as

expenses during the 15 year rent-restricted holding period (or

the use restriction period, extended to at least 30 years),

the appraisal must contain a reasonable initial expense

estimate including an estimate of any additional management

and maintenance expenses LIHTC projects may experience to

attract and retain tenants eligible to occupy set-aside units.

If available, similar rent-restricted expense comparables

should be selected; but project-based budget-based Section 8

projects insured under Section 236 or 221 (d) (3) must be

carefully scrutinized to determine whether Form HUD-92410

Annual Financial Statement amounts reflect reliable processing

estimates (Confer with the assigned Loan Management Servicer-

LMS). Where no reliable rent restricted or subsidized expense

comparables are available, market rate projects selected for

92274 analysis must be properly adjusted for differences.

Varying set-aside assumptions in \"mixed income\" projects may

also affect expense estimates. Appraisers must provide a full

explanation of adjustments, directly relating differing

advertising or maintenance expense estimates to varying

turnover rates, and differing administrative expenses to LIHTC

compliance and record-keeping requirements, i.e., the

Appraiser must substantiate the estimate.

After completing the Form HUD- 92274 expense estimate, the

Appraiser must establish the minimum allowable processing

rent. This is accomplished by dividing up total project

expenses on a per unit per month individual unit type basis,

and then building in a 30% cushion, which provides a minimum

contribution to debt service.

Therefore, the Appraiser needs to develop unit type expense

shares based on unit type space ratios. A unit type\'s space

ratio is that unit type\'s total number of units multiplied by

its estimated square footage, with the result divided by Line

C 34, the net rentable residential area. If calculated

properly the sum of all unit type space ratios derived will be

1\.

After determining a space ratio for each unit type, the

Appraiser will then multiply the ratios derived by the total

9

project expenses, Line E29. Next, the results for unit type

shares of the total expense are divided by the number of units

of each individual unit type to estimate the base

expense/rent, which is simply one individual unit\'s share of

total project expenses. This base multiplied by 130% is a

unit\'s minimum permissible annual rent.

Example. Assume a 150-unit project which has total project

expenses before debt service of \$500,000, and net rentable

residential area of 134,500 square feet distributed among the

unit types in Section C as follows:

1 BRs - 50 @ 650 sq.ft.

2 BRs - 30 @ 800 sq.ft.

30 @ 1000 sq.ft.

3 BRs - 40 @ 1200 sq.ft.

Determining the 1 BR unit type\'s space ratio is done as

follows: 50 1 BR units X 650 sq.ft. = 32,500 sq. ft.; 32,500

/ 134,500 = .24, i.e., the one-bedrooms account for about 24%

of the net residential area. Proceeding similarly with the

two and three bedroom types yields ratios of .18 for the

smaller 2 BRs, .22 for the larger 2 BRs and .36 for the 3 BRs.

The sum of .24, .18, .22, and .36 = 1, which means that the

Appraiser has properly divided space by unit type.

Next, the Appraiser multiplies the ratios by the total project

expenses, as follows in this example:

1 BRs - \$500,000 X .24 = \$120,000

2 BRs - 800 sq.ft. \$500,000 X .18 = \$90,000

1000 sq.ft. \$500,000 X .22 = \$110,000

3 BRs - \$500,000 X 36 = \$180,000

The next step is to determine the dollars per unit for each

type:

1 BRs - \$120,000 / 50 units = \$2400

2 BRs - \$90,000 / 30 units = \$3000

\$110,000 / 30 units = \$3667

3 BRs - \$180,000 / 40 units = \$4500

10

Divide by 12 to get monthly expense apportionment:

1 BR: \$200

2 BR, 800 sq. ft.: \$250

1000 sq. ft.: \$305

3 BR: \$375

Multiply by 1.3 to build in 30% cushion, and provide for some

debt service contribution:

1 BR: \$260

2 BR, 800 sq. ft.: \$325

1000 sq. ft.: \$397

3 BR: \$488

Line 5 of Form HUD-92264-T may not be less than the minimum

amounts calculated above for this example subject\'s unit

types. Thus, if EMAS recommends that the lower \"sill\" of the

area median income \"window\" (the upper \"sash\" is 60% of area

median income for projects with 40% set aside) must be lowered

below these rents to produce a large enough pool of eligible

tenants to make the project marketable, the project is not

economically feasible and the Appraiser should recommend

either modification (a lower proportion set-aside), or,

rejection of the application proposal as submitted. See also

\"Unsubsidized Rents and Marketability\" subsection below.

c\. Cost Estimates in Previously HUD-insured Projects. For

projects already subject to a HUD-insured loan, e.g., a

Section 236 or 221(d) (3) loan staying with the project after

transfer and/or repairs insured under, say, a proposed Section

241 loan, and subject to a 100 percent project-based Section

8 contract, Cost and Valuation will reflect only the cost of

supplemental improvements on Lines G36-72, Form HUD-92264, and

the outstanding indebtedness of the existing loan on Line G73.

HUD anticipates very few such combinations of assistance to be

economically feasible under Section 8 rent restrictions, but

see also \"Subsidized Rents\" subsection below.

2\. Rental Analysis.

a\. Unsubsidized Rents and Marketability. For projects combining

LIHTCs with only HUD mortgage insurance assistance, the

Appraiser will complete Form HUD-92264-T in accordance with

11

Addendum 8. The Appraiser will initially assume the Sponsor\'s

proposed set-aside proportion to determine project rents and

marketability. However, the Appraiser should consult with

EMAS on whether there is market need assuming both the

intended, and, alternative set-aside assumptions, making

appropriate recommendations to the DHMF concerning processing

rents and marketability.

This means the Appraiser should not complete Line 5 of Form

HUD-92264-T until EMAS has completed its market review at

proposed set-aside levels, and the Appraiser has analyzed

expenses as described above. The Appraiser should consult

with EMAS and determine what number of unassisted units can be

filled by income-eligible tenants at the location in question

(See also the discussion under \"Operating Loss Deficit\"

below). Narrow \"windows\" of income eligibility (e.g., a

window of 45% to 60% of area median income) affect the total

\"pool\" of potential tenants and marketability of units. EMAS

and/or the Appraiser may, as a result of their analyses,

recommend fewer units and a lower percentage set-aside to the

DHMF. Alternatively, lower rents may be estimated for Line 5,

based on how much larger the pool of potential tenants must be

increased by opening the window further to, e.g., 35% to 60%

of area median income, in order to use the owner\'s proposed

set-aside assumption in processing. However, see the

operating expense discussion above for absolute rent minimums

the Appraiser may recommend.

Subsequent to an HCA\'s award, the MHR and Appraiser must

verify through the HCA\'s Reservation Agreement the total

percentage of units to be set aside for low income use. For

example, if the Owner has indicated that 40 percent of the

units will be set aside at 60 percent of the area median

income, the 40 percent set-aside is just a minimum

requirement, but the Owner must set aside all units for which

LIHTCs are received. If the Reservation Agreement assumes a

greater percentage of LIHTC set-aside units, e.g., 100 percent

is typically set-aside, then the Appraiser must reflect the

total percentage in the rental analysis.

Rents for all set aside units are transferred from Form HUD-

92264-T to Section C, Form HUD-92264. The usual effect of

using the Form HUD-92264-T for rent restricted projects will

12

be to significantly reduce the total net operating income,

Line F34 of Form HUD 92264, and the Debt Service Mortgage,

Criterion 5 of Trial Form HUD-92264-A. Loan to Cost Ratios of

55% to 65% are not unusual. Generally, the higher the set-

aside percentage is, then the lower the net operating income

which should be expected, and the lower the Loan to Cost ratio

which can be anticipated (leaving a larger Gap in equity

financing for the LIHTC to fill).

b\. Subsidized Rents. Appraisers and Loan Management Servicers

(LMSs) should determine through a simple up-front analysis

whether increased HUD Section 8 rental assistance is feasible

in conjunction with Section 241 mortgage insurance. If the

LMS assigned to an existing HUD-insured project has determined

that excess Section 8 contract authority exists to warrant

additional mortgage insurance processing to finance

supplemental loan repairs, then the Appraiser must work

together with the LMS to determine processing rents and

whether they can support the proposal submitted.

For example, the LMS should show the Appraiser how the current

Section 8 contract rents are calculated using a format similar

to the Rent Computation Worksheet (See HUD Handbook 4350.1,

REV-1, 9/92 version, page 7-77) The LMS and Appraiser must

work together to complete a new Worksheet assuming completion

of improvements.

The Appraiser\'s Form HUD-92274 Operating Expense Analysis also

assumes completion of proposed improvements. The LMS should

share data concerning the operating and maintenance cost of

the existing project (Form HUD-92410) so the Appraiser can

refine post-improvement estimates. Line E21 of Form HUD-92264

must include both Replacement Reserves for the new

improvements and adequate annual reserve requirements for the

existing improvements. The LMS and, if available,

Architectural staff, should be consulted regarding the

adequacy of current reserve requirements, and what the total

annual deposit should be. Assigned staff should agree on

estimated total expenses including reserves, so the LMS can

complete \"Box C\" of the Worksheet.

The Appraiser should calculate the additional debt service

necessary on the Section 241 loan, i.e., multiply the new debt

service constant, Line 5d of Trial Form HUD-92264-A, by the

13

Section 241 maximum insurable mortgage (MIM). The LMS may use

this estimate as the new mortgage debt service assumption when

completing the Rent Computation Worksheet.

The LMS must complete the worksheet3/, and then finally

determine whether there is sufficient Budget Authority in the

existing Section 8 contract to pay the amounts estimated to be

necessary. If the FO has sufficient contract authority to

grant the Section 8 increase involved, it may approve the

increase. If there is not sufficient contract authority, then

the FO must reject the requested rent increase and not provide

new Section 241 mortgage insurance (See Addendum 11, Section

III: LIHTCs may be available; but if no new HHA is involved,

no SLR is required, unless the HHA was subject to SLR

requirements at the time it was provided.) FOs may use

Addendum 5 for cases involving non-mortgage insurance HHA

combined with LIHTCs and/or other forms of OGA.

3\. Operating Loss Deficit Estimate. Appraisers must include a

reasonable operating loss deficit estimate in their appraisal and

underwriting recommendations (See \"Operating Loss Deficit\" and

\"Rent Reserves\" in RSLG Glossary). This is essential for LIHTC-

assisted projects combined with only HUD mortgage insurance

assistance because without project-based rental assistance

absorption rates may be slower and initial rent concessions are

more slowly eliminated. Rent restrictions related to tenant income

limitations decrease the size of the pool of eligible tenants for

set aside units, i e. , demand is restricted and decreased. Many

income eligible tenants generate enough income to pay the rent

without rental assistance if rents are set below area median

maximums. e.g., 60%, but may never increase their income to that

maximum or whatever percentage is used in processing pursuant to

3/ For Box \"B\" of the Worksheet where returns to equity are estimated,

the LMS should allow the same percentage of annual return to any

new equity contributed as was originally permitted under the

program involved. However, Net Syndication Proceeds which are used

to pay for approved project uses are not counted as equity

contributions for this purpose.

14

Line 5 of Form HUD-92264-T4/. Operating losses occur where

processing rents exceed rents the property manager can obtain to

achieve LIHTC set-aside compliance, i.e., owners must meet rent

restricted occupancy requirements to keep the whole LIHTC

Allocation, and post construction Syndication Installments from

Limited Partners may be commensurately reduced if LIHTCs are lost,

or, developer-funded or guaranteed reserves may be disbursed to

reimburse limited partners/investors for LIHTC losses.

Consequently, project managers often rent LIHTC set-aside

apartments as concessions to families which earn less than the

applicable area median maximums, e.g., 60%, and effectively

establish minimums they will not go below when leasing units, e.g.,

45%. This creates a narrow \"window\" of eligible tenants: those who

make too much or too little are not accepted for set-aside unit

tenancy. This practice assures initial compliance with rent

restriction terms, but may adversely affect project economics if

rents cannot be raised to Line 4, Form HUD-92264-T maximum

allowable monthly rent by formula before reserves are depleted and

tenants are unable to obtain Section 8 certificates or vouchers.

The lower window sill is generally not established too low, e.g.,

at 25% of area median income, because such rent is usually not even

enough to cover project operating expenses attributable to the set-

aside unit, e.g., \$200 - \$375 per unit per month in the example

provided above, without even taking into consideration contribution

towards debt amortization. Therefore, as described above, Line 5

may be used to establish sustainable processing rents which are

lower than Line 4 maximum formula estimates, but equal to or

greater than per unit per month operating expense estimates

multiplied by 130%.

The Appraiser should consult with EMAS to determine how wide the

window must be opened in the subject\'s location to achieve stable

and continued occupancy at the set -aside proportion anticipated,

without unduly burdening the project\'s economic feasibility.

Valuation and EMAS may determine that the project is not feasible

in the proposed area at the proposed set-aside level. For example,

if EMAS recommends opening the window to 30% of area median income,

and this equals \$325 for a given 1-BR unit in a particular area,

4/ Alternatively, such tenants may be unable to obtain Section 8

certificates or vouchers, even though they are technically

eligible, because of insufficient resources and waiting lists.

15

but Valuation\'s per unit per month expense estimate multiplied by

130% is \$350 for that 1-BR unit, then either the set-aside

proportion for such units must be sufficiently decreased,

increasing the market rent proportion of the mixed-income project

to improve project economics (individual unit type marketability

may vary, and fewer units of specific types may be necessary to

enhance feasibility; overall project set-aside proportions will be

affected by the cumulative marketability of all proposed unit

types), OR, the project must be rejected as proposed as

unmarketable and economically unfeasible without rental assistance.

If the Appraiser believes that any initial rent concessions will be

eliminated within 24 months of initial occupancy, Line 5 rent

estimates may simply be the lesser of Lines 1 and 4. The Appraiser

should consider EMAS recommendations concerning whether rent

concessions are likely to disappear, i.e., economic conditions are

generally projected to improve in the area for prospective

occupants, and whether the pool of eligible tenants is large enough

for project management to remove initial rent concessions without

suffering loss of occupancy. Operating losses estimated to occur

during rent-up, whether due to rent concessions or a slow rate of

absorption, must be calculated in all LIHTC cases.

4\. Loan Term. For LIHTC projects, the loan term used to complete

Criterion 5 of Form HUD-92264-A is equal to the restricted use

term. This means that the initial compliance period of 15 years,

plus an extended use agreement of at least another 15 years, will

provide at least 30 year terms in post-1989 LIHTC projects seeking

Section 221 or 223 financing. However, the maximum terms of 40 and

35 years, respectively, also apply. The Appraiser or MHR must

review the terms of the Reservation or Allocation Agreement to

determine the property\'s total restricted use period and

corresponding loan term limitation.

5\. Completion of Processing: Additional Processing Instructions. The

Appraiser will complete Appendix 4 of 4430.1 REV-1, and forward it

to the MHR and FO Counsel. Completed Forms HUD-92264 and Trial-

92264-A are forwarded to the MCE. The Appraiser may assist the MHR

in partial completion of the appropriate S & U Format if a 911 SLR

will be performed by a HCA. In areas where the HCA does not have

Section 911 SLR authority, or LIHTCs are not involved but some

other form of OGA is, the Appraiser must also complete

16

instructions in Section H below before forwarding processing

results to the MCE.

6\. Preservation and LIHTCs/911 SLRs. For any preservation cases

proposing to combine LIHTCs, insured Section 241 loan(s), and any

other form of HHA, Appraisers should bear in mind that preservation

value estimates should not include any enhanced value by virtue of,

or in anticipation of, the LIHTC Allocation; rather, the project\'s

Title II or Title VI preservation values should be measured

separately as if no Allocation has been or will be awarded. After

the Appraiser completes preservation processing according to

outstanding instructions, the details of any indicated Section 241

loans will be forwarded to Mortgage Credit and Loan Management,

where processing continues. HCAs which perform Section 911 SLRs

will need to coordinate with authorized FO personnel in these cases

to properly complete Addendum 6. The types of non-Section 8

payable uses and allowable amounts on the lower portion of Addendum

6 should be established through the HCA\'s consultation with the

FO\'s LMS and MCE in 911 SLRs, with the Appraiser offering

information and assistance as requested.

F. Mortgage Credit Instructions for SLRs. In addition to the basic

instructions contained in Chapter 18 of HUD Handbook 4470.1 REV-2, the

Mortgage Credit Examiner (MCE) will consider the following in processing

cases involving LIHTCs.

1\. Determination of the Maximum Insurable Mortgage. Complete Section

I of Form HUD-92264-A in accordance with outstanding program

instructions applicable to the Section of the Act under which the

application is made. The MCE is to treat the amount of required

mortgage reduction noted by Valuation in the Remarks Section of

Form HUD-92264 similar to grant/loan funds and make adjustments to

the applicable mortgage criteria in accordance with paragraph 16-3

A through E of Handbook 4470.1 REV-2.

2\. Determination of the Total Requirements for Settlement. For all

cases, whether or not LIHTCs are involved, if a working capital

and/or operating deficit escrow are required, the MCE shall

consider such amounts in the estimation of the total requirements

for settlement under Section II of Form HUD-92264-A. In addition,

if the Sources and Uses Statement indicates that the project will

involve a Resident Initiative Fund, the identified amount shall be

included as an additional cash requirement. Other non-mortgageable

uses such as alternative builder\'s profit and developer\'s fees are

not to be reflected as an additional cash requirement.

17

3\. Sources of Funds. At commitment processing, review the financial

statements of the mortgagor, if formed and capitalized, and the

principals to determine available sources of funds. Record results

in Section III of Form HUD-92264-A.

a\. Participating HCAs. For cases where the HCA is participating,

since the actual tax credit Allocation will not be made at the

time the MCE is conducting its review, the MCE shall assume

that the HCA will award enough LIHTC assistance to result in

sufficient net syndication proceeds to cover any funding gap

that exists. All cases where this assumption is made must

contain the condition in Section I (below) in the commitment.

NOTE: Include the following condition in the commitment (in

addition to the applicable conditions in Section I) if the HCA

performs a 911 SLR, but neither the owner nor its principals

have the financial capacity to meet the total estimated cash

requirements for closing without an LIHTC Allocation:

Since neither the owner nor its principals have

demonstrated the financial capacity to meet the total

estimated cash requirements for closing, this commitment

is provided on the assumption that the HCA will award

sufficient LIHTC assistance to fill the funding gap.

After the HCA has made a Reservation of LIHTCs, but no

later than at least 20 days prior to initial endorsement,

the mortgagor will sat a financing plan that meets the

requirements of paragraphs 18-4.D.2 and 3 of handbook

4470.1 REV-2 and a copy of the commitment

letter/agreement between the mortgagor and the investing

partner(s) that will be making the periodic payments of

syndication proceeds.

The MCE will review the required documentation to determine

that sufficient syndication proceeds will be. realized at

initial endorsement to meet the funding gap between the

mortgagor\'s and its principals\' sources of funds and the total

estimated cash requirements. Installments that have been

pledged as collateral to obtain bridge loan financing may not

be considered. In those cases where the financing plan

discloses that a bridge loan has been obtained for the project

18

under review, the MCE must ensure that the requirements in

paragraph 18-4.D.2.b. (5) have been met. It should be noted

that all required escrows must be established and funded in

accordance with outstanding handbook instructions. If the

financing plan is unacceptable, the MCE shall notify the DHMF

that the project is a mortgage credit reject. For such cases,

apply paragraphs 18-4.E.2 and 3.

b\. Non-Participating HCAs. For those cases where HUD performs

the SLR (e.g., HCA does not accept Section 911 SLR authority

or has been revoked), and the mortgagor and its principals do

not have the financial capacity to meet the total estimated

cash requirements for closing, the MCE shall follow the

instructions in paragraph 18-4.D.1 through 3 of Handbook

4470.1 REV-2. The financing plan and commitment letter/

agreement(s) must be submitted prior to issuance of a

commitment. These documents shall be reviewed in the same

manner as outlined above for participating HCAs. If the

financing plan is unacceptable follow the instructions in

paragraph 18-4.E of Handbook 4470.1 REV-2.

4\. Pre-Cost Certification Conference and Cost Certification.

Paragraphs 18-5 and 18-6, HUD Handbook 4470.1 REV-2 are only

applicable if a \"back-end\" SLR is required. Back-end SLRs are only

required if different types of Sources not previously considered

are involved, a mortgage increase is requested, or construction

costs decrease by more than 2%. The MCE will forward \"allowable

costs\" and \"disallowed costs, excluding disallowed developers fees\"

to the HCA if a 911 back-end SLR is required. If HUD must perform

a back-end 102 SLR, then the MCE will request that Valuation

compare project costs on Forms FHA-2331A, and 2580 with the

estimates used in processing. (Valuation will prepare another

Addendum 2 RCF using cost certified allowances, recalculate the

MIM, and return the results to the MCE.)

5\. Mortgage Increases. If a project qualifies for a mortgage increase

based on instructions contained in paragraph 11-11 of HUD Handbook

4470.1 REV-2, an increase may only be approved if there is no

evidence of diversion of net proceeds for a Use not allowed under

the RSLGs.

19

G. Correspondence with and Monitoring of an HCA.

1\. Acknowledging an HCA\'s Acceptance of Section 911 SLR and

Certification Authority. If an HCA certifies to the FO that it

understands and accepts its Section 911 SLR responsibilities in

accordance with Addendum 11, Section I, then that FO will write a

short response acknowledging the delegation of SLR authority.

2\. Communications.

DHMFs, and MHRs as directed, must strive to communicate with all

HCAs within its jurisdiction in the manner prescribed in Addendum

11, Section II. In areas with participating HCAs, where Valuation

and Mortgage Credit have completed application processing, the DHMF

should:

a\. confer with the MCE and Field Counsel to ascertain that all

requirements discussed herein have been addressed;

b\. inform the Sponsor and HCA of HUD\'s essential findings by

providing photocopies of the SAMA Letter, Form HUD-92264, Form

HUD-92264-A, and qualified commitment, or rejection letter, as

applicable to the circumstances;

c\. follow up to assure that the HCA\'s S & U Formats and Section

911 Certifications have been received;

d\. establish and maintain a separate file record of all LIHTC-

related Correspondence between HUD and HCAs for monitoring

purposes.

If an HCA alters HUD\'s processing assumptions regarding the

proportion of set-aside units assumed earlier as the basis for

underwriting, the FO may:

e\. reject a project which is not marketable with varied set-aside

assumptions;

f\. recalculate the MIM, cash requirements and mortgage credit

assessment of the Sponsor\'s ability to meet those

requirements;

g\. alter its underwriting conclusions or requirements

accordingly;

h\. revise and re-issue or refuse to issue (cancel) a commitment.

If the HCA does not alter any processing assumptions, the Sponsor

has a valid commitment, and can proceed towards Initial

Endorsement. The Sponsor must also have a Reservation of LIHTCs

20

from the HCA before syndicating the project\'s combination of debt

and equity financing to private or public investors. Note that a

closing cannot be held until the MCE approves the Sponsor\'s

Financing Plan, and the MCE and Counsel approve the Syndication and

Partnership Agreements in accordance with outstanding Handbook and

RSLG requirements. (See Addendum 11, Section II.)

3\. FO Monitoring. HCAs must submit Section 911 SLR Certifications and

S & U Formats in conformance with the RSLGs to the applicable FO.

Sponsors must report any subsequent changes in individual project

amounts on Form HUD-2880. \"Back-end\" SLRs are only required if new

Sources not previously considered are obtained, or Uses decrease by

more than 2%. HCAs must provide Governing Board or Approving

Authority Resolutions or QAP provision references supporting

departure above the RSLG Safe Harbor Standards, or for

Applicability Exceptions granted.

FOs may, if deemed necessary, conduct annual on-site monitoring

reviews of all HCA SLR files. The FO should provide adequate

written notice to the HCA to schedule such inspection of records.

HCAs should provide HUD access to relevant HCA personnel to discuss

the documentation maintained in its Section 911 files. (See HUD

Handbook 1840.1, REV-2 in conjunction with monitoring objectives

discussed below.)

Project-by-project upon receipt of Section 911 Certifications, the

FO should compare HUD\'s processing assumptions and RSLG limitations

to the HCA\'s completed S & U Statement. No amounts exceeding

Ceiling standards are permissible, except for in a limited number

of Applicability Exception cases (See RSLG Guideline Standards).

The HCA may not generally allow Mortgageable Replacement Cost uses

in excess of HUD\'s processing estimates. Similarly, where HCAs

alternatively establish and fund Builder or Developer Fees outside

the mortgage, then such fees must be properly calculated, and the

Estimated Cost excluding Builder and Developer profit and overhead

must be used for the \"Mortgageable Replacement Cost Uses\" portion

of the S & U Format.

At Initial Endorsement, DHMFs may notice slight differences in the

amount of Net Syndication proceeds projected to be received and the

precise Gap equity financing necessary to balance the S & U

Statement. This is acceptable so long as the FO began completing,

and the HCA completed, the proper S & U format for establishing

21

the Gap Filler equity necessary, and the HCA capitalized the Gap by

a market-derived Rate in establishing the maximum LIHTC Allocation.

FOs should recognize that HCAs are already required to perform a

back-end Placement in Service Review under Treasury regulations,

and LIHTCs can be adjusted again at that time. Therefore, the FO

should provide cost certification data to assist the HCA as soon as

it is completed, regardless of whether a back-end 911 SLR is

triggered.

Front-end SLRs are based on estimates of anticipated marketplace

conditions, and therefore, may not produce exact results \"to the

penny\". For example, HUD expects HCAs to properly calculate the

necessary Gap Filler equity financing for every case, but cannot

expect HCAs to always precisely estimate the exact amount of

investor proceeds a LIHTC Reservation will attract for the

combination of project assistance involved through selection and

application of a Market Rate to calculate Reservation amounts.

Standard 4 is deliberately designed to provide HCAs the latitude to

push and stimulate the market, i.e., it purposefully offers the

HCAs negotiating flexibility, and therefore, should not be viewed

as a precision instrument.

Generally, HCAs are primarily responsible for administering the

LIHTC program, and FOs should simply encourage HCAs to refine the

market capitalization pricing factors derived (RSLG Standard 4

Market Rates) by updating survey data for the types of projects

awarded LIHTCs. The FO must recognize that two competing Section

911 statutory objectives are: 1) to maximize equity capital

contributions, 2) without providing excessive profits to

participants. These objectives exist in dynamic tension. FOs

should not second-guess in hindsight an HCA\'s applied Market Rate

where the HCA used the best simultaneous market evidence available

to derive a reliable indicator for bridging the necessary Gap in

financing.

On the other hand, if the FO determines that:

a\. significant differences between HUD\'s estimates of allowable

sources and uses under the RSLGs and the HCA\'s estimates

exist; and

b\. the HCA provides no reasonable explanations for such

differences, or makes no reasonable efforts to properly:

1\) calculate Gap Filler equity proceeds needed to balance

approved S & U Formats, or

22

2\) apply an appropriate Market Rate in establishing maximum

LIHTC Allocations, or

3\) establish competitive procedures assuring that the

maximum level of investment capital is being obtained

through syndications, or

4\) permit HUD on-site inspection of all records relating to

LIHTC cases, as requested, or

5\) capitalize Gap Filler amounts by adjusted Standard 4

Market Rates where higher percentages of ownership are

retained, or

6\) obtain and provide justification for Governing Board or

Approving Authority departure approvals (to increase Safe

Harbors, or for excess over Safe Harbors) or

Applicability Exceptions from the RSLGs, as required, or,

c\. the HCA deliberately and routinely applies understated Market

Rates, and consequently, provides Allocations which produce

Net Syndication Proceeds in significant excess of necessary

equity Gaps, and does not appropriately adjust such

Allocations at its Placement in Service review,

then the FO must provide the HCA written notice of HUD\'s intent to

revoke and the details supporting HUD\'s position. If after such

notice, substantial differences between HUD and HCA RSLG

interpretation or implementation persist, a Notice of Revocation of

Section 911 Authority should be prepared with the assistance of

Counsel, consistent with Section 911 of the Housing and Community

Development Act of 1992. As set forth in the RSLGs, HCAs may

appeal such decisions to HUD Headquarters, which will make a final

determination. Sponsors may not appeal individual 911 case

determinations to FOs or Headquarters; however, FO 102

determinations are subject to appeal to Headquarters.

H. HUD\'s Residual 102 SLR Authority; Additional Instructions for 102
SLRs;

Miscellaneous Processing Anomalies. In areas where an HCA does not

accept Section 911 authority, or the HCA re-delegates it back to HUD, or

HUD revokes the authority, or a Non-LIHTC form of OGA is involved, or

questions arise about Tax-Exempt Bond, HOME, Pension Fund, Risk-Sharing,

Section 223 (f), or Section 223 (a) (7) financed proposals, FOs will

23

follow applicable instructions above, and complete also the applicable

procedures outlined below: (Subsections covering tax-exempt, 223 (f),

223 (a) (7), HOME, Section 8 Community Investment, and Risk-Sharing

cases appear in the outline below as these programs relate to HUD\'s 102

SLR activities, for ease of organization and convenience\'s sake.

Nevertheless, HCs may perform a 911 SLR for such cases involving LIHTCs,

relieving the FO of its 102 SLR responsibilities)

1\. Valuation\'s Replacement Cost Formula (RCF) - For new construction

or substantial rehabilitation, Valuation must complete the Addendum

2 RCF using Form HUD-92264 construction estimates. To calculate

the revised Criterion 3 MIM limitation, Valuation must first

complete Addendum 3, or whichever Format applies, in accordance

with the RSLG\'s Safe Harbor Standards (e.g., either BSPRA or SPRA

plus Builder\'s Profit may be allowed), and then:

a\. Multiply the Total 10-year Allocation by the applicable

Standard 4 Market Rate if no Letter of Intent or Syndication

Agreement is yet available (use projected Net thereafter if

Letter or Agreement reflects current market conditions), e.g.,

if .50 is the Market Rate and there is a \$100,000 LIHTC stream

for 10 years (\$1,000,000 total), then the resulting estimate

is \$500,000. (Note: The Appraiser also adds Standard 4 high

percentage ownership adjustments to this amount, and any

excess Standard 3 amounts.)

b\. Subtract from the estimated (or actual) Net Syndication

Proceeds the Subtotal Non-Mortgageable Uses (See latter Uses

portion of Addendum 3) paid by Non-Mortgage Sources. Thus,

Valuation does not make a mortgage deduction for Source

amounts earmarked, or generally available, to pay for

nonreplacement cost, non-mortgageable items. Read the RSLGs

for such allowable amounts, and review the line item uses

reflected under Non-Mortgageable Uses on the S & U Statement

before subtracting. The Appraiser must not deduct non-

mortgageable uses which are paid by Grants, i.e., reduce the

Net Syndication Proceeds by only those non-mortgageable uses

paid by the LIHTC Source, after grants or other Sources which

pay for non-mortgage able uses are also deducted.

c\. Assume that the remainder is available for mortgageable

replacement cost items and deduct it from the RCF like a

grant, or any other deduction. Complete the RCF in

24

accordance with outstanding instructions, except that Net

Syndication Proceeds available for mortgageable items are

deducted like grants. Any OGA available for mortgageable

items may be reflected on the \"Grant\" deduction line, and

described on the back of the RCF. Record in the Remarks

Section of Form HUD-92264 the \"Net Syndication Proceeds

Available for Mortgageable Items,\" and indicate any other RCF

deductions and the resulting MIM.

d\. Revise the Trial Form HUD-92264-A Criterion 3 mortgage

limitation, reflecting the results of the RCF. The RCF and

Criterion 3 must reflect 100% as the applicable loan to value

ratio if the project is typically syndicated (See RSLG

Comments 7 and 10, Standard 4, and \"Ownership\" in the

Glossary). If greater than 5% ownership interests are retained

in the LIHTCs, i.e., the project is not fully syndicated, then

the otherwise applicable program loan ratio is applied. The

other MIM criteria assume applicable program ratio

limitations.

e\. Refine Section G of Form HUD-92264 using the new MIM, and

forward the results to Mortgage Credit.

2\. Tax-Exempt Bond Financing, LIHTCs. and Section 221. Tax-exempt

bond-financed projects may or may not also receive LIHTCs. If the

project does not receive LIHTCs, the Sponsor must provide an

appropriate Form HUD-2880 Certification, indicating no LIHTCs, and

the Appraiser will complete Form HUD-92264-T in estimating

processing rents for 20% of the units. No further detailed SLR

applies if no other OGA is involved. If the project receives

LIHTCs, the Sponsor must fully detail all Sources and Uses of funds

on its Form HUD-2880, and the Appraiser must also complete the

applicable S & U Statement and calculate the LIHTC Proceeds

Available for Mortgageable Items deduction line of the RCF as

discussed above. Because the total Allocation of LIHTCs for tax-

exempt projects is substantially less than for market-rate financed

projects, lesser (or no) RCF deductions may be anticipated, and

Criterion 5 is more likely to be the limiting MIM.

3\. Section 223 (f). Because HCAs can award rehabilitation LIHTCs for

repairs exceeding \$3000 per set-aside unit, but HUD generally

requires \$6500 per unit for the entire project multiplied by the

applicable high cost factor of an area to define \"substantial

25

rehabilitation\" eligibility, projects receiving LIHTCs for repairs

falling somewhere in between these two standards may apply for

mortgage insurance under Section 223 (f). Instead of using the

Addendum 2 RCF, and because Section 223 (f) is a \"value\" program,

Appraisers will reduce the Subtotal Value Uses Related to Mortgage

Financing by the sum total of any Grants, Net Syndication Proceeds,

and any other OGA available for mortgageable items.

Therefore, for cases combining LIHTCs and Section 223 (f) mortgage

insurance, deduct from net syndication proceeds the Non-

Mortgageable Uses of Addendum 4. The remainder is presumed to be

available for mortgageable items, which in Section 223 (f) cases,

is value rather than replacement cost. Add to this amount any

grants or OGA available for mortgageable items. Deduct the sum

from the Subtotal Value Uses Related to Mortgage Financing

reflected on the upper subpart of the Uses portion of Addendum 4,

and the result is a new Criterion 3 or 7 or 10, as applicable (See

\"Uses\" portion of Sources and Uses Statement to determine which;

the applicable percentage loan to value ratio for criteria 3, 7,

and 10 in fully syndicated LIHTC projects is 100%, and in non-

fully-syndicated 85%). Criterion 5 is not affected (See also note

below).

Valuation Note: For tax-exempt bond financing cases eligible for

Section 223 (f), Appraisers should use a \"market\" capitalization

rate (i.e., \"built-up\" rates should assume taxable financing for

the debt portion), and to be consistent, the Appraiser also ignores

the rent restrictions tied to the debt financing when determining

the income to be capitalized by the rate thus derived (for the

purposes of determining Section K, Form HUD-92264, and Criterion 3,

Form HUD-92264-A Value only). In calculating net operating income

for Criterion 5 Debt Service, however, rent restrictions must be

observed. Therefore, the Appraiser should complete two Section C

rent schedules, Form HUD-92264. The Line 6, Form HUD-92264-T rents

should be on the schedule used for calculating Criterion 5, and the

market rents on the schedule used for calculating Criterion 3, Form

HUD-92264-A. Similarly, for projects receiving LIHTCs and taxable

market-rate mortgage financing, the Appraiser will use a market-

based capitalization rate and will assume market rents including

repairs in the Income and Comparison Approaches to value, but will

assume rent restrictions in determining what net operating income

may be capitalized by the debt service rate for Criterion 5

determination purposes.

26

4\. Preservation and LIHTCs/102 SLRs. If the FO must conduct a 102

SLR, then after completing preservation processing according to

outstanding instructions, the Appraiser deducts Net Syndication

proceeds available for \"Uses Payable through Section 8 or, Grants,\"

including Section 241 loans, from amounts of incentives calculated

prior to consideration of any LIHTC assistance. The initially

processed Section 241 loan appears under Sources, but is subject to

reduction by HUD if Sources exceed Uses.

To determine whether Sources exceed Uses, the Appraiser must work

closely with the LMS and MCE. Working together, staff must

complete Addendum 6. If Sources exceed Uses, then reduction to

HUD-provided Sources must be made. In a manner similar to that

described above for RCF deductions in mortgage insurance cases, the

Appraiser should ultimately determine the excess proceeds available

to double-up on \"Uses Payable through Section 8 or Grants.\" To

determine this, the Appraiser again estimates net syndication

proceeds, subtracts from this the Subtotal Uses funded separately

(the bottom Uses portion of Addendum 6), and the remainder, which

is assumed to be available for Uses payable through Section 8, is

subtracted from the Subtotal Uses Payable through Section 8. The

Appraiser may reduce Section 241 loans either proportionately or

commensurately, in conjunction with the LMS, and the LMS will

commensurately reduce the Section 8 rental assistance or grants.

5\. HOME Funds Please note that where HOME fund grants or loans are

provided together with some form of HHA, and an HCA has accepted

section 911 SLR authority, the HCA may apply HOME\'s Guidelines in

accordance with Notice CPD-94-24. If HHA is involved in a HOME-

assisted project, but no LIHTCs are involved or a 911 SLR has not

been performed, then the FO should refer to Notice CPD-94-24, and

perform a 102 SLR in accordance with the Notice and the basic

principles and instructions discussed herein.

6\. Section 8 Community Investment Demonstration Program. Either a 911

or 102 SLR is required; however, appropriate modifications to the

most applicable S & U Format may serve as the basis of the review.

See the basic principles section above. Headquarters\' consultation

or SLR is available, as necessary, on a case-by-case basis.

7\. Risk-Sharing. Section 542 (b) and (c) Risk-Sharing cases involving

LIHTCs will require SLRs which take into consideration the widely-

27

varying: 1.) underwriting standards employed, resulting in

different allowable Project Uses, and 2.) possible combinations of

debt and equity Source financing involved. Please note that cases

not involving LIHTCs may not even require detailed SLRs because

\"layering\" may not occur (See Addendum #1, Comment 17). Under

section 542 (c) , an HFA/HCA can clearly administer an individual

LIHTC project\'s total debt and equity financing needs more

efficiently under one roof if 911 SLR authority is accepted. Risk-

sharing HFAs must be strongly encouraged to accept section 911 HCA

SLR authority (where possible, i.e., where the HFA and LIHTC-

Allocating HCA are the same entity) to avoid the inefficiencies

which may result from FOs performing 102 SLRs. FOs will delay

production of units if excess subsidy is detected and either LIHTCs

or mortgage insurance have to be adjusted. Where 102 SLRs are

performed, then the FO should apply the same principles discussed

throughout these instructions to the facts of the Risk-Sharing

case, i.e., establish a S & U Format by segregating the Project

Uses which HHA Sources can theoretically pay for, from what OGA and

other Sources may reimburse, with no overlapping Uses and overall

Statement balance. Headquarters\' consultation is available as

necessary on Risk-Sharing cases, and HQ will continue to offer

consultation to Qualified Participating Entities until all section

542 (b) concerns relating to initial implementation have been

addressed and resolved. Please note that all reserve accounts

established for Risk-sharing projects must contain provisions which

clearly state that unused amounts at the expiration of the escrow\'s

term will stay with the project, or be applied to repay soft-second

financing, in accordance with the RSLGs (see Addendum 1).

8\. Section 223 (a) (7). Section 102 SLRs are not typically required

in Section 223 (a) (7) cases so long as proposed repairs are modest

and OGA is not involved, or whatever OGA is involved does not

duplicate HHA payment of any Project Uses. However, insured

projects initially endorsed after HRA \'89, which subsequently

obtain LIHTCs, are subject to closer scrutiny and a 102 SLR if 223

\(a\) (7) assistance is sought, i.e., Sponsors may not avoid SLRs by

disguising or changing their LIHTC intentions. Cost certification

results will be used in such SLRs to verify all Project Uses

relating to construction and reserves.

9\. Section 102 Certification. If a Section 102 SLR is required, the

DHMF must sign a Section 102 Certification (Addendum 12) and

28

retain it in the FO and Washington Docket files. Either a Section

911 or a Section 102 Certification must be made for every case

involving a combination of HHA and OGA.

This means that where HCAs award LIHTCs and perform Section 911

SLRs, a HUD Section 102 Certification is not required. If an HCA

does not accept Section 911 SLR authority, or it has been revoked,

or re-delegates the authority, or a non-LIHTC form of OGA is

involved, the DHMF must make a Section 102 Certification. Mortgage

insurance commitments should contain all applicable special

provisions in Sections F and I, as well as any reduced mortgage

amount(s) the SLR necessitates, and should be executed

simultaneously with the Section 102 Certification.

For projects which combine HD mortgage insurance assistance and

also project-based Section 8 rent increases or some other form of

HM-administered assistance, Loan Management staff must provide

assurance that necessary funds are available and approved before HD

issues a commitment, and the DHMF makes a Section 102

certification.

I. FO Counsel Assistance.

1\. Reserve Escrows.

a\. Operating Deficit Escrows. Where proceeds from the proposed

sale of a project receiving LIHTCs are used to fund the

operating deficit escrow, and an MHR, Appraiser, or MCE

verifies and advises HUD Field Counsel of the same, Counsel

should amend clause 4 of Form HUD-92476-A, \"Escrow Agreement

Additional Contribution by Sponsors,\" or its equivalent to

read as follows:

4\. IT IS UNDERSTOOD AND AGREED that at the expiration of

the escrow period, or at such earlier date as the

Commissioner determines that the project has achieved

sustaining occupancy and income, any balance remaining on

deposit must be transferred to the project\'s Replacement

Reserve account.

b\. Resident Initiative Fund Reserves. Similarly, for LIHTC

projects, establish Resident Initiative Activity Escrows by

properly modifying a Form HUD-92476-A Agreement (if

Syndication Proceeds will initially fund a Resident

Initiatives Activity Account; Confer with the Appraiser and

MCE regarding what the S & U Statements and Financing Plan

29

regarding what the S & U Statements and Financing Plan

indicate for initial funding, if any). See RSLG Glossary for

the precise language which Counsel should add to the Escrow

Agreement. Also, Counsel should add a proviso which requires

that while the mortgagee may generally hold and manage the

account initially established, the FO Resident Initiative

Specialist must approve all disbursements relating to such

activities in accordance with program objectives and

allowances.

c\. Miscellaneous Reserve Escrows Established by Sponsor. Reserve

accounts established for any project-related purpose must be

reflected on Form HUD-2880 as Project Uses. MCEs who review

Financing Plans should offer assistance in determining which

reserve escrows are being funded by LIHTC Syndication

Proceeds, and are therefore subject to applicable RSLG

requirements, i.e., all escrow agreements must contain a

provision requiring that at the end of the otherwise

applicable term, unused amounts remain with the project or may

be used to repay soft second financing, as applicable.

Sponsor submissions should be reviewed accordingly.

2\. Use Restrictions and Subordination. See HUD Handbook 4430.1, REV-

1, paragraphs 1-41 and 1-42.

3\. Special Commitment Provisions.

a\. Sponsor\'s Certified Intentions Not to Obtain OGA. If the

Sponsor has indicated that LIHTCs or OGA will not be involved

through an executed Form HUD-2880 disclosure form, Counsel

should include in the project commitment for mortgage

insurance the following condition:

Pursuant to Form HUD-2880, this commitment is based on owner

certifications regarding the absence of Tax Credit or Other

Government Assistance. If the owner\'s intentions subsequently

change, and Tax Credit or Other Government Assistance is

applied for, Form HUD-2880 must be updated, and HUD reserves

the right to unilaterally alter any and all of its

underwriting determinations, or revise the terms of its

mortgage insurance commitment or regulatory agreement

accordingly.

b\. Commitments to Project Sponsors Receiving or Intending to Apply for

LIHTCs. If a Sponsor is applying for or has received a LIHTC

Reservation, and intends to subject some or all of the units to a

30

Use Restriction Agreement in receipt thereof, then the following

provision must be included in the commitment:

The owner has received, or has indicated intentions of

applying to receive, Tax: Credit assistance from the qualified

Housing Credit Agency (HCA) having jurisdiction over such

reservation and allocation in this area. HUD\'s underwriting

conclusions, including but not limited to its determinations

to: approve project feasibility and marketability; approve

mortgage insurance assistance; establish a maximum insurable

mortgage amount; establish reserve amounts, the front money

escrow, and any other cash requirements; establish available

funding sources, ARE SUBJECT TO REVERSAL OR ADJUSTMENT should

assumptions contained within HUD\'s processing change. This

means that HUD may unilaterally alter or cancel this

commitment based on any changes in the Sponsor\'s anticipated

Tax: Credit assistance, as represented by the Sponsor to HUD

on Forms HUD-2880 and HUD-92013.

c\. Commitments to projects which receive any form of OGA including

LIHTCs, must include the following condition:

It is understood that a section 102 or section 911 \"subsidy

layering review\" and certification must be completed prior to

initial endorsement. HUD performs this review pursuant to its

underwriting processes in 102 jurisdictions, and includes its

certification with this package. The applicable Housing

Credit Agency which allocates Tax: Credits may do so in 911

jurisdictions, and its certification must be obtained, prior

to Initial Endorsement. Form HUD-2880 Disclosure and Update

requirements and penalties apply in both 102 and 911

jurisdictions.

4\. LIHTC Reservation Review. Counsel must review the HCA\'s

Reservation documentation to ascertain whether there are any

outstanding conditions which might prevent or delay Initial

Endorsement. The MHR should have obtained a copy from the Sponsor

prior to initial Endorsement (see Exhibits subsection above). The

HCA\'s Qualified Allocation Plan should also be reviewed for overall

consistency with the RSLGs, e.g., see Comments 10 through 12 of

Addendum 1. Any concerns should be discussed with the DHMF.

31

5\. Syndication and Partnership Agreements. See Addendum 11, Section

II\. Counsel will confirm in its review of Syndication and

Partnership Agreements (or letter of Intent, as applicable) the

following (Appraisers and MCEs should assist in these findings and

recommendations):

a\. the percentage ownership of LIHTCs retained by the Sponsor is

less than 5%, or, applicable RSLG Standard 4 adjustments have

been made;

b\. the mode and cost of syndication, whether public or private,

was anticipated and is acceptable to the HCA and DHMF;

c\. the Letter of Intent OR Syndication Agreement recites

estimated Total Project Costs and Sources of financing,

including HUD-estimated replacement cost and mortgage debt and

LIHTC Allocation terms generally consistent with those the HCA

and FO have committed to (so investors are fully informed of

all cost and financing terms, and encounter fewer potential

subsequent surprises).

32

Addendum 1

Administrative Guidelines:

Limitations on Combining HUD and

Other Government Assistance; \"Subsidy Layering\"

AGENCY: Office of the Assistant Secretary for Housing-Federal Housing

Commissioner, HUD.

ACTION: Notice of Administrative Guidelines to be Applied in
Implementing

section 911 of the Housing and Community Development Act of 1992 (HCDA
\'92)

(42 U.S.C. §3545 note) and section 102 of the Department of Housing and
Urban

Development Reform Act of 1989 (HRA \'89) (42 U.S.C. §3545).

..TX:

SUMMARY: This document sets forth the Administrative Guidelines which

qualified allocating and suballocating Housing Credit Agencies (HCAs) ,
as

defined under section 42 of the Internal Revenue Code of 1986, must
follow to

comply with section 911 of HCDA \'92. HUD Field Offices (FOs) will apply
the

Revised Subsidy Layering Guidelines (RSLGs) in accordance with
Implementing

Instructions to monitor HCAs accepting 911 authority. FOs also have
residual

102 Subsidy Layering Review authority and must apply the RSLGs in areas
where

HCAs do not (non-acceptance of delegation or revocation) or for cases
where

HCAs cannot (non-LIHTC cases) accept 911 Subsidy Layering Review
authority.

The RSLGs were designed to ensure that participants in affordable
multifamily

housing projects do not receive excessive compensation by combining
sundry

HUD Housing Assistance with assistance from other Federal, State, or
local

agencies.

DATES: Effective Date: December 15, 1994

FOR FURTHER INFORMATION: For questions, write to the attention of Helen

Dunlap, Deputy Assistant Secretary for Multifamily Housing Programs,
Room

6106, 451 Seventh Street, S.W., Washington, D.C. 20410, or call (202)
708-

0624; TDD \# (202) 708-4594. Please note that these phone numbers area
toll

free.

SUPPLEMENTARY INFORMATION:

PURPOSES: The Revised Subsidy Layering Guidelines (RSLGs) make final
actions

taken in the Interim Guidelines published on February 25, 1994, to:
replace

HUD\'s previous Subsidy Layering Review procedure for Low Income Housing
Tax

Credit (LIHTC) projects under section 102; eliminate redundant Subsidy

Layering Reviews on LIHTC projects through implementation of section
911;

activate Subpart D of 24 CFR part 12 for non-LIHTC Subsidy Layering
Reviews.

STATUTORY BASIS FOR DELEGATION OF AUTHORITY: Section 911 of HCDA \'92,
as

amended by section 308 of the \"Multifamily Housing Property Disposition

Reform Act of 1994,\" provides, as follows:

33

Subsidy Layering Review

\(a\) CERTIFICATION OF SUBSIDY LAYERING COMPLIANCE. - The requirements
of

section 102 (d) of the Department of Housing and Urban Development Act

of 1989 may be satisfied in connection with a project receiving

assistance under a program that is within the jurisdiction of the

Department of Housing and Urban Development and under section 42 of the

Internal Revenue Code of 1986 by a certification by a housing credit

agency to the Secretary, submitted in accordance with guidelines

established by the Secretary, that the combination of assistance within

the jurisdiction of the Secretary and other government assistance

provided in connection with a property for which assistance is to be

provided within the jurisdiction of the Department of Housing and Urban

Development and under section 42 of the Internal Revenue Code of 1986

shall not be greater than is necessary to provide affordable housing.

\(b\) IN PARTICULAR - The guidelines established pursuant to subsection

\(a\) shall-

\(1\) require that the amount of equity capital contributed by

investors to a project partnership is not less than the amount

generally contributed by investors in current market conditions, as

determined by the housing credit agency; and (2) require that the

project costs, including developer fees, are within a reasonable

range, taking into account project size, project characteristics,

project location and project risk factors, as determined by the

housing credit agency.

\(c\) REVOCATION BY THE SECRETARY - If the Secretary determines that a

housing credit agency has failed to comply with guidelines established

under subsection (a), the Secretary-

\(1\) may inform the housing credit agency that the agency may no

longer submit certification of subsidy layering compliance under

this section; and

\(2\) shall carry out section 102 Id) of the Department of Housing

and Urban Development Reform Act of 1989 relating to affected

projects allocated a low-income housing tax credit pursuant to

section 42 of the Internal Revenue Code of 1986.

\(d\) APPLICABILITY - Section 102(d) of the Department of Housing and

Urban Development Reform Act of 1989 (42 U.S.C. 3545(d)) shall apply

only to projects for which application for assistance or insurance was

filed after the date of enactment of the Housing and Urban Development

Reform Act.

APPLICABILITY: In all cases where a project receives HUD Housing
Assistance

(HHA) and receives or is expected to receive Other Government Assistance

(OGA), a section 102 or 911 certification is required. That
certification

34

is required. That certification shall be executed affirmatively without

further review, unless developers or owners combine HHA and OGA which

programmatically allow payment for similar project uses within the same

Multifamily Project. In such cases, Subsidy Layering Reviews are
required.

HHA includes the types of assistance listed in Subpart D, 24 CFR Part
12. OGA

is broadly defined to include \"any loan, grant, guarantee, insurance,

payment, rebate, subsidy, credit, tax benefit, or any other form of
direct or

indirect assistance from the Federal Government, a State, or a unit of

general local government, or any agency or instrumentality thereof.\"
(See

section 102 (b) (1) of HRA \'89 and 24 CFR §12.30.) A Subsidy Layering
Review

will be required even if HHA and OGA are not requested and combined at

precisely the same time, if the available Sources may pay for similar
Uses.

(There are potential overlaps in program assistance provision periods.)

Nevertheless, a detailed Subsidy Layering Review will not be required if
HHA

and OGA Sources categorically cannot duplicate payment of similar Uses
during

any overlap in periods, e.g., if an HHA program of rental assistance
pays

only for operations and maintenance, while the OGA program pays only for

capital improvements. (See Comment Responses 5 and 17 below for other

examples.) Note that there must be the LIHTC form of OGA combined with
HHA

for an HCA to perform a 911 Subsidy Layering Review.

FHA-Housing applied other Administrative Guidelines (See Federal
Register,

dated April 9, 1991, at 56 FR 14436) and Instructions to HHA requests

received prior to February 25, 1994. HUD published its Interim
Guidelines

for effect on February 25, 1994, at 59 FR 9332, inviting further public

comment for their refinement. This notice responds to those comments,
makes

revisions as discussed below, and establishes the Final RSLGs.

HUD reserved until February 25, 1994 implementation of its regulations
at 24

CFR Part 12, Subpart D (as well as implementation of conforming changes
made

to HUD\'s program regulations- see Federal Register, January 16, 1992,
57 FR

1942\) for Subsidy Layering Review of Non-LIHTC projects under section
102 of

HRA \'89. These regulations are now fully effective for all forms of OGA

combined with HHA. The Final RSLGs and HUD\'s Implementing Instructions

supersede HUD\'s previously published notices, memoranda, Administrative

Guidelines and February 25, 1994 Interim Guidelines.

HCAs may communicate their acceptance of section 911 Subsidy Layering
Review

authority to HUD Multifamily Insuring Offices (HUD State Area Offices
which

process or service multifamily loans-HUD has a total of 52) for all
projects

involving LIHTCs. HCAs may also subsequently re-delegate Subsidy
Layering

Review authority back to the FO through written notice. FOs will perform

section 102 Subsidy Layering Reviews for all projects combining
non-LIHTC

forms of OGA with HHA, and monitor all 911 Subsidy Layering Reviews. FOs

35

will also perform 102 Subsidy Layering Reviews for all LIHTC projects
located

in states or areas where the HCA having allocation or suballocation
authority

has declined to accept section 911 Subsidy Layering Review authority,
has re-

delegated the authority back to HUD, or has had its authority revoked by
HUD

for non-compliance with the RSLGs. If monitoring reviews of an HCA\'s
files

are deemed necessary, HCAs must allow designated HUD or Office of
Inspector

General personnel access to all section 911 Subsidy Layering Review
records.

HCAs may appeal FO determinations to revoke section 911 Subsidy Layering

Review authority directly to Headquarters.

The RSLGs deliberately emphasize HUD mortgage insurance and HCA LIHTC

assistance, because these forms of HHA and OGA provide comprehensive
debt and

equity financing for the new construction and rehabilitation of
multifamily

units. Please note that acquisition and rehabilitation LIHTCs can be

combined with nonmortgage insurance HHA without necessarily triggering
102 or

911 Subsidy Layering Reviews (See Comment Response 17 below and FO

Implementing Instructions for further clarification).

When a 102 or 911 Subsidy Layering Review is triggered, additional

application exhibits are required (See FO Instructions). If the Sponsor
has

previously submitted its Form HUD-2880, \"Applicant/Recipient

Disclosure/Update Form,\" to HUD with its mortgage insurance application
and

indicated no intention to apply for or receive LIHTCs, and the
application

has been processed through to a commitment as of the date of RSLG

publication, and the Sponsor now submits Form HUD-2880 revisions
indicating

application for or receipt of LIHTCs, then a \"significant deviation\"
from the

Form HUD-92013, \"Application for Multifamily Housing Project,\" is
proposed,

and new processing fees are required. For cases reviewed under HUD\'s

previous guidelines which have not reached final endorsement, Sponsors
may

accept the results of that previous Subsidy Layering Review or resubmit
the

case to the applicable FO or HCA for Subsidy Layering Review under the
RSLGs.

The Office of Public and Indian Housing (PIH) will publish a separate
set of

guidelines which will apply to Section 8 Moderate Rehabilitation
projects

developed under 24 CFR Part 882, Subparts D and E, and project based
Rental

Certificate projects developed under part 882, Subpart G. Until PIH\'s

guidelines are published, Subsidy Layering Reviews will continue to be

conducted at Headquarters, with input from PIH Field Offices. In
performing

these reviews, PIH will rely on the Interim Administrative Guidelines

published February 25, 1994.

The Office of Special Needs Assistance Programs (SNAPS), of the Office
of

Community Planning and Development, will issue its own set of
guidelines,

tailored to its individual programs. Until further guidance is provided
to

CPD Field Offices and SNAPS grantees, Subsidy Layering Review for
Section 8

36

Moderate Rehabilitation SRO projects and SRO projects under the Shelter
Plus

Care Program will continue to be conducted at Headquarters. For these

reviews, SNAPS will generally rely on the Interim Administrative
Guidelines

published February 25, 1994. Please contact Maggie H. Taylor, Acting

Director, (202) 708-4300 for additional information.

RESPONSES TO PUBLIC COMMENTS

The Department published Interim Guidelines on February 25, 1994 (59 FR
9332)

which: initially implemented section 911 of HCDA \'92; revised its

implementation of section 102 of HRA \'89; and invited further public
comment.

Comments were received from 16 sources including 6 national trade

organizations or their legal representatives, 5 state or city housing
credit

agencies (HCAs) , 2 law firms, 1 mortgage banker, 1 syndicator, and 1
housing

development consultant. Issues raised and HUD\'s responses are organized
as

follows:

Comment Number: Issue Reference:

1 Semantics: New Title & Organization

2 HUD Handbook References & Non-LIHTC Subsidy

Layering Reviews

3 Pipeline Cases & Subsidy Layering Review

Timetables

4 Which HCAs May Accept 911 Subsidy Layering

Review Authority

5 What Types of OGA Trigger a Subsidy Layering

Review

6 \"Back-End\" Subsidy Layering Reviews and Cost

Certification

7 Communication between FOs and HCAs

8 Monitoring Details

9 HCA Fees if 911 Subsidy Layering Review

Authority Accepted

10 Blanket Approvals to Exceed Safe Harbors

11 Revisions to Standards 1 through 3

12 Absolute Ceilings for Standards 1 through 3

13 Revisions to Standard 4

14 Standard 4 Typical Ownership Requirements

15 Acceptable Source and Use Statement Formats

16 \"Applicability Exception\" Category

17 Additional RSLG Exclusions

18 Additional RSLG Inclusions

19 Operating Deficit Reserves

20 Resident Initiative Fund Reserves

21 Compounding and Discounting of Installments

1\. Whether the title, terminology, and organization should be revised?

37

Input: Three commenters noted terminology and organization problems in
the

Interim Guidelines, and one pointed out problems with the title.

Response: The Department has made several semantic and organizational

revisions to the RSLGs. Note that procedural descriptions, HUD forms,
and

Source and Use (S & U) Formats have been moved from the RSLGs to the FO

Instructions. Regarding the title, HUD accidentally retained the title

associated with the previous effective Guidelines which were applicable
to

only LIHTCs combined with HUD and Other Government Assistance. The title
is

now amended to \"Administrative Guidelines: Limitations on Combining HUD
and

Other Government Assistance,\" and may be colloquially referred to as
the

Revised Subsidy Layering Guidelines (RSLGs).

2\. Whether HCA standards should be exclusively referenced in the RSLGs,

rather than as alternatives to HUD Handbook standards; and whether the
RSLGs

should be restructured to more clearly address how HUD will perform
Subsidy

Layering Reviews for non-LIHTC projects?

Input: Three commenters suggested that references to HUD Handbook rules

not well-known by all market participants are confusing and should be
either

expanded upon, or simply replaced by an HCA\'s program administration

standards. One suggested that not enough detail is provided for projects

utilizing non-LIHTC Other Government Assistance (OGA)

Response: Not all HCAs may accept 911 Subsidy Layering Review authority,
and

every Subsidy Layering Review case may not involve LIHTCs. The RSLGs
must

provide standards applicable to all cases. Also, reference to HUD
program

areas and rules is inevitable since HUD Housing Assistance (HHA) must be

involved to trigger a Subsidy Layering Review. If an HCA accepts 911
Subsidy

Layering Review authority, FO communication of HHA program requirements
to

all parties involved in the transaction is essential. FHA Housing\'s

Implementing Instructions, which have been revised in accordance with
RSLG

changes, explain in greater detail how FOs will perform 102 Subsidy
Layering

Reviews for non-LIHTC assisted projects.

3\. What rules apply to pipeline cases; and how much time will Subsidy

Layering Reviews take to complete?

Input: Five commenters raised related issues. Four requested
clarification

regarding the effect of the \"Effective Date\" of February 25, 1994 to
cases

pending, or at least some more discussion of \"transition rules\". Two

recommend that the RSLGs bind HUD and HCAs to specific time requirements
for

102 or 911 Subsidy Layering Reviews.

38

Response: HCAs have been eligible to accept 911 Subsidy Layering Review

authority since February 25; but since few have, HUD is still performing

section 102 Subsidy Layering Reviews in most states through a
collaboration

between Headquarters and FOs. After HUD officially issues its
Implementing

Instructions and conducts some orientation, FOs will efficiently perform
102

Subsidy Layering Reviews at the local level, and the process may be
greatly

improved for LIHTC projects where cooperating HCAs accept 911 Subsidy

Layering Review authority. Sponsors with cases reviewed under previous

Guidelines and Standards have the option of accepting HUD or an HCA\'s

previous determinations, or requesting a new Subsidy Layering Review
under

the RSLGs. Regarding the establishment of fixed time frames for 911 or
102

Subsidy Layering Reviews, HUD will not bind itself or HCAs to definite
time

periods. If Sponsors fully comply with the new RSLG and FO Instruction

requirements regarding additional application exhibits, then additional

application processing time triggered by the Subsidy Layering Review
will be

kept to a minimum, e.g. , in mortgage insurance cases, the sponsor\'s

submission and updating of Forms HUD-2880, HUD-92013 and exhibits,
Financing

Plan, Syndication and Partnership Agreements all affect the amount of
time

required to start construction or rehabilitation.

4\. Which Allocating and Sub-Allocating HCAs may accept section 911
Subsidy

Layering Review authority?

Input: Four commenters raised related issues. One commenter noted that

the RSLGs do not speak specifically to whether HCAs in New York,
Minnesota,

and Illinois may independently accept section 911 Subsidy Layering
Review

authority, and avoid any overlap in authority. One stated that the RSLGs
do

not cover which HCA has Subsidy Layering Review authority where 9%
credits

are awarded by one HCA, but another HCA awards tax-exempt financing and
4%

LIHTCs. Another commenter stated that the RSLGs should clarify that
LIHTCs

must be involved for an HCA to accept section 911 Subsidy Layering
Review

authority.

Response: The words \"or suballocation authority\" have been added to
the RSLG

text for clarification. The FO Implementing Instructions describe what
any

interested HCA should do to accept 911 Subsidy Layering Review authority
from

HUD. Regardless of how state and local HCAs share allocating

responsibilities any HCA which has the authority to allocate LIHTCs and
issue

Form IRS-8609 may accept 911 Subsidy Layering Review authority. Such

acceptance should be conveyed to all FOs which are within the HCA\'s

geographical authority. It should also be noted that an HCA cannot
provide

9% LIHTCs to a project already receiving tax-exempt bond financing, with
or

without 4% LIHTCs, so the hypothetical overlap in authority suggested
cannot

occur. Clearly, LIHTCs must be involved for an HCA to perform a 911
Subsidy

Layering Review.

39

5\. Whether the inclusion of Historic Tax Credits on the list of
examples of

Other Government Assistance (OGA) should be eliminated or modified?

Input: One commenter noted that HCAs do not award Historic Tax Credits,

and that this reference should be stricken or amended.

Response: Historic Tax Credits are an example of OGA which HUD under 102
and

an HCA under 911 must consider. The RSLGs now reference the broad
definition

of OGA included in the statute and regulations. This means that HCAs
should

use an slightly higher Market Rate (Standard 4) for projects receiving
both

Historic Tax Credits and LIHTCs, award only the amount of Gap Financing

necessary, and calculate LIHTC Allocations accordingly. HUD in its
residual

102 Subsidy Layering Review responsibilities (where there is no
participating

HCA) will observe the same differential HCAs deem appropriate in such

combination cases when reviewing net amounts obtainable. If Historic Tax

Credits are not combined with LIHTCs, Sponsors must simply demonstrate
to the

FO on its Form HUD-2880 that no excess Sources are available for the
same or

similar Project Uses to satisfy the 102 Subsidy Layering Review.

6\. Whether an HCA must perform a \"back-end\" Subsidy Layering Review
at

Placement in Service?

Input: Two commenters raise this issue in the context of year-end cost

certification submissions to HUD, and meeting the issuance date for Form
IRS-

8609 following the year of Placement in Service.

Response: HUD has eliminated the \"back-end\" 911 Placement in Service
or 102

Cost Certification Subsidy Layering Reviews except where new types of
HHA or

OGA are subsequently added, or construction or rehabilitation costs are

reduced. (See Comment 13 below.)

7\. Whether communications between FOs and HCAs can be improved in 102
and

911 Subsidy Layering Reviews?

Input: One commenter requested that HUD provide mortgage insurance

processing results in cases involving LIHTCs to the applicable HCA, and

encouraged HUD to work with HCAs to \"do everything possible and
practical to

resolve its concerns before canceling a commitment.\"

Response: FOs and HCAs must communicate with each other as contemplated
in

the Fo Instructions, sharing all relevant application processing
results.

The Department believes it has made vast improvements in the sequence
and

delivery of \"joint\" assistance application processing. The RSLGs
reflect

solutions developed through consultation between HUD and the National

40

Council of State Housing Agencies, its underwriting partner in 911
Subsidy

Layering Reviews.

8\. Whether HUD should describe its monitoring of HCAs in the RSLGs?

Input: One commenter requested that HUD\'s monitoring procedure be

described in the RSLGs.

Response: The Department intends to issue its Implementing Instructions
soon

so that FOs and HCAs are fully advised of new 911 and 102 Subsidy
Layering

Review responsibilities.

9\. Whether the RSLGs must address HCA Fees, and whether such Fees may
be

excluded from the definition of Syndication Expenses for the purposes of

Standard 3?

Input: Three commenters request clarification on HCA Fees. One requests

that the RSLGs contain a reasonable fee standard. Two others suggest
that

such fees not be included as a Syndication Expense subject to Standard 3

limitations.

Response: The Department is not responsible for the setting or
monitoring of

an HCA\'s fee schedule for LIHTC application reviews. Further, section
911

does not specifically authorize HUD to define what fee is reasonable if
an

HCA accepts the Department\'s delegated Subsidy Layering Review
authority.

The HUD-established RSLGs, and an HCA\'s responsibilities for satisfying
HUD\'s

requirements, are clearly distinguishable from an HCA\'s previous
layering

review activities because of varying statutory and regulatory standards.

Whether such distinctions affect past fee schedules is a matter for
affected

HCAs to determine. The Department also agrees that whatever fees HCAs

determine to be reasonable should not be categorized as \"Syndication

Expenses\" subject to Standard 3 limitations, e.g., HCA Fees are now
included

on the Sources and Uses (S & U) Format as a \"Use Payable from
Non-Mortgage

Sources\".

10\. Whether an HCA must seek Governing Board or Approving Authority

approvals on a case-by-case basis, or, may instead obtain blanket
approval

through a Board of Directors\' resolution to raise Safe Harbor standards
for

all projects exhibiting defined characteristics, or, by including in its

Qualified Allocation Plan provisions regarding applicable Safe Harbor

standards according to project type and risk correlations?

Input: Eight commenters noticed that the Interim Guidelines required
case-

by-case approvals, a procedure believed to cause delay without any

corresponding gain.

Response: The Department agrees and has revised the RSLGs accordingly.
HCAs

may increase Safe Harbor limitations by either including higher limits
in

41

their Qualified Allocation Plans, or, by obtaining a Board of
Directors\'

resolution raising the limits for various types of projects and
associated

project risks. Pursuant to Notes which follow the Standards, the HCA or
Board

must specifically reference in the Qualified Allocation Plan or
Resolution

what special factors justify exceeding base published Safe Harbor limits
in

such cases, effectively establishing higher Safe Harbors for all such

projects. Ceiling amounts may not be exceeded by Qualified Allocation
Plan

provision or Board Resolution, but may be exceeded in a limited number
of

\"Applicability Exception\" cases (see Comments 12 and 16). Where
applicable,

each section 911 certification and supporting Sources and Uses (S & U)

Statement which an HCA submits to the affected FO must also include a

photocopy of the Qualified Allocation Plan provision or Board Resolution

supporting the \"blanket\" application Safe Harbor standard for the type
of

project involved. So long as adequate opportunity for public review and

comment on the increasing of the Safe Harbor standards for well-defined

projects is provided by HCAs, and all those who might support or oppose
such

revisions are heard in the process, HCAs may take a blanket approach to

revising Safe Harbors through these or functionally equivalent methods.

11\. Relating to Standards 1 through 3: whether proposed Safe Harbor

Standards should be increased; whether HUD should exceed Safe Harbors in
102

Subsidy Layering Reviews; whether the base for Builder\'s Profit and

Developer\'s Fees should be revised; whether \"lump sum\" contracts may
be used

pursuant to Standard 1; and whether HCAs must elect between using HUD\'s

processing fees or Alternatively \"funding\" fees for each case, or make
one

election for all 911 Subsidy Layering Reviews.

Input: Nine commenters expressed disagreement over the adequacy of Safe

Harbor standards HUD established. Three of these recommend that FOs
should

also have the option to exceed Safe Harbors. Two object to any Standard
3

limitations on Public Offerings and seek clarification regarding
\"Regulation

D\" Private Offerings. Six commenters stated that the base for
estimating

Standard 2 Developer\'s Fees in rehabilitation cases should not be
HUD\'s

definition of Total Development Costs, but rather, should include the

acquisition cost of the property for rehabilitation proposals (HUD
includes

\"as is\" value of improvements and land in mortgage insurance
processing

replacement cost, but not in the base for fee calculation). Four noted
in

particular that HUD\'s Property Disposition sales, \"bargain sale\"
rehab, and

Section 223 (f) proposals will suffer as a result of not including

acquisition cost in the base for Developer\'s Fees. Four recommend the

Alternative Standard 1 Builder\'s Profit base should be defined as

construction costs, not Total Development Costs. Two request
clarification on

whether HCAs must \"elect\" to apply Alternative standards on a
case-by-case or

blanket basis. Two stated that establishing numerical \"builder\'s
profit\"

standards discourages the use of \"lump sum\" contracts and
unnecessarily

42

promotes exclusive use of \"cost-plus\" contracts. One commenter
requested

additional discussion of how Builder\'s and Developer\'s Overhead is
treated in

HUD mortgage insurance processing.

Response:

Safe Harbors can be Adjusted for 911 Subsidy Layering Reviews - The

Department\'s response to Comment 10 makes it unnecessary to address
uniform

theoretical standards, allowing for more practical local solutions. HCAs
may

increase Safe Harbor percentages for projects exhibiting specified risk

factors in accordance with market data in their area for 911 Subsidy
Layering

Reviews, and must document their actions through acceptable public

accountability measures.

FOs limited to Safe Harbor processing limitations in 102 - Although the

National Council of State Housing Agencies issued its \"Standards for
State

Tax Credit Administration,\" members are not bound to uniformly accept
and

apply them. State and local HCAs apply varying Developer Fee allowances
to

induce strong and dependable market participation, producing a large
range in

the fee schedule ceilings adopted. HUD\'s RSLGs are deliberately
designed to

respect the autonomy of our partners in this endeavor, and reaffirm the

Department\'s confidence in an HCA\'s ability to measure local market

conditions and needs. HUD is relying on the HCAs\' experience and,
therefore,

recognizes and accommodates potentially higher fees so long as HCAs

specifically reference risk or market factors which justify higher

compensation in accordance with market data. Also, HCAs have public

\"sunshine\" processes in place to ensure that the public good is being
served

in the establishment of appropriate fee schedules for builders and

developers. HUD has no such procedure in place, and will not create
another

bureaucracy to serve this function. HUD will generally limit itself to
Safe

Harbor allowances in 102 Subsidy Layering Reviews, e.g., only SPRA or
BSPRA

for Section 221 (d) proposals reviewed under Standard 2 Developer\'s
Fee.

Standard 1 Revisions: Base for Calculating Builder\'s Profit is now

Construction Cost; \"Lump Sum\" and \"Cost Plus\" Construction Contracts
are both

Acceptable - HUD\'s typical processing assumes construction \"hard
costs\" as

the base for its non-identity of interest builders profit, and the
\"soft

costs\" as a base for the Sponsor\'s Profit and Risk Allowance (SPRA) /

developer\'s fee. In contrast, identity-of-interest builders profit and

developer\'s fees are intermingled in the BSPRA calculation, which is

estimated on a much larger \"hard and soft cost\" of the improvements
base,

i.e., \"Total Development Cost\". Each of these profit calculations is

separate from overhead. Builders overhead, general requirements, and

developer\'s overhead (HUD terms the latter \"organizational expenses\")
are

estimated and included in the Total Development Cost as separate items,

43

the first two as hard costs, and the latter as a soft cost. HUD included

smaller percentages (4% and 6%) of the larger Total Development Cost
base in

its Interim Guidelines in an effort to accommodate potential variance
with

HCAs in Standard 1 \"Alternative\" allowances.

But the Department has revised Standard 1\'s structure and allowances

because of the confusion created. BSPRA (Builders and Sponsors Profit
and

Risk Allowance) will be retained as one acceptable Safe Harbor standard
for

identity-of-interest developer/builders under Standards 1 and 2, and
SPRA and

Builder\'s Profit for non-identity of interest developer/builders. Lump
sum

contracts are permissible for non-identity-of-interest developers and

builders under 221 (d) (4), but the Builder must break out its profit
and

overhead for HUD under 102, or the HCA under 911, on Form FHA-2328,

\"Contractor\'s and/or Mortgagor\'s Cost Breakdown\" in accordance with
Standard

1 limitations.

For identity-of-interest 221 cases, HCAs performing 911 Subsidy Layering

Reviews may apply the HUD processing numbers to satisfy Standard 1, or,

substitute as an Alternative up to 6% of construction costs for
Builder\'s

Profit, 2% for Builder\'s Overhead, and 6% for General Requirements,
i.e., the

\"Standards for State Tax Credit Administration\" must be applied
(except for

\"high cost\" areas, where the FO processing numbers may be used to
comply with

Safe Harbor). Standard 1\'s previous Safe Harbor amounts are now
effectively

Ceiling amounts and have been retitled.

Standard 2 Revisions: Base for Calculating Developers Fee & Alternative

Calculation of Fee - The Department initially required HCAs to adhere to
its

definition of the Total Development Cost base for Standard 2
calculation, and

separated out appraised Values for projects for at least two sound
reasons:

1\) HCAs benefit from HUD\'s appraisals of land or land and improvements
and

have some basis for evaluating the economic reasonableness of a
Sponsor\'s

proposed acquisition and new construction or rehabilitation (and can
compare

that to competing Sponsors and their proposals for the limited LIHTC

resource); and 2) FOs benefit from the selection of its definition of

estimated replacement cost for monitoring purposes. These two goals can
be

achieved without requiring HCAs to uniformly define the Total
Development

Cost base. HCAs may look to Line G73 of Form HUD-92264 for an
independent

appraisal opinion, and at the same time, Alternatively fund by applying

percentages to its definition of Total Development Cost, reflecting
state and

local LIHTC-program requirements and practices. However, acquisition
cost in

excess of value may not generally be considered in the base for
Developers

Fees. An HCA indicates its election regarding the application of HUD\'s

processing results versus Alternative funding by selecting between the
two

numbers on the Mortgageable Use portion of the S & U Format, and may do
so on

44

a case-by-case basis. HUD will generally use BSPRA/SPRA allowances and
its

Total Development Cost definition in performing 102 Subsidy Layering
Reviews.

Please note that HUD substitutes \"Sales Price\" for \"Property Value\"
in

Property Disposition (PD) cases, and HUD Approved Debt as a Use in cases

where new HHA and OGA will be provided to projects already receiving
some

form of HHA. HUD will generally not include these amounts in the base
for

fee calculation in 102 Subsidy Layering Reviews, and HCAs must determine
what

acquisition costs (up to a maximum of price or debt) may be included in
the

base in 911 Subsidy Layering Reviews if fees are Alternatively funded.

Standard 3 Revisions - The Department is raising Private Offering RSLG

Standard 3 limitations to a Safe Harbor of 10% and a Ceiling of 15%.
Public

Offering levels will be retained as proposed. Although two commenters
pointed

out that the latter transactions are otherwise regulated by the
Securities

and Exchange Commission and the North American Securities Administrators

Association, the Department believes that sections 102 and 911 require

efficiency, accountability, and cost containment in the guidelines

established for all transactions. Also, a new enforcement mechanism has
been

added, as described in Notes following the Standards. Regarding Private

\"Regulation D\" Offerings marketed to individuals, the RSLGs now
clarify that

these are subject to the same standards as for Public Offerings: 15%
Safe

Harbor and 24% Ceiling.

12\. Whether Ceiling amounts in Standards 1 through 3 should be raised,
or,

HCAs should be permitted to establish Ceilings through Qualified
Allocation

Plans or Governing Board or Approving Authority Resolutions rather than
HUD

through its RSLGs?

Input: Five commenters raised related issues. Two commenters agreed with

HUD\'s Ceiling percentages, but two others disagreed. One commenter
stated,

\"HCAs ought to be able to secure governing body approval of Ceiling
standards

as a part of their allocation plans and reserve project-specific
governing

body reviews to projects with special circumstances (such as those
elaborated

in the Note on Standards 1 and 2 on page 9336 of the SLGs as published
in the

February 25, 1994 Federal Register).\"

Response: The Department believes that absolute \"Ceilings\" are within
its

authority and responsibility to establish in the RSLGs. It has
established

these in an objective manner. There are a limited number of
\"Applicability

Exceptions\" for the truly extraordinary circumstances referred to which
may

arise and require some flexibility from imposition of the Ceilings; but

generally the Department\'s own experience, as reinforced by HCA data

45

regarding these standards, strongly supports the position that uniform

maximums must be established and maintained. The revisions made pursuant
to

our responses to Comments 10 and 11 also ameliorate the expressed
concern.

The Department is maintaining absolute Ceilings in the RSLGs except for
in

Applicability Exception cases (Comment 16), and will consider any
hardships

caused in the future in determining whether revision is necessary to

encourage greater market interest and participation.

13\. Whether Standard 4 should be revised to clarify its purpose and

application?

Input: Ten commenters raised this concern. Eight commenters agree with

Standard 4 in concept but request clarification and modification. Six of

these same commenters offered suggestions for improving the standard.

Observations and suggestions include the following: clarify what effect

reaching the \"threshold\" has; clarify that such cases are still
subject to

the HCA\'s Qualified Allocation Plan standards; base the numerical
standard on

only 99% ownership; remove all references to a specific number for the
upper

level in Standard 4, but retain the concept; tie the upper Standard 4

numerical standard to an established index so adjustments take place

automatically; allow the FHA Commissioner to frequently adjust the
standard,

e.g., through monthly Notice to HCAs and FOs, rather than through

publication; retain a specific numerical Standard 4 upper level, but
revise

the RSLGs to describe what criteria HUD will use to adjust it.

Response: The Department is revising Standard 4 as follows:

\- the numerical concept of \"thresholds\" has been eliminated from

Standard 4, and the standard has been modified to be more consistent

with section (b) (1) of 911, HCDA \'92 in that HUD recognizes that

maximum equity contributions may be obtained by reliance on \"current

market conditions, as determined by the HCA\";

\- at its LIHTC Reservation stage, the HCA will rely on current market

conditions; previous syndication data; and proposed syndicator\'s
offers,

Syndication Agreements, or Partnership Agreements (if available at the

time of Reservation processing) in selecting the appropriate Market Rate

for an individual Project. The HCA will simply capitalize (divide) the

Gap Filler equity reflected on the applicable S & U Format by its

selected Market Rate to estimate the maximum LIHTC Allocation amount (if

eligible project cost calculations or other criteria produce a lower

Allocation, the HCA will use it);

\- an HCA may complete its 911 Subsidy Layering Review

responsibilities by forwarding a balanced S & U Format and Certification

to HUD prior to formal HUD assistance approval, e.g., Initial

Endorsement in mortgage insurance cases. No \"back-end\" Subsidy

46

Layering Review is required unless: 1.) a new Source type (or a mortgage

increase) not previously considered in the front-end Subsidy Layering

Review is subsequently requested or obtained, or, 2.) certified Project

Uses (costs) decrease by more than 2% from estimates used in the front-

end Subsidy Layering Review.

\- Standard 4 and the section 911 certification (Attached) have been

revised to clarify that a project which reaches the Market Rate-

estimated Gap Filler amount is not exempt from the Guidelines, nor

necessarily from \"further review.\" Rather, it should be noted that HUD

or 911 HCAs always perform a Subsidy Layering Review if new HHA and

LIHTCs are requested, and HCAs always apply at least Qualified

Allocation Plan limitations to LIHTC projects;

\- the lower level of Standard 4 has also been eliminated. HUD

anticipates that so long as LIHTC-application requests significantly

outnumber overall allocation resources, competition should keep Market

Rates at reasonable levels;

\- HUD or HCAs will apply adjusted Market Rate assumptions to Sponsors

retaining greater than 5% ownership interests. The effect of

capitalizing the necessary Gap Filler by such \"above\" Market Rates
will

be to reduce the LIHTC Allocation in 911 Subsidy Layering Reviews (See

Comment 14 below). HUD strongly discourages Sponsors from changing

syndication/ownership assumptions after Initial Endorsement. Sponsors

must notify HUD through Form HUD-2880 of any change in ownership

retention intentions, and after Initial Endorsement, HUD must approve

such changes. Such revisions will likely cause serious delays, i.e.,

HUD Transfer of Physical Asset approval requirements pertain, which

should be avoided once construction has commenced. (Sponsors should

determine percentage ownership and related Gap Filler funding issues

prior to construction closing, and stick to the original Financing Plan

submitted to HUD, if possible.)

14\. Whether the Sponsor\'s required 1-5% minimum ownership retention

assumption when an HCA estimates Net Syndication Proceeds should be

eliminated or modified?

Input: One commenter states, \"This requirement is entirely unfair and
will

deny access to HUD programs to those tax credit project Sponsors who
wish to

receive compensation in the form of tax credits.\" Another remarks,
\"Please

explain why HCAs should make this assumption in cases where there is
evidence

otherwise (where the ownership interest exceeds 5%).\" Yet another
suggests,

\"A separate, higher standard for net equity contribution (as compared
to Net

Syndication Proceeds when equity comes from outside sources) should be

inserted in the guidelines \... when the developer retains more than a 5

percent ownership interest in the tax credits. Such a standard should be
at

least 15 percent higher than the standard for net syndication
proceeds.\"

47

Response: In 911 Subsidy Layering Reviews, HCAs must make Market Rate

adjustments when calculating maximum LIHTC Allocations for projects not

completely syndicated. Also, the value of a \"given\" LIHTC Reservation
amount

must be more accurately assessed by FOs in 102 Subsidy Layering Reviews
where

projects are not fully syndicated. These requirements prevent owners and

developers who retain and use larger percentages of LIHTCs from reaping
an

unintended windfall of benefits not available to the developer who must
seek

limited partner investment to fill equity gaps. For example, because

\"syndication expenses\" are foregone in owner-held LIHTC projects, the
value

of the interest retained is worth more than the Market Rate for sale of
the

LIHTC project per allocation dollar. The value associated with any cash

flow, depreciation, and gain or loss on disposition which is retained
must

also be considered. HUD or HCAs, when performing Subsidy Layering
Reviews

under these RSLGs, must therefore recognize the full value of LIHTC
projects

which are not fully syndicated. The Department is retaining its paradigm
for

the Standard 4 Market Rate calculation: syndication of 95%-99% of the

project, with adjustments required for projects with higher than typical

percentage ownership retention. (See Standard 4 for effects, and the
Glossary

under \"ownership\".)

15\. Whether additional Source and Use formats may be developed?

Input: One commenter requested that the Department allow HCAs to develop

formats for non-mortgage insurance cases since the Interim Guidelines
Sources

and Uses Statements did not cover every possible combination of HHA and
OGA.

Response: See FO Instruction supplements. Risk-Sharing and Reinsurance

Agencies may develop appropriate variations for risk-sharing and
reinsurance

cases.

16\. Whether the \"Applicability Exceptions\" category appearing under

\"Guideline Standards\" should be retained as proposed, modified,
extended to

HUD 102 Subsidy Layering Reviews, or eliminated altogether?

Input: Five commenters expressed diverging opinions on the
\"Applicability

Exceptions\" category. Three agree with the concept, and one of these

suggests FOs performing 102 Subsidy Layering Reviews should also
consider

granting Exceptions. Two others question the category because it may
produce

\"inequitable\" treatment of like circumstances. One commenter urges
revision

of the criteria HCAs apply in granting Applicability Exceptions.

Response: HUD believes the Applicability Exceptions category is
necessary and

retains it in the RSLGs. If FO monitoring of HCAs reveal abuse, then HUD
may

revoke the offending HCA (HCAs must specify as justification for
granting an

48

Exception the extraordinary circumstance involved). If HUD finds that

several HCAs abuse this category, which was added for the worthwhile
purpose

of adding flexibility for extraordinary development circumstances, then
HUD

will prospectively eliminate the category altogether without further
public

notice.

The RSLG criteria have been revised to clarify that \"extraordinary

circumstances\" must be involved before an HCA grants an Exception.
Examples

are provided describing the types of circumstances which might warrant

compensation for added building, development, and investment risks. HCAs
may

not act arbitrarily in awarding Applicability Exception category status
to a

project. HCAs should exercise due diligence in identifying extraordinary

circumstances justifying departure from one or more standards, and must

include copies of approved Exceptions to the FO. To the extent that an
HCA

runs out of its allocated Applicability Exceptions, the result may be
that

similar cases are not treated similarly. Sponsors with projects which
are

similar to Applicability Exception projects, but who are limited by the

standards because the HCA did not have enough Exceptions to provide them
to

all like Sponsors similarly situated, do not have grounds for complaint

against an HCA, its Governing Board, or Approving Authority. HUD

Headquarters and FOs will not hear individual Sponsors, appeals relating
to

not receiving an HCA\'s Exceptional status and treatment. Generally, HUD
will

monitor an HCA\'s performance in its totality rather than on the basis
of

isolated incidents. Consistent with our reasoning in Comment 10 Response

above regarding exceeding Safe Harbor standards, FOs will generally not

consider granting Applicability Exceptions to individual project owners

pursuant to section 102 Subsidy Layering Reviews.

17\. Whether there should be additional exclusions to the scope of the
RSLGs?

Input: Six commenters recommend additional exclusions to the RSLGs or

raise applicability issues. One commenter said that the Department
should

make clear that Section 223 (a) (7) refinance and 202 elderly housing

programs are not HHA which may trigger Subsidy Layering Reviews if
combined

with OGA. The same commenter requests HUD to join it in \"asking
Congress for

a statutory change which would subject only those projects combining HUD

subsidies with Low Income Housing Tax Credits to a subsidy layering
review.\"

One commenter stated, \"HUD\'s subsidy layering requirements should not

interfere with an HFA\'s statutory authority to use its own underwriting

criteria for loans insured under the risk-sharing program. Please
clarify in

the final guidelines that an HFA\'s developer and builder fee limits are
the

limits that should be utilized for the subsidy layering review of
projects

financed under the risk-sharing program.\" One commenter requests that
the

49

Department explicitly exempt from Subsidy Layering Reviews projects
which

receive no greater than 25% project-based Section 8 assistance. One

commenter requests that HUD clarify that routine annual Section 8
increases

are not considered HHA and do not trigger a Subsidy Layering Review. One

commenter requests that the Department exclude application of the
Standards

to multifamily projects with less than 24 units. One commenter requests
that

HUD clarify how projects which received LIHTCs 2-8 years ago will be
treated

if they make application for Section 223 (f) financing 3 years after

construction, i.e., are these applicants subject to a Subsidy Layering

Review, and if so, who will do it?

Response: HUD notes that Section 223 (a) 7 refinances involving no OGA
do not

require a Subsidy Layering Review. Please note also that new HHA under
223

\(a\) 7 may not exceed the original mortgage insurance assistance
provided, and

only modest repairs are allowed under this program. But if the repairs
are

substantial and OGA such as LIHTC proceeds have been or will be
obtained,

then the proposal is subject to a Subsidy Layering Review. With respect
to

Section 202 proposals, the Department notes that these are on the lists
of

covered programs at 24 CFR §§12.10 (8) and 12.30 (8), (9); 12.50 (7),
(8).

HUD will continue to subject such HHA combined with OGA to 102 Subsidy

Layering Reviews.

This is also the Department\'s position regarding excluding all
non-LIHTC

OGA from subsidy layering requirements. The Department notes that
Congress\'s

mandate to HUD in the HRA \'89 made statutory a practice FHA-Housing has

followed for approximately a decade for combinations of HHA with OGA,
i.e.,

grants or loans for mortgageable or direct loan uses caused reductions
in

HHA. While it is true that the Department did not develop a similar
device

for controlling excess subsidy in LIHTC cases between 1986 and 1989,
FHA-

Housing has essentially and consistently performed Subsidy Layering
Reviews

on other OGA cases for at least 10 years, and would not recommend
statutory

revisions at this time to well-established underwriting, direct loan,
and

capital advance processing practices.

The Department does not agree that required Risk-Sharing Subsidy

Layering Reviews should be performed pursuant to a participating HFA\'s

Builder\'s Profit and Developer\'s Fee limitations, rather than
Standards 1 and

2\. HCAs must apply the RSLGs and Standards 1 and 2 to Risk-Sharing
cases.

(However, Risk-Sharer\'s may define the Total Development Cost base as

discussed above in Comment 11, e.g., for rehabilitation proposals,

acquisition costs not in excess of value may be included.) A
risk-sharing

HFA, if it is also a 911 Subsidy Layering Review HCA, may make
appropriate

alterations to HUD\'s S & U Formats for risk-sharing projects subject to
911

Subsidy Layering Reviews. (HUD Headquarters is available to provide any

necessary guidance regarding content.)

50

Where HOME fund grants or loans are provided together with some form of

HHA, please see the FO Implementing Instructions for further guidance.

Projects receiving only project-based Section 8 rental assistance for

25% or less of the units combined with OGA are subject to a Subsidy
Layering

Review. However, if the, OGA and project-based Section 8 HHA involved,

whatever the percentage, are not provided for the same or similar
Project

Uses (e.g., LIHTCs are provided for a capital improvement Use, but
Section 8

rental assistance does not include debt service for capital improvement

loans, but only operating expense increases or reimbursement) then
\"layering\"

concerns are absent (i.e., potential Project Uses do not overlap), and a
102

or 911 Certification may be made without further Subsidy Layering
Review.

Thus, routine budget-based increases based on higher operating costs,
and

annual adjustment factor increases in Section 8 assistance, do not
trigger a

detailed Subsidy Layering Review unless the increase is related to debt

service obligations on capital improvement loans (where combination with

LIHTCs would clearly trigger a more detailed and substantive Subsidy
Layering

Review).

Note that program participants are generally only required to submit

detailed Form HUD-2880s if the HHA request involved is greater than
\$200,000.

(See 24 CFR 12.32 (a) (1).) Where less than this amount of HHA is
requested,

FOs and HCAs may, in lieu of Form HUD-2880, accept the Sponsor\'s simple

written attestation that all programs of assistance involved do not
produce

a potential overlap in Project Uses. By way of example, if a Flexible

Subsidy Capital Improvement Loan for \$40,000 is sought, and LIHTCs are
also

provided to finance capital improvements, a Subsidy Layering Review is

required; i.e., for cases involving clear potential program overlap,
Sponsors

must demonstrate to HUD (102 Subsidy Layering Reviews) or to the HCA
(911

Subsidy Layering Reviews) through fully detailed Form HUD-2880s that no

overlap in Project Uses is contemplated (capital improvement Sources
being

provided do not exceed capital improvement costs estimated), and that
both

Sources are necessary to provide the affordable multifamily housing.
This is

consistent with the regulatory requirement that Sponsors provide details
on

OGA \"as HUD deems necessary\" to make a Subsidy Layering Review
Certification.

(Emphasis added: see 24 CFR 12.32 (b) (1) (iv) .) In summary, where
there is

no potential program assistance overlap, i.e., where overlap cannot
occur

programmatically, HUD does not require detailed disclosures or Subsidy

Layering Reviews, because they are not deemed necessary; but where there
is

potential overlap, the burden is on Sponsors to demonstrate no actual
overlap

in Project Uses to satisfy either a 102 or 911 Subsidy Layering Review.

51

Small projects of 24 units or less are already specifically identified

in the RSLG Note regarding Standards 1 and 2 as deserving of special

attention and Compensation under the risk factor \"size\". HCAs should
be

mindful of the importance of not discouraging this type of development
and

risk by ignoring its Builders\' and Developers\' legitimate expectation
to be

properly compensated for developing needed low and moderate income
housing

which fits into every neighborhood, and offers a multifamily development

alternative which avoids over-concentration issues. HUD and HCAs will

seriously consider economy of scale arguments such participants present.

With respect to Section 223 (f) applications, where LIHTCs were

allocated some years ago to a project which is now somewhere \"in the
middle\"

of the 10-year stream, a Subsidy Layering Review is required because new
HHA

is being combined with OGA which still provides current benefits to the

project. These benefits, while previously awarded by the HCA, fall under
the

broad definition of OGA contained in section 102, HRA \'89, and were

presumably awarded pursuant to capital improvements performed. HUD will

perform the required Subsidy Layering Review, since HCAs cannot
practically

adjust LIHTCs awarded after Placement in Service. The Sponsor\'s
Disclosure

and Updating form must thoroughly detail the actual costs incurred in

acquisition and rehabilitation, and the Conventional debt financing
obtained

and equity financing raised through the syndication of the project to
meet

such costs. HUD will apply the RSLGs and Implementing Instructions in
making

adjustments to the actual net equity obtained as of the Placement in
Service

date to determine the appropriate Section 223 (f) mortgage necessary to

replace the conventional financing. Note that HUD will observe this

procedure regardless of what year the project is currently in with
respect to

the annual LIHTC stream. No Subsidy Layering Review is required if 223
(f)

insurance is sought on a project which has received the full stream of

LIHTCs, or, has fallen out of compliance and completely lost its LIHTC

Allocation (assuming no other OGA is involved).

18\. Whether there should be additional inclusions to the scope of the
RSLGs?

Input: One Commenter states, \" \... a standard should be established
for

cash flow distributions to limited partners\... The previous guidelines

contained such a standard. If HUD acts to reduce the mortgage amount, or
if

a low mortgage is proposed, and the credit agency comes in and provides
tax

credits (with or without other subsidies) to fill up whatever financing
gap

remains, there is a potential for excessive profit in the form of cash
flow

distributions. A judgement cannot be made as to whether or not
government

assistance is more than is necessary to make a project work unless there
is

some judgement on the amount of cash flow the project is likely to
receive.\"

The commenter cites 24 CFR 207.19 (b) (4), and the Department would

supplement by citations to 24 CFR 12.52 (a) (2) (ii); 221.532 (d); 231.8

52

(c), (d); 232.45 (b); 241.130 (c); 882.714 (c) (4); 882.715 (c); and
882.732

(c). The same commenter observes that HUD should add to its list of risk

factors under Standard 2 the \"proposed percentage of set-aside units
which

will benefit low income households.\"

Response: The Department does not agree that cash flow distributions
must be

analyzed and approved at precisely defined levels in order to establish

whether the necessary amount of government assistance is being provided
to a

project. This is why HUD moved from the \"16% Internal Rate of Return\"
model

applied under its previous guidelines to a \"net equity\" model. (See
also \"Net

Syndication Proceeds\" and \"Ownership\" in Glossary section of RSLGs)
The

Department agrees with industry critics who urged revision to HUD\'s

guidelines in 1992. Cash flow from LIHTC projects is not a significant

element affecting investor decisions, because positive cash flow cannot
be

assured. But note that HUD does limit returns in cases where there are

limited dividend Sponsors, or where HUD Section 8 project-based rental

assistance is combined with OGA.

The Department agrees with the commenter to add to the \"Note on

Standards\" the factor indicated: a project\'s estimated occupancy by
truly low

income households does affect the developer\'s risk, which may be
rewarded by

HCAs through the fee. (This is consistent with HCA guideline
requirements

under OBRA §7108 (o) to give priority to projects serving the lowest
income

tenants and to projects obligated to serving qualified tenants for the

longest period.) Some HCAs already apply such a policy to applications,

exclusively reserving LIHTCs only for proposals which limit rents to 50%
or

less of area median income. But HUD does not believe it is appropriate
to

dictate that all HCAs apply such a policy to all applications.

19\. Whether any balance remaining in Operating Deficit Reserve escrows
(when

funded by Net Syndication Proceeds) may be used to reduce secondary
debt, or,

must instead roll over into the Replacement Reserve in all mortgage
insurance

cases; whether any additional Reserves or separate policy may be
established

for non-mortgage insurance HHA cases; and whether such Reserves affect

permissible Developer\'s Fees under Standard 2?

Input: Four commenters raise related issues. Two commenters requested

that the Glossary discussion of the permissible uses of any remaining
balance

of Operating Deficit Reserve be expanded to include the option of paying
off

secondary debt or extended to other uses. Two others request
clarification

on how the Developer\'s funding of such Reserves (or Working Capital
Reserves)

should be treated under Standard 2 limitations. One of the former two

commenters stated that HUD is too restrictive in its Reserves policy, or
at

least, should adopt a different policy in non-mortgage insurance cases
than

53

in other FHA-Housing-assisted cases where the Department does not bear
the

long term risks, e.g., project-based Section 8 rental assistance cases
which

FHA-Housing administers.

Response: Because many projects may receive only HUD mortgage insurance

assistance and no HUD rental assistance in conjunction with LIHTCs, the

Department is concerned that projected operating deficits be adequately

funded. HCAs may allow additional \"Rent Reserves\" so long as it is

understood by the Sponsor that HUD\'s Operating Deficit Reserve and the
HCA\'s

Rent Reserve are commingled in the HUD Loan Management-administered
Escrow

(Form HUD-92476-A) and must be funded by the Sponsor prior to Initial

Endorsement. In 911 Subsidy Layering Reviews, HCAs must determine
whether

Net Syndication Proceeds may be projected and used to fund such
reserves.

Since many rent-restricted projects will not have rental assistance, and

because project expenses may increase at a faster rate than project
income

over the holding period in many areas, and project replacement reserves
for

necessary repairs in 10 to 15 years may not be fully funded under such

\"tight\" cash flow situations, HUD has decided to retain the limitation
on

uses of any remaining balance in funded Operating Deficit Reserve
escrows

(commingled with Rent Reserves).

Regarding the question about a separate policy for Flexible Subsidy

loans, Loan Management Set-Aside, or Housing\'s Project-based Section 8-

assisted cases and application of unused Reserves, FHA-Housing agrees
that

while its long-term interests are not affected when it is not taking the

long-term risks through mortgage insurance assistance, the project\'s
long-

term needs do not change, i.e., Replacement Reserve needs do not shift
when

the form of HHA is different. FHA-Housing believes it is demonstrating
its

long-term commitment to a project receiving these other forms of HHA by

requiring that any unused Operating Deficit Reserves roll over into the

Replacement Reserve account. FHA-Housing is not responsible for program

administration outside its purview, and will not presume to speak
regarding

PIH or CPD program assistance and policy in this area; these offices
will be

establishing and issuing their own authoritative Guidelines. In regards
to

FHA-Housing\'s policy, however, new lines have been added for
\"Additional

Working Capital\" and \"Rent Reserves\" to the Sources and Uses Formats
which,

if funded, may contribute to the project\'s long term viability (see

Glossary).

Regarding the question about the effect on Developer\'s Fees of, a

Sponsor funding such reserves, HCAs should follow their established
practice,

making that practice clear to the FO monitoring them. Please note that
where

the HCA\'s practice requires a Developer to fund Reserves out of its
fee,

\"Developer Fees Returned to Fund Reserves\" may be reflected as a
separate

Source line on the 5 & U Format. (See Glossary discussion of Developers
Fees

as \"paper\" allowances.) Developers must plead their case to the
applicable

54

HCA regarding reserves and fees. The total amount of assistance the
LIHTC

program and Net Syndication Proceeds can provide in this mix is limited,
and

while S & U Statement fees represent the sum total of potential earnings

eventually received by the Developer, reserves stay with the project.
HCAs

must determine a reasonable proportional allocation between fees and

necessary reserves for individual projects within the confines of
overall fee

limitations and overall LIHTC-program resources.

20\. Whether the Resident Initiative Fund Reserve requirements should be

revised?

Input: Two commenters raise this issue. One commenter stated that HCAs

should not be required to coordinate any LIHTC proceed funding of these

reserves with HUD because the HCA \"does not have the requisite
experience to

determine the amounts necessary to provide services to be funded from
such a

fund.\" The other commenter noted as follows: \"The Guidelines require
that any

resident initiative funds unspent after ten years be used to pay down
the

mortgage or added to project reserves. We believe this limitation should
be

deleted.\"\'

Response: It is because HCAs may not have experience in funding and

administering these services that the RSLGs encourage them to coordinate

LIHTC-proceeds-provided assistance with the FO offering assistance in
such

cases. With potential assistance from both sources, more tenants may
benefit

from such services. Regarding the second comment, HUD notes that the

\"transfer after ten years\" requirement was included to encourage
active use

of the funds provided for the stated purpose of the fund. However,
Sponsors

may request an extension of the term beyond ten years if there are funds

remaining which will be used for resident initiatives.

21\. Whether Discounting and Compounding at applicable Bridge Loan Rates
is

the only acceptable method for estimating the net present value of

syndication proceeds as of the Placement in Service date?

Input: Three conmenters suggested alternative methods for discounting
and

compounding, using different rates than the bridge loan rate to more

accurately estimate the net present value of syndication proceeds as of
the

Placement in Service date, whether projects in fact obtain bridge loan

financing or utilize an equivalent equity funding source at lower rates.
One

commenter suggested HCAs should simply be required to reflect the sum of
the

face amounts of all installments.

Response: The Department agrees that an HCA may implement its own
compounding

and discounting requirements for the calculation. Compounding and
Discounting

may be calculated using other rates such as a construction rate
(composed of

55

the prime plus 2% or 3%) or the 7-year Treasury Note rate. If the final

syndication installment is conditioned on several contingencies
occurring,

perhaps an even higher rate may be applied to discount its present value
as

of Placement in Service. Example: Assume a first installment of 30% of

proceeds is received 2 years prior to construction completion at the

execution of the Syndication Agreement, a second installment of 40% is

received at construction completion and Placement in Service, and a
final

installment of 30% is received after sustaining occupancy is reached,

estimated to occur 2 years after completion. If the HCA determines that
the

early and late installments are to be compounded and discounted at the
same

rate, e.g., the bridge loan rate, then simply adding the face amounts of
all

installments is adequate, i.e., the 2 year compounded 30% portion and 2
year

discounted 30% portion exactly \"offset\" each other, and the middle

installment received as of Placement in Service is neither compounded
nor

discounted. The proportion of early and late installments, and the

difference between compounding and discounting rates are the factors

affecting Net Syndication Proceed value as of the Placement in Service
date.

The FO Instructions describe how Sponsors are required to provide the
Net

Present Value as of the Placement in Service date in accordance with the

HCA\'s selected compounding and discounting method in 911 reviews (HCA

verification of the net will typically occur after a 911 review is

completed), while FOs will review the Sponsor\'s submission for
technical

accuracy in 102 reviews.

GUIDELINE STANDARDS

Applicability - Standards 1 and 2 apply to all cases combining HHA and
OGA,

if the program assistance involved provides for either builder profit or

developer fees. Standards 3 and 4 specifically apply to LIHTC cases,
whether

reviewed under section 102 or 911.

Separate Standards Appear for Standards 2 and 3 - HCAs may simply apply

published Safe Harbors in 911 Subsidy Layering Reviews, or raise the
Safe

Harbors through Governing Board or Approving Authority Resolution or

Qualified Allocation Plan provision up to the published maximum Ceiling

level. Documentation of such action should be submitted to the FO, as

applicable to individual cases. Ceiling Standards represent absolute

limitations, except for Applicability Exception cases.

Applicability Exceptions - An HCA may grant a limited number of
exceptions to

the standards referenced below, i.e., it may exclude the greater of
either 5

individual projects or 10 percent of the total number of projects
reviewed

under 911 in a single calendar year from Standards 1 through 3 below.
(There

are no exceptions to Standard 4.) These exceptions should only be
granted

56

when extraordinary circumstances relating to the market or risk factors,
as

discussed below in the Note on Standards 1 and 2, warrant excluding the

project from the standards. HCAs may not act arbitrarily, and all
exceptions

must be approved by the HCA Governing Board or Approving Authority in a

public forum. For example, a small project of no more than 24 units may

receive a Builders Profit greater than the Alternative Ceiling amount as
one

exceptional case, if approved by the Board. Similarly, a project located
in

a qualified census tract may receive a Developer\'s Fee of greater than
15

percent and may incur Syndication Expenses for private placement of
greater

than 15 percent of gross proceeds as a second exceptional case.
Additionally

for these cases, the HCA must determine whether the amount of equity
capital

raised and project costs incurred satisfy the mandates in section 911(b)
of

the HCDA \'92, and do not exceed the HCA\'s Qualified Allocation Plan

allowances.

1\. BUILDER\'S PROFIT

Ceiling Standard - Where there is no Identity-of-Interest (See Glossary)

between the Builder and the Sponsor/Developer, the Builder\'s Overhead,

General Requirements, and Profit may not exceed HUD\'s estimates
reflected on

Lines G42 through G44 of Form HUD-92264, \"Rental Housing Project Income

Analysis and Appraisal,\" except for Lump Sum contracts, where the
amounts

reflected on Form FHA-2328 must be acceptable to the FO. Where there is
an

Identity-of-Interest, the combined Builder\'s Profit and Sponsor\'s
Profit/

Developer\'s Fee is limited to BSPRA, as reflected on Line G68. At
HUD\'s

discretion, commensurate amounts may be estimated in non-mortgage
insurance

programs. Alternatively, HCAs may elect to use the \"Estimated Cost

Excluding\...Overhead and Profit\" line on the \"Mortgageable
Replacement Cost\"

Uses portion of the S & U Statement, and may reflect up to 6% of
construction

costs for Builder\'s Profit, 2% for Builder\'s Overhead, and 6% for
General

Requirements (pursuant to the National Council of State Housing
Agencies\'

\"Standards for State Tax Credit Administration\") under the
\"Non-Mortgageable

Uses-Alternative Builders Profit\" line of the Statement. (HCAs may
accept FO

processing allowances for builders in high cost areas which exceed the

National Council Standard allowances.)

2\. SPONSOR\'S PROFIT/ DEVELOPER\'S FEE

Safe Harbor Standard - Where there is no Identity-of-Interest between
the

Sponsor/Developer and the Builder, SPRA will be recognized as a
limitation by

HUD in Section 221 mortgage insurance application processing and section
102

Subsidy Layering Reviews. Where there is an Identity-of-Interest, BSPRA
will

be recognized as the Safe Harbor standard limitation for the combined

Builder\'s Profit and Developer\'s fee. Developer
Overhead/Organization\"

expenses on Line G65 are also separately calculated and allowed in HUD

processing under the Safe Harbor Standard. At HUD\'s discretion,
commensurate

57

amounts may be estimated in non-mortgage insurance programs.
Alternatively,

HCAs may elect to allow up to 10 percent of its definition of Total

Development Cost on the \"Non-Mortgageable Uses-Alternative Developers
Fee\"

line of the applicable S & U Statement.

Ceiling Standard - Following the Alternative funding pattern above, the
HCA

may reflect Developer\'s Fees of up to 15 percent of the HCA\'s
definition of

Total Development Cost under the \"Non-Mortgageable Uses\" portion of
the

applicable S & U Statement where approved by the Governing Board or
Approving

Authority in accordance with special market or risk factors.

3\. SYNDICATION EXPENSES

Safe Harbor Standard - The sum total of expenses, excluding bridge loan

costs, incurred by the Sponsor in obtaining cash from the sale of LIHTC

project interests to investors through public offerings may not exceed
15

percent of the gross syndication proceeds, and the total incurred
pursuant to

private offerings may not exceed 10 percent.

Ceiling Standard - The sum total of expenses, excluding bridge loan
costs,

incurred by the Sponsor in obtaining cash from the sale of LIHTC project

interests to investors through public offerings may not exceed 24
percent of

the gross syndication proceeds, and the total incurred pursuant to
private

offerings may not exceed 15 percent.

4 NET SYNDICATION PROCEEDS AND MARKET-DERIVED RATE ASSUMPTIONS FOR

CALCULATING MAXIMUM LIHTC ALLOCATIONS

Net Syndication Proceeds as of Placement in Service Date - HCAs will
divide

the Gap Filler equity amount necessary to balance Sources against Uses
for a

project by an applicable Market-Rate, expressed in cents netted per
dollar of

credit allocation, in calculating maximum LIHTC Allocations. Net
Syndication

Proceeds estimated as of Placement in Service may approximate, but
should not

generally exceed, Gap Filler needs. The projected Placement in Service
date

is the date of valuation of Net Syndication Proceeds regardless of when
a

Subsidy Layering Review is performed. The sum of the value of all

installments received must be included in the calculation. Sponsors must

calculate and report the effects of compounding and discounting in
accordance

with an HCA\'s selected rates and methodology. An HCA\'s LIHTC
Allocation may

not generally produce net syndication proceeds exceeding the necessary

subsidy Layering Review Gap Filler, and HCAs will subsequently lower the

annual dollar amount of credit on Form IRS-8609 accordingly. The Market
Rate

selected should be based on: 1) an individual project\'s market value as

reflected in Competing Letters of Intent the Sponsor submits, and/or 2)

58

Comparable Syndication/ Limited Partnership Agreements from the most
recent

past transactions; and/or 3) the HA\'s judgment regarding market trends.

Ownership Retention Adjustments - HAs must capitalize Gap Filler
requirements

by Market Rates plus the following incremental values (Rates) if higher
than

typical ownership interests are retained (See \"Ownership\" in
Glossary):

0-5% ownership retention: use Market Rate

5-50% ownership retention: add 10 cents

over 50% retention: add 20 cents

and reduce the maximum LIHTC Allocation accordingly.

NOTE ON STANDARDS 1 through 3: An HCA may choose to allow fees which are
less

than the Standard 2 Safe Harbor standard, or less than the Ceiling
amount

under Standard 1. Between Standard 2 Safe Harbor and Ceiling amounts,
and

beneath Standard 1 Ceiling amounts, HCAs may also use their discretion
in

awarding incremental Builder\'s Profit or Developer\'s Fees depending on

project market or risk factors (and may re-establish the Standard 2 Safe

Harbor through a blanket approach for well-defined categories of
projects as

described in Comment 10). Project risk factors may include: location in
a

\"qualified census tract\"; project size; challenging Substantial

rehabilitation projects; affordability, e.g., the degree to which the

project\'s set-aside units will serve lower income tenants earning less
than

50% of median income; whether there is an Identity-of-Interest
relationship

between the Developer and Builder affecting total fees. An HCA may
develop

and rely on other factors not listed above, and may reference in its

Qualified Allocation Plan all factors which its Application scoring
procedure

requires of all projects awarded Reservations, and which justify higher
Safe

Harbor levels \"across-the-board\" to projects receiving LIHTCs.

NOTE ALSO: Because HUD analyzes and determines the allowance for
Builder\'s

Overhead in processing (See Line G43 of Form HUD-92264), and
Developer\'s

Overhead under the rubric \"Organization,\" Line G65, extraordinarily
high

overhead may not be cited as a factor justifying a higher Developer\'s
fee.

Similarly, where relatively high local development fees are involved,
HUD

already includes these fees under the rubric \"Other Fees,\" Line G48 of
Form

HUD-92264, so this factor does not justify higher fees (may not be
duplicated

as a Project Use). If HUD\'s processing which reflects Safe Harbors is
relied

on, all of these items may be included within the mortgage as
mortgageable

items, and may be reflected on the S & U Statement under \"Mortgageable

Replacement Cost\". But Alternatively funded \"Builders Profit\" must
also

include \"General Requirements\" and \"Overhead,\" Consolidated on the S
& U

Statement, or itemized in accordance with the Standard allowances under
\"Non-

Mortgageable Uses,\" and Alternatively funded Developers Fees must
include

59

consolidated overhead and profit. Developer\'s acquisition cost in
excess of

the HUD-appraised value does not generally warrant higher Developer\'s
Fees,

and should not be included in the base of estimation.

For Section 223(f) refinances the Developer\'s Fee must be Alternatively

funded and reflected under the \"Non-Mortgageable Uses\" portion of the
S & U

Format (See applicable FO Instruction Format), because HUD typically

recognizes minimal overhead but no profit allowance in this program. The

base for the calculation will be Total Development Costs as defined by
the

HCA in 911 Subsidy Layering Reviews; but HUD will use 10% of the \"work
write-

up\" total for 102 Subsidy Layering Reviews. Builders Profit may not be

Alternatively funded, because 223 (f)\'s \"work write-up\" includes such
profit

and overhead as mortgageable items if value is added through proposed

repairs.

For Section 241 proposals, Developers Fees must be Alternatively funded
if

LIHTCs are involved. 10% of Line G72 less Lines G42 through G44 and G65,

Form HUD- 92264 will be permitted in 102 Subsidy Layering Reviews, but
HCA\'s

may Alternatively fund the appropriate percentage of its definition of
Total

Development Cost in 911 Subsidy Layering Reviews. Builders Profit

percentages are dependent on whether there is an identity-of-interest,
but

generally, will be based on construction hard costs for non-identity

builders.

NOTE ON STANDARDS 3 and 4: If ownership interests retained are between
5%-

50%, then Standard 3 Private Offering Safe Harbors multiplied by 50%
will be

applied. Where greater than 50% ownership interest is retained, then
\"Owner

Overhead and Organization Expense\" must be reported in lieu of
\"syndication

expenses\".

Amounts in excess of Standard 3 are added to the \"Additional Required
Sponsor

Equity Contribution\" line of the S & U Statement in 911 Subsidy
Layering

Reviews, or to the Net Syndication Proceeds line in 102 Subsidy Layering

Reviews, and consequently, will cause a reduction in Mortgage or LIHTC

assistance depending on who performs the Subsidy Layering Review. This

requirement supports enforcement of Standard 3 limitations, and also
supports

HCAs enforcement of OBRA §7108 (o) , which provides that state
guidelines must

give highest priority to projects that have the lowest percentage of
costs

attributable to intermediaries.

..TX:

In 102 Subsidy Layering Reviews, FOs will simply review

Letters of Intent, or

Syndication or Partnership Agreements, to estimate Net Syndication
Proceeds;

whatever the LIHTC Reservation or Allocation amount is, and thereafter

provide its assistance as a Gap Filler accordingly to balance the
appropriate

S &

U

ownership adjustments also apply.

60

GLOSSARY

BRIDGE LOAN COSTS AND OTHER INTERIM FINANCING DEVICES. Sponsors must
report

and HUD or the HA must evaluate all interim financing costs incurred on
loans

obtained by the pledge of investors\' deferred capital contributions to
the

project receiving LIHTCs. Such loans and advances must be on an
\"arm\'s-

length\" basis, i.e., Identity-of-Interest between the lender and any
partners

or investors in the project is prohibited. If bridge financing is
secured by

future Syndication Proceed installments, it should not be reflected on
the S

& U Format as either a Source or a Use, since the Net Syndication
Proceeds

line already includes the discounted value of such installments, less
bridge

loan interest and costs. Bridge financing must be an obligation of a
third

party who is not the mortgagor.

BSPRA/SPRA. Line G68, Form HUD-92264 BSPRA for Identity-of-Interest

Builder/Developers is calculated as follows: 1.) not more than 10
percent of

the sum of Lines G5O, G63, and G67, and 2.) no profit is allowed on Line
G44.

Line G68, Form HUD-92264 SPRA for non Identity-of-Interest
Developer/Sponsors

is calculated as follows: 1.) not more than 10 percent of the sum of
Lines

G45, G46, G63, and G67, and 2.) profit is allowed on Line G44.

DEVELOPER\'S FEES. The amount reflected on the Alternative developer\'s
fee

line of the S & U Format is the \"paper\" allowance for Developer\'s
Fees. A

developer\'s actual net fee will be affected by whether: acquisition
costs

exceed or are less than recognized HUD value; third party consultants
are

involved whom the developer must pay; the developer must fund other
costs or

reserves which are not otherwise reflected on the S & U Format out of
its

fee; there are highly contingent \"deferred fees\" involved, e.g.,
latter

installment(s) valued as of Placement in Service.

GRANTS. HUD and HCAs must recognize all grant amounts available for any

allowable project Uses. In mortgage insurance cases, grants available
for

mortgageable item Uses are subtracted by HUD in the determination of the

mortgage Source. However, all such grant amounts, plus the remaining
grant

amounts available to meet allowable project Uses outside of the
mortgage,

should be reflected on the S & U Format, and the \"Non-Mortgageable
Uses\"

portion should be supplemented by whatever costs the grant covers
outside the

mortgage.

GROSS SYNDICATION PROCEEDS. All amounts paid by purchasers of project

interests before subtraction of syndication and bridge loan costs.
Sponsors

must certify such amounts on Form HUD-2880, and also calculate Net

Syndication Proceeds in the manner prescribed in these RSLGs. HUD and
HCAs

will verify whether such calculations have been properly performed.

61

IDENTITY-OF-INTEREST. A financial, familial, or business relationship
that

permits less than arm\'s length transactions. Includes but is not
limited to

existence of a reimbursement program or exchange of funds; common
financial

interests; common officers, directors, or stockholders; or family

relationships between officers, directors, or stockholders.

LOAN TERM. In cases where LIHTCs are combined with mortgage insurance,
HUD

now provides loan terms commensurate with the terms relating to
restricted

use. The mortgage term equals the initial LIHTC-compliance period of 15

years plus whatever extended use agreement period applies (a minimum of
15

years), up to a maximum under Section 221 (d) (4) of 40 years. Section
223

\(f\) mortgage insurance allows a maximum loan term of 35 years, so

combinations of post-1989 LIHTCs and mortgage insurance should provide
for

full amortization of debt over 30 to 35 years.

NET SYNDICATION PROCEEDS ESTIMATES & MARKET RATES. The net estimated by

Sponsors and reviewed by HUD and the HA shall be the net present value
of all

syndication proceed installments as of the Placement in Service date
(does

not include annual cash flows; see \"ownership\" and Comment 18) less
any

bridge loan interest and costs, and less Syndication expenses. For the

purpose of making estimates, installments received subsequently will be

discounted at an appropriate rate, and installments received prior to

Placement in Service will be compounded. Thus, the difference between

\"early\" and \"late\" installments, the rate(s) selected, the
syndicator\'s load,

and an individual Sponsor\'s need for bridge financing all affect the
actual

net and appropriate Market Rate to be applied. Market Rates are
estimated

and established by HCAs to approximate the market price for syndications
of

projects with varying investment risks and combinations of assistance.
Gap

Filler Financing divided by a Market Rate equals the maximum LIHTC

Allocation, which should approximately produce Net Syndication Proceed

estimates, i.e., equity needs.

OPERATING DEFICIT RESERVE. An escrow established to fund net operating

losses projected to occur between the date of initial occupancy and the
date

by which the project\'s operating income is expected to cover
replacement

reserve deposits, debt service, expenses, and ground rent, if any,
related to

operation of the rental project. HCAs may make recommendations to the FO
to

increase (through the \"Rent Reserves\" line item) but not decrease the

Operating Deficit Reserve, if funded by Net Syndication Proceeds; but
the

Sponsor must agree to enter into HUD\'s standard Escrow Agreement for
the

total amount involved. In addition, the Escrow Agreement must be amended
to

provide that any escrow remaining after the escrow period will be
transferred

to the project\'s Replacement Reserve account rather than being returned
to

the Sponsor (Form HUD-92476-A, \"Escrow Agreement Additional
Contribution by

Sponsors;\" amend clause 4).

62

OWNERSHIP. There are essentially 4 benefits deriving from the ownership
of

LIHTC-assisted real estate which may be syndicated, i.e., sold: 1.) the

LIHTCs; 2.) cash flow; 3.) depreciation losses; and 4.) any reversionary

value at the end of the investment period. HUD\'s previous Guidelines

attempted to value all four ownership benefits based on a Discounted
Cash

Flow model and defined projections occurring over an extended holding
period.

HUD\'s Net Syndication proceeds/Gap Filler analysis replaces the
previous

Guidelines method, and contains fewer speculative factors. It simply

reflects the value of all sales proceeds received in exchange for the

ownership interests conveyed to limited partners, i.e. , what limited

partners agree to pay the developer in cash to acquire an equity
position.

Typically, investors purchase 98% or 99% of the LIHTCs and depreciation,
but

share greater proportions of cash flow and reversions with the
Developer.

PROPERTY VALUE. HCA must accept the FO\'s estimates of allowable value
when

performing the section 911 Subsidy Layering Review, i.e., Line G73 of
Form

HUD-92264, except for Subsidy Layering Reviews involving risk-sharing
cases.

HUD estimates this value without considering any additional subsidies to
be

made available to the project, or any LIHTCs or other tax benefits the
owner

will receive. This permits Sponsors to acquire property for new
construction

or rehabilitation at its market value. By using \"as-is\" market value
of

improvements and/or land instead of investment value or acquisition
cost, HUD

seeks to eliminate any value attributable to the LIHTCs the
owner/purchaser

seeks, and prevent unearned windfall profits. Note: HUD will not require

appraisals for property purchased from HUD, or at a foreclosure sale
where

HUD is the foreclosing mortgagee. In these cases, the allowable amount
will

be the purchase price when a project is competitively sold based on the
high

bid price at either a foreclosure sale or HUD-owned sale (if new HHA is

involved; otherwise no Subsidy Layering Review is required). When HUD
sells

a property at a predetermined price, as in a negotiated sale, the
allowable

amount is that price and is not subject to adjustment. Also, for
acquisition

or refinance and rehabilitation of projects that will remain subject to

existing HUD-insured loans (whether current or assigned/HUD-held) HUD
and

HCAs will generally permit the outstanding indebtedness as a
Mortgageable or

Approveable item in lieu of value or acquisition cost, e.g., Section 241

cases may recognize outstanding indebtedness on Line G73.

PUBLIC VERSUS PRIVATE OFFERINGS. Public offerings are those syndications

which must be registered with the Securities and Exchange Commission and

Regulation \"D\" private offerings; Private offerings include all
others.

QUALIFIED CENSUS TRACTS. Those census tracts, census enumeration
districts,

and/or block numbering areas designated by the Secretary in accordance
with

63

section 42(d) (5) (C) (ii) (I) of the Internal Revenue Code as amended
(See

Federal Register, Vol 59, No.204, Monday, October 24, 1994, page 53518).

REPLACE COST USES (Section 221 cases). The \"Elected Mortgageable
Replacement

Cost Uses\" reflected on an individual project\'s S & U Format (See FO

Instruction Formats) must be equal to HUD\'s Line G74 of Form HUD-
92264,

except for cases where Standard 1 or 2 amounts are Alternatively funded
as

\"Non-Mortgageable Uses,\" in which case Line G74 is reduced by the sum
of

Lines G42, G43, G44, G65, and G68.

REQUIRED REPAIRS/SUBSTANTIAL REHABILITATION. For mortgage insurance,
those

repairs which HUD multifamily staff include in the work write-up
pursuant to

Section 223(f) processing, or determine to be necessary in Section 241

processing. FHA \"substantial rehabilitation\" thresholds for Sections
221 and

232 are defined in accordance with various criteria described in those

sections of the National Housing Act and program instructions. Required

Repairs in other HHA programs are defined by project need and cost
estimation

review.

RESIDENT INITIATIVE FUND RESERVE. If such a reserve is to be combined
with

other HUD Housing-administered assistance, it is required that: 1) the
fund

will be used only for resident management/ownership initiatives,

security/drug free housing initiatives, job-training or other support

services; and 2) all initiatives or services will be targeted to the

residents of the. project for which the fund is established. The HCA
must

coordinate any LIHTC proceed funding of such reserve escrows with the

affected HUD Housing Office, e.g., the FO responsible for Multifamily

Property Disposition should be consulted pursuant to the activities
described

in Chapter 9 of HUD Handbook 4315.1 REV-1. Preservation cases involving
such

activities will be analyzed in accordance with Chapter 9, HUD Handbook

4350.6. Hope 2 resident initiative activities for multifamily projects
must

be analyzed in accordance with the Resident Initiative Office\'s
\"Interim

Guidelines\". Generally, the HCA may include as much as it and HUD deems

necessary to support such activities, but the Sponsor must agree as a
term of

the reserve escrow that any unused funds remaining after 10 years will
be

transferred to the Replacement Reserve account, or, in the event of
default,

will immediately be applied to prepay HUD-insured mortgage loans (if any
are

applicable). The Sponsor may petition the FO to extend this period if

activities will continue and any funds remain.

SET-ASIDE ASSUMPTIONS. HUD requires that the Sponsor provide the
materials

listed in Form HUD-2880 regarding the amount of LIHTCs or OGA being
sought at

the time any form of HHA is requested, and update this information as
changes

occur. LIHTC set-aside assumptions must be detailed on the form in order
for

HUD to perform the appraisal in mortgage insurance cases. Sponsors must

64

specify whether units will be set aside and marketed to very low income

tenants below 60% area median income, e.g. 45%, and HAs should
communicate

with FOs regarding LIHTC Application \"Applicable Fraction\" and
\"Qualified

Basis\" assumptions so that the debt financing underwriting is performed

properly. FOs will closely scrutinize project marketability and
feasibility

at proposed set-aside levels.

TOTAL PROJECT USES. All HUD-recognized or RSLG-allowed project Uses must
be

identified and the total cost must appear on the applicable S & U
Format. If

allowable total project Uses exceed total available Sources, either Gap

Filler LIHTC proceeds may be provided, or, additional equity is required
of

the Sponsor to \"balance\" S & U. If total available Sources are greater
than

allowable total Uses, then too much assistance has been provided to the

project, and one of the Sources must be reduced. In 911 Subsidy Layering

Reviews, HCAs will reduce the assistance within its control to balance S
& U,

i.e., LIHTC Allocations. In 102 Subsidy Layering Reviews, HUD will
reduce

the applicable assistance within its control to balance S & U, e.g.,
reduce

the mortgage, Section 8 assistance, etc.

WORKING CAPITAL RESERVE. For Profit-Motivated Sponsors developing
Section

221 new construction proposals the HCA may allow within Project Costs
HUD\'s

estimated working capital reserve of 2 percent of newly insured
mortgages,

but the reserve must be funded by non-mortgage sources. HUD also
determines

whether any working capital is necessary for substantial rehabilitation

cases, and will communicate any necessary amounts on Form HUD-92264-A.
HCAs

and HUD may allow working capital reserves in excess of HUD\'s 2% to be
funded

by non-mortgage sources so long as an escrow is established prior to

construction or rehabilitation, and at Final Closing, any remainder is
at the

Sponsor\'s option applied to repay grants or loans or transferred to the

Replacement Reserve account.

OTHER MATTERS

HUD Negotiated or Competitive sales. In addition to the restrictions

described above, and outlined in FO Instructions, HUD reserves the right
to

negotiate/impose other conditions when it sells real estate.

Environmental Review. A Finding of No Significant Impact with respect to
the

environment was made on the Interim Guidelines in accordance with HUD

regulations at 24 CFR Part 50 which implements section 102(2) (c) of the

National Environmental Policy Act of 1969 (42 U.S.C. 4332). That Finding
is

available for public inspection during regular business hours in the
Office

of General Counsel, Rules Docket Clerk, at the above address. Since the

provisions of these Final Guidelines are unchanged with respect to the
impact

on the environment, the original Finding is still valid.

65

Executive Order 12612, Federalism. The General Counsel, as the
Designated

Official under section 6(a) of Executive Order 12612, Federalism, has

determined that this notice does not have \"federalism implications\"
because

it does not have substantial direct effects on the States (including
their

political subdivisions), or on the distribution of power and
responsibilities

among the various levels of government.

Executive Order 12606, the Family. The General Counsel, as the
Designated

Official under Executive Order 12606, the Family, has determined that
this

notice does not have potential significant impact on family formation,

maintenance, and general well-being.

List of Forms Referenced.

Forms HUD-2530; 92013; 92264; 92264-A; 92330; 92330-A; 92331; 92410;

92476-A; FHA-2328; 2331A; 2580: AVAILABLE THROUGH HUD FOs

Forms HUD-92264-T and Form HUD- 2880: See FO Implementing Instructions

DATED:

Nicolas P. Retsinas

Assistant Secretary for Housing-

Federal Housing Commissioner

66

Attachment

SECTION 911 CERTIFICATION

Pursuant to section 911 of the Housing and Community Development Act of
1992

(HCDA \'92), as amended, and in accordance with HUD\'s Administrative

Guidelines for implementation thereof, (name of HCA of (location of HCA)

hereby certifies that (Project name and HUD project number) (Check
applicable

line or lines below):

will be receiving tax credits for the number of units presumed

by and discussed with your office;

OR,

will not be receiving tax credits in the amount assumed by HUD

in processing assistance requests, with the following

revisions to be noted by your office:

Attached hereto please find the applicable approved Sources and Uses

Statement. Pursuant to the subsidy layering review performed for
projects

receiving tax credits I also certify that:

a \"Market Rate\" in accordance with Standard 4 was used to

establish the maximum LIHTC Reservation/Allocation, and,

Standards 1 and 2 have been applied in accordance with \_\_\_\_

HUD processing allowances, or, \_\_\_\_\_\_ Alternatively funded

amounts (check applicable), and,

Standards 2 and 3 Safe Harbor or Ceiling amounts have been

applied, as applicable, with all supporting Governing Board,

Approval Authority, or Qualified Allocation Plan documentation

attached,

OR,

at least one Ceiling standard was exceeded, but the HCA has

determined that this case presents extraordinary circumstances

warranting an Applicability Exception, and the HCA\'s Governing

Board or Approving Authority approves (copy attached)

Project Cost estimates reflected on the attached applicable Sources &
Uses

Statement Format are those provided by or discussed with your office,
and are

deemed reasonable.

(name of HCA) certifies that it has properly implemented the
Administrative

Guidelines and that the mandates of section 911 (b) of the HCDA \'92, as

67

amended, have been satisfied. (name of HCA) further certifies that, in

accordance with its Qualified Allocation Plan, section 911, and the

Administrative Guidelines, the combination of tax credits, HUD
Assistance-

(specify here, e.g. mortgage insurance, Section 8 HAP contract, etc.)-
and

any other Other Government Assistance, being provided to meet allowable

project uses, is not more than is necessary to provide affordable
housing.

(Authorized HCA Official) Date

68

Addendum 2

Replacement Cost by Formula:

New Construction or Substantial Rehabilitation;

With & Without BSPRA\*

Value of Leased Fee (Section K, Form HUD-92264) \$\_\_\_\_\_\_\_\_\_\_

Grants and OGA Available for Mortgageable Items \$\_\_\_\_\_\_\_\_\_\_

Excess Unusual Land Improvements ((-) land value) \$\_\_\_\_\_\_\_\_\_\_

Syndic. Proceeds Available for Mortgageable Items
\$\_\_\_\_\_\_\_\_\_\_\*\*

TOTAL DEDUCTIONS FROM PROJECT REPLACEMENT COST \$\_\_\_\_\_\_\_\_\_\_=D

Consultant Fee (See HBs 4500. 1; 4571.4 &.5) \$\_\_\_\_\_\_\_\_\_\_

Supp. Management Fund (See 4381.5; 4571.4 &.5) \$\_\_\_\_\_\_\_\_\_\_

Warranted Price of Land (if New Construction) \$\_\_\_\_\_\_\_\_\_\_

Ground Rent During Construction (if Leased Fee) \$\_\_\_\_\_\_\_\_\_\_

Major Moveable Equipment (Section 232 & SROs only)
\$\_\_\_\_\_\_\_\_\_\_

Relocation Cost (if Rehab, under certain programs)
\$\_\_\_\_\_\_\_\_\_\_

Contingency Reserve (Rehab only) \$\_\_\_\_\_\_\_\_\_\_

\"As Is\" value (Rehab only) \$\_\_\_\_\_\_\_\_\_\_

Offsite Cost (Rehab only) \$\_\_\_\_\_\_\_\_\_\_

TOTAL KNOWNS ON WHICH BSPRA IS NOT ALLOWED \$\_\_\_\_\_\_\_\_\_\_=A

Total for All Improvements (Line G50) \$\_\_\_\_\_\_\_\_\_\_

Taxes During construction \$\_\_\_\_\_\_\_\_\_\_

Insurance During Construction \$\_\_\_\_\_\_\_\_\_\_

Title and Recording \$\_\_\_\_\_\_\_\_\_\_

Legal (Do not duplicate Consultant Fee amounts) \$\_\_\_\_\_\_\_\_\_\_

Organizational (Do not duplicate Consultant Fees) \$\_\_\_\_\_\_\_\_\_\_

Cost Certification Audit Fee \$\_\_\_\_\_\_\_\_\_\_

Interest on 1/2 \"As Is\" Val OR Existing Debt-Rehab
\$\_\_\_\_\_\_\_\_\_\_

Inspection Fee -Rehab; based on Total Improvements
\$\_\_\_\_\_\_\_\_\_\_

TOTAL KNOWNS ON WHICH BSPRA IS ALLOWED \$\_\_\_\_\_\_\_\_\_\_=B

(Interest Rate/2) X Construction Period (Mos./12)
\_\_\_\_\_\_\_\_\_\_\_%

MIP (Dependent on length of construction period) \_\_\_\_\_\_\_\_\_\_\_%

Examination Fee \_\_\_\_\_\_\_\_\_\_\_%

Financing Fee (cannot exceed 2%) \_\_\_\_\_\_\_\_\_\_\_%

FNMA/GNMA Fee (+ Financing, cannot exceed 3.5%) \_\_\_\_\_\_\_\_\_\_\_%

Inspection Fee (New Construction Only) \_\_\_\_\_\_\_\_\_\_\_%

AMPO (See HUD HB 4500.1) \_\_\_\_\_\_\_\_\_\_\_%

Subtotal \_\_\_\_\_\_\_\_\_\_\_\_ X \_\_\_\_\_\_\_\_\_\_\_\_\_\_\_ Loan
Ratio \_\_\_\_\_\_\_\_\_\_\_%

Marketing Expense (Cooperative or Condo only) \_\_\_\_\_\_\_\_\_\_\_%

TOTAL UNKNOWNS \_\_\_\_\_\_\_\_\_\_\_%=C

69

NEW CONSTRUCTION WITH BSPRA:

Project Cost less Deductions

(A + (1.1B) - D)/(1 - (1.1C)) \$\_\_\_\_\_\_\_\_\_\_=X

Total Project Replacement Cost

X + D (+outstanding debt in 241 cases) \$\_\_\_\_\_\_\_\_\_\_\_=R

NEW CONSTRUCTION WITHOUT BSPRA:

Project Cost less Deductions

(A + B - D) / (1 - C) \$\_\_\_\_\_\_\_\_\_\_=X

Total Project Replacement Cost

X + D (+outstanding debt in 241 cases) \$\_\_\_\_\_\_\_\_\_\_=R

SUBSTANTIAL REHABILITATION WITH BSPRA:

Project Cost less Deductions

(A + (1.10055B) - D) / (1 - (1.10055C)) \$\_\_\_\_\_\_\_\_\_\_=X

Total Project Replacement Cost

X + D \$\_\_\_\_\_\_\_\_\_\_=R

SUBSTANTIAL REHABILITATION WITHOUT BSPRA:

Project Cost less Deductions

(A + B - D) / (1 - C) \$\_\_\_\_\_\_\_\_\_\_=X

Total Project Replacement Cost

X + D \$\_\_\_\_\_\_\_\_\_\_=R

MAXIMUM MORTGAGE; NEW CONSTRUCTION OR REHABILITATION:

R - D = \$\_\_\_\_\_\_\_\_\_ x Loan Ratio \_\_\_\_\_\_\_\_ % =
\$\_\_\_\_\_\_\_\_\_\_\_

(Rounded down to nearest \$100 is maximum RCF mortgage)

Complete Section G of Form HUD-92264 using the MIM. The \"Total

Estimated Replacement Cost of Project\" will approximate \"R\" as
calculated by

formula when Criterion 3 limits the mortgage. Note that for the new

construction Interest calculation, 1/2 of the MIM is used to determine
the

Section G amount. For Rehabilitation construction, add 1/2 of the MIM
and

1/2 of either \"As Is\" Value or existing debt when recalculating
Interest for

Section G.

\* A different RCF format must be used in SPRA cases.

\*\* Deduction for sale of project receiving tax credits. Multiply
Market

Rate by Total LIHTC Allocation (See Guidelines Standard 4), or review

Syndication Agreement for Net Syndication Proceeds. Subtract from this

amount allowable Subtotal Non-Mortgageable Uses from Addendum 3.

70

Addendum 3

REQUIRED FORMAT-Section 221 1/

SOURCES USES STATEMENT

SOURCES:

Debt Sources:

HUD maximum insurable mortgage- \_\_\_\_\_\_\_\_\_\_

Other loans (specify)- \_\_\_\_\_\_\_\_\_\_

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

Equity Sources:

Grants available for project uses- \_\_\_\_\_\_\_\_\_\_

Estimated Net Syndication Proceeds- \_\_\_\_\_\_\_\_\_\_2/

Additional Required Sponsor

Equity Contributions/Non-LIHTC Sources- \_\_\_\_\_\_\_\_\_\_3/

TOTAL SOURCES \$\_\_\_\_\_\_\_\_

PROJECT USES 4/

Mortgageable Replacement Cost Uses:

Estimated Cost Including Builder\'s

and Developer\'s Overhead & Profit- \_\_\_\_\_\_\_\_\_\_5/

Estimated Cost Excluding Builder\'s

and Developer\'s Overhead & Profit- \_\_\_\_\_\_\_\_\_\_6/

HCA ELECTED FHA MORTGAGEABLE REPLACEMENT COST USES:

(use one of the two estimates above in accordance

with Alternative funding election) \$\_\_\_\_\_\_\_\_\_7/

Non-Mortgageable Uses:

(i.e. Uses Payable by Sources Other than the Mortgage)

HCA Fees- \_\_\_\_\_\_\_\_\_\_8/

Resident Initiative Fund- \_\_\_\_\_\_\_\_\_\_

Working Capital Reserve (or LC costs)- \_\_\_\_\_\_\_\_\_\_9/

Additional Working Capital Reqmts. over 2%- \_\_\_\_\_\_\_\_\_\_10/

Operating Deficit Reserve (or LC costs)- \_\_\_\_\_\_\_\_\_\_11/

Additional Rent Reserves (See Comment 19)- \_\_\_\_\_\_\_\_\_\_

Alternative Builder\'s Profit- \_\_\_\_\_\_\_\_\_\_12/

Alternative Developer\'s Fee- \_\_\_\_\_\_\_\_\_\_13/

Offsite Costs (Line M17, Form HUD-92264)- \_\_\_\_\_\_\_\_\_\_

Demolition Costs (Line J14(3)(a))- \_\_\_\_\_\_\_\_\_\_

Tangible Personal Property, Furnishings and

Fixtures- \_\_\_\_\_\_\_\_\_\_

Other (specify)- \_\_\_\_\_\_\_\_\_\_

Other (specify)- \_\_\_\_\_\_\_\_\_\_14/

SUBTOTAL NON-MORTGAGEABLE USES \$\_\_\_\_\_\_\_\_\_

TOTAL PROJECT USES \$\_\_\_\_\_\_\_\_\_\_

71

\"Syndication and Allocation Information15/\"

A. Allocation Calculation:

1\. Gap Filler Proceeds Necessary (from S & U) - \$\_\_\_\_\_\_\_\_\_

2\. Market-Derived Rate Assumed 16/- \_\_\_\_\_\_%

3\. Maximum Allocation (1 divided by 2)- \$\_\_\_\_\_\_\_\_\_

4\. Actual Allocation (e.g., may be limited by other

criteria such as \"eligible cost\" calculation) - \$\_\_\_\_\_\_\_\_\_

B. Syndication Expenses 17/:

1\. Accountant\'s Fee- \$\_\_\_\_\_\_\_\_\_

2\. Syndicator\'s Fee- \$\_\_\_\_\_\_\_\_\_

3\. Attorney\'s Fee- \$\_\_\_\_\_\_\_\_\_ 18/

4\. Organizational Expense- \$\_\_\_\_\_\_\_\_\_ 19/

5\. Syndicator\'s Required Reserves- \$\_\_\_\_\_\_\_\_\_

6\. Other (Specify) - \$\_\_\_\_\_\_\_\_\_

7\. Other (Specify) - \$\_\_\_\_\_\_\_\_\_

8\. Syndication Expenses Total

(Sum of Lines B1 through 7)- \$\_\_\_\_\_\_\_\_\_

9\. Gross Proceeds (sum total of

face amounts acceptable)- \$\_\_\_\_\_\_\_\_\_

10\. Line 8 divided by Line 9- \_\_\_\_\_% 20/

C. Bridge Loan/Net Present Value Analysis:

(show calculations in right margin in

accordance with RSLG requirements).

1\. Bridge Loan Costs Including Interest- \$\_\_\_\_\_\_\_\_\_

(Bridge Loan Rate- \_\_\_\_\_\_%)

2\. Compounding Rate (as Required by HCA for

\"early\" installments- \_\_\_\_\_%

3\. Discounting Rate (for \"late\" installments)- \_\_\_\_\_%

4\. Net Present Value (as of Placement in Service

date) of Net Syndication Proceeds- \$\_\_\_\_\_\_\_\_\_

D. Reconciliation:

1\. C4 divided by A1- \_\_\_\_\_\_\_%

2\. If D1 greater than 100% the HCA has reduced or will reduce the

Reservation/Allocation of LIHTCs as follows:

3\. If D1 is less than 100% does the Sponsor show sufficient working
capital

to fund the difference and proceed to Closing, and if not, what are the

HCA\'s intentions? (e.g., increase the Allocation)

72

1\. This same format may be used for cases previously insured by HUD for

which a Section 241 supplemental loan is proposed, but see Addendum 10

caveats. Potential combinations of Section 232 \"Residential Care
Facility\"

insurance and LIHTCs may also require the use of this format. For
Section

223 (f) cases, see Addendum 4. A format for other non-mortgage insurance
HHA

cases is included as Addendum 5. Preservation cases will be analyzed
using

Addendum 6.

2\. Review Syndication/Partnership Agreement. The estimated Net may not

generally be more than the Gap Filler which balances the Statement. The

necessary equity Gap should closely approximate the amount obtainable or

obtained by the owner from the syndication of the LIHTC project (i.e.,
gross

proceeds less allowable syndication expenses and bridge loan interest
and

costs). Thus, HCAs will \"back into\" maximum LIHTC Allocations through

capitalization of the balancing Gap Filler by the Market Rate (prior to

Initial Endorsement) for 911 SLRs. HUD will simply multiply Allocations
by

Market Rates to complete this line during processing in 102 SLRs, or may

apply Syndication Agreement refinements before Initial Endorsement.

3\. This line may be used to reflect the additional amount needed from
the

Sponsor to balance Sources against Uses when no additional monies are

available from other Sources. It must also be used where high percentage

ownership retention/ \"Imputed Value\" assumptions require Sponsor cash

contributions to cover the Gap Filler necessary to balance the
Statement.

4\. HCAs should be aware that many of the \"eligible costs\" developers
may

submit have already been analyzed in FHA mortgage insurance processing
and

are implicitly paid for through the Sponsor\'s application fee such as:
an

environmental assessment and approval, a market study/analysis and
approval,

and an appraisal. Others are included in the processing replacement cost

such as examination and cost certification fees (accounting), interim

construction loan costs, financing origination and placement fees,
physical

inspection fees during construction, etc. Still others are incurred
which

are not mortgageable but which have been analyzed or are required such
as:

the insurance application fee itself, operating (deficit) and working
capital

reserves, and off-site costs (please note that because HUD insures only
on-

site security assumed \"fully-improved\" up to the physical boundaries,
off-

site costs are analyzed as a cash requirement). Surveying fees, Tap Fees
&

Local Development Fees typically appear under G48 as \"Other Fees\". Any
other

HCA questions regarding overlap should be directed to the FO.

5\. Line G74, Form HUD-92264. BSPRA/SPRA, Organization Costs, and
Builder\'s

General Requirements, Overhead, and Profit, as applicable, are included.

HCAs may elect to use it to comply with Standards 1 and 2 Safe Harbors.

73

6\. This is completed by the FO, and reflects Line G74 less Lines G42,
43,

44, 65 and 68 (except in \"lump sum\" contracts, where builder\'s\'
profit and

overhead will be included, and may not be Alternatively funded). It will
be

used by HCAs which choose to Alternatively fund Builders or Developers
Fees.

7\. The elected amount in 232 cases also includes the cost of
mortgageable

\"major moveable\" equipment; Sponsors must provide an itemization of
all

mortgageable and non-mortgageable major moveables to the FO and HCA. In
102

SLRs, FOs will simply use Line G74.

8\. Typically based on total assistance requested, and may be
nonrefundable

in some states.

9\. Indicate the full cash reserve amount if funded by Non-Mortgage
Sources.

Indicate only the costs of obtaining a Letter of Credit if other Sources
fund

only such costs but not the reserve (Sponsor may fund by a Letter of
Credit

at initial closing at Mortgagee\'s discretion).

10\. Amounts in excess of the 2% of the loan HUD requires may be
required by

other project underwriters/ sources of assistance involved. This escrow
may

only be included here or considered for funding by Non-Mortgage sources
if an

escrow agreement is established containing a provision requiring that
any

unused excesses at term expiration be used to pay down soft second
loans, or

transferred into the Replacement Reserve account at the Sponsor\'s
option.

11\. Line 13, Form HUD-92264. Indicate the full cash reserve amount if

funded by Non-Mortgage Sources. Indicate only the costs of obtaining a
Letter

of Credit if Non-Mortgage Sources fund such costs but not the reserve.

Mortgagee may permit Sponsor to fund by a Letter of Credit at initial

closing.

12\. See Standard 1 for Alternative funding option and applicable
standards.

If FO\'s Estimated Replacement Cost Including Profit is elected above
under

Mortgageable Uses, or a lump sum contract is used, then this line should
be

left blank. If Alternative funding is elected, then \"construction
cost\" as

defined by the HCA is the base for General Requirements, Profit and
Overhead

Percentages.

13\. See Standard 2 for Alternative funding option and standards. If
FO\'s

Estimated Replacement Cost Including Profit is elected above as
Mortgageable

Uses, this line should be left blank. If Alternative funding is elected,
then

the HCA\'s defined \"Total Development Cost\" is the base for the
calculation.

74

14\. HCAs and HUD FOs must communicate with each other regarding the
various

costs which Net Syndication Proceeds may cover, and how these costs will

diminish Developer Fees if not otherwise-recognized. The HCA should
explain

its policy to the FO regarding Alternatively funded Developer\'s Fees,
and

which costs it requires the Developer to absorb within that fee. FOs
must

allow HCAs reasonable flexibility in the identification of costs the

developer does not absorb, and recognition as non-mortgageable uses.
HCAs

must determine whether such costs may be covered through Net Syndication

Proceeds.

15\. The HCA must send this format or its equivalent to the FO for all

mortgage insurance cases in 911 SLRs. Sponsors must revise and submit
Form

HUD-2880 so that HCAs can complete it. Pursuant to monitoring
requirements,

it is also required as a submission in cases using Addendum 4, 5, and 6

Formats (and Risk Sharing Formats).

16\. Adjusted according to Standard 4 for higher than typical ownership

retention: a percentage expressed in terms of net cents per dollar of
LIHTC

Allocation.

17\. \"Owner Overhead and Organization\" Expense in non-syndicated
deals,

subject to Standard 3 reduced amounts.

18\. Such fees may not duplicate legal charges already recognized on
Line

G64, Form HUD-92264, nor title work as reflected on Line G62. On these

lines, HUD accounts for legal fees associated with typical non-LIHTC

projects. Therefore, only fees associated with the additional legal
service

involved in LIHTC projects will be recognized here.

19\. Organizational expenses/Developers Overhead are already included
for

non-LIHTC projects under Line G65, Form HUD-92264, and should not be

duplicated. Therefore, only additional organizational expenses incurred

because of the LIHTC-associated application preparation activities
should be

included here. Alternatively, HCAs may include such Developer Overhead

amounts under Standard 2 limitations, rather than Standard 3,
recognizing

nothing here.

20\. Line B10 may not exceed applicable RSLG Standard 3 Safe Harbor or

Ceiling limitations for Private and Public Offerings. The amount by
which it

does may result in a reduction in LIHTC or mortgage assistance.

75

Addendum 4

REQUIRED FORMAT - Section 223(f)

SOURCES AND USES STATEMENT 1/

SOURCES:

Debt Sources:

HUD 223 (f) loan- \_\_\_\_\_\_\_

Other loans (specify)- \_\_\_\_\_\_\_

Other (specify) \_\_\_\_\_\_\_

Equity Sources:

Grants available for project uses- \_\_\_\_\_\_\_

Estimated Net Syndication Proceeds- \_\_\_\_\_\_\_

Additional Required Sponsor Equity

Contributions /Non-LIHTC Sources \_\_\_\_\_\_\_

TOTAL SOURCES \$\_\_\_\_\_\_\_\_\_

PROJECT USES:

Use Limitations Related to Value & Mortgage Financing:

Use Limitation \"A\":

\"Fair Market Value\" of the Property

Including Required Repairs,

from Section L, Form HUD-92264- \$\_\_\_\_\_\_\_\_\_

Use Limitation \"B\": (for projects being acquired)

Item 7g., Form HUD-92264A- \$\_\_\_\_\_\_\_\_ 2/

Use Limitation \"C\": (for projects owned)

Item log., Form HUD-92264A \$\_\_\_\_\_\_\_\_ 3/

SUBTOTAL VALUE USES RELATED TO MORTGAGE FINANCING:

For Property Acquired (lesser of \"A\" or \"B\") - \$\_\_\_\_\_\_\_\_

For Property Owned (lesser of \"A\" or \"C\") - \$\_\_\_\_\_\_\_\_

Non-Mortgageable Uses:

(i.e., Uses Payable by Sources Other than the Mortgage)

HCA Fees- \$\_\_\_\_\_\_\_

Resident Initiative Fund- \$\_\_\_\_\_\_\_

Initial Deposit to Replacement

Reserve (Only allowed if A \< B or C)- \$\_\_\_\_\_\_\_

Operating Deficit Reserve \$\_\_\_\_\_\_\_

Addtnl. Rent Reserves (See Comment 19)- \$\_\_\_\_\_\_\_

Alternative Developer\'s Fee 4/- \$\_\_\_\_\_\_\_ 5/

Contingency Reserve- \_\_\_\_\_\_\_\_ 6/

Tangible Personal Property, Furnishings

and Fixtures- \_\_\_\_\_\_\_\_

Other (specify)- \_\_\_\_\_\_\_\_

Other (specify)- \_\_\_\_\_\_\_\_

SUBTOTAL NON-MORTGAGEABLE USES: \$\_\_\_\_\_\_\_\_

TOTAL PROJECT USES \$\_\_\_\_\_\_\_\_

76

1\. This format is only appropriate for projects which HCAs award

\"rehabilitation\" LIHTCs, but proposed repairs are less than HUD\'s
substantial

rehabilitation eligibility test, or for projects which were
conventionally

financed, still receive LIHTCs, and are now eligible for 223 (f)
insurance.

Because only \$3000 per-unit may be required to obtain LIHTCs, but
FHA\'s per-

unit thresholds for Section 221 \"substantial rehabilitation\" are much
higher,

projects with repairs falling somewhere in between may be analyzed using
this

format.

2\. See HUD Handbook 4480.1, pages 2264A-18a. through 18d; see also
Notice

H 92-31.

3\. See HUD Handbook 4480.1, pages 2264A-18g. through 18j; see also
Notice

H 92-31.

4\. See RSLG Standards 1 and 2, and \"Notes\" following.

5\. Please note that working capital reserves do not apply to §223 (f)
loans,

and thus, are not an allowable use. Also, as a matter of policy, HUD
will

not permit unfinished work write-up escrow amounts to be funded through

syndication proceeds, or

alternatively, allows only so much escrow amounts

relating to 100% of estimated costs to be included on this Statement.

..TX:

6\. HUD does not include a Contingency Reserve above for the moderate
rehab

allowed under this program; Non-mortgage Sources may fund such amounts
as

deemed necessary, but HUD\'s general policy of requiring repairs to be

completed or escrowed for at closing will be enforced. Unused reserves
must

be recaptured by the HCA at their Placement in Service review in 223 (f)

cases, or roll over into HUD\'s Replacement Reserve account.

77

Addendum 5

REQUIRED SOURCES AND USES FORMAT FOR

MOST OTHER HHA and OGA COMBINATIONS 1/

PROJECT SOURCES:

Debt Sources:

HUD loans (program\_\_\_\_)- \_\_\_\_\_\_\_\_\_\_

Other loans (specify)- \_\_\_\_\_\_\_\_\_\_

Any other Debt-related

Other Govt. Asst.(specify)- \_\_\_\_\_\_\_\_\_\_

SUBTOTAL DEBT 2/ - \_\_\_\_\_\_\_\_

Equity Sources:

Grants available for project uses- \_\_\_\_\_\_\_\_\_\_

Estimated Net Syndication Proceeds 3/ - \_\_\_\_\_\_\_\_\_\_

Additional Newly Required Sponsor Equity

Contribution 4/ /Non-LIHTC Sources - \_\_\_\_\_\_\_\_\_\_

SUBTOTAL EQUITY 5/ - \_\_\_\_\_\_\_

TOTAL PROJECT SOURCES \$\_\_\_\_\_\_\_\_\_

PROJECT USES:

Proposed Repairs/Rehabilitation,

and Approved Debt 6/:

Estimated Cost of Rehab/Repairs

excluding builder and developer

profit and overhead- \$\_\_\_\_\_\_\_\_\_ 7/

HUD Approved Debt (or PD sales price) - \$\_\_\_\_\_\_\_\_\_ 8/

Resident Initiatives (if funded through

HUD grant only): \_\_\_\_\_\_\_\_\_\_

SUBTOTAL REPAIRS AND EXISTING DEBT USES \$\_\_\_\_\_\_\_\_\_

Profit, Reserve, and Fee Uses:

HCA Fees (LIHTC cases) - \_\_\_\_\_\_\_\_\_\_

Res. Initiatives (if not funded by HUD) - \_\_\_\_\_\_\_\_\_\_

Operating Deficit Reserve (if any) - \_\_\_\_\_\_\_\_\_\_ 9/

Addtnl. Rent Reserves (See Comment 19)- \_\_\_\_\_\_\_\_\_\_

Relocation Costs - \_\_\_\_\_\_\_\_\_\_ 10/

HUD-approved Repl. Reserve Deposits 11/ - \_\_\_\_\_\_\_\_\_\_ 12/

Alternative Builder\'s Profit - \_\_\_\_\_\_\_\_\_\_ 13/

Alternative Developer\'s Fee - \_\_\_\_\_\_\_\_\_\_ 14/

Working Capital Reserves - \_\_\_\_\_\_\_\_\_\_ 15/

Contingency Reserve - \_\_\_\_\_\_\_\_\_\_ 16/

Tangible Personal Property, Furnishings and

Fixtures - \_\_\_\_\_\_\_\_\_\_

Other (specify) - \_\_\_\_\_\_\_\_\_\_

Other (specify) - \_\_\_\_\_\_\_\_\_\_

SUBTOTAL PROFIT AND RESERVE USES \$\_\_\_\_\_\_\_\_\_

TOTAL PROJECT USES \$\_\_\_\_\_\_\_

78

1\. See Addenda above for Section 221, 232, 241, and 223 mortgage
insurance

cases. This format is for all other HA and OGA-Assisted projects subject
to

SLRs, except preservation cases. All other proposed format deviations
must be

in general accord with the RSLGs, including any formats developed by
HCAs for

use in the Section 542 (c) Risk-Sharing, or by FNMA or FHLMC under 542
(b).

2\. Indicate by asterisk which debt sources are assisted through a
project-

based Section 8 contract, Flexible Subsidy loan, or any other HUD
Housing

Management-administered debt source subject to reduction. In 911 SLRs,
HUD

will simply do its processing and reflect its results for such Sources
in

accordance with outstanding program limitations, and the HCA will then
fill

any necessary financing Gap. But if a 102 SLR is required, HUD may
adjust

its Source as necessary. For example, in P.D. cases, if the Gap Filler

necessary to balance the Statement is less than Line 16 or 18, as
applicable,

of Form HUD-9650, then it may be substituted on Line 19, or the
difference

may be paid into Replacement Reserves (See also Handbook 4350.1 REV-1,
para.

34-2 for other AAF adjustments). As another example, if a project-based

budget-based Section 8 case requests an increase, but LIHTC-generated
equity

already pays for most rehab repairs, then the Gap to balance the
Statement

(if any) will be the debt supported instrument above, and the Gap
financing

necessary should be substituted for the sum of \"Box A\" plus \"Box C,
\" less

Allowed Expenses (see \"Rent Computation Worksheet,\" Appendix 5, p.
7-80,

Handbook 4350.1 REV-1) in the recalculation of the Section 8 rents.

Generally, HUD will not decrease already existing Section 8 contract

assistance, but may increase replacement or other reserve requirements
in 102

reviews so long as such amounts are escrowed to remain with the project.

3\. See RSLGs and other Formats for description.

4\. HCAs or HUD may use this line for the additional amount needed from
the

Sponsor to balance Sources against Uses when no additional monies are

available from any other Sources, or when a higher percentage of
ownership

than is typical is retained.

5\. Indicate by asterisk which equity sources are assisted through any
HUD-

provided Source. HUD Grants may be reduced as necessary to balance
Statement

in 102 SLRs.

6\. Repair and rehabilitation improvements which may be undertaken on
HUD-

assisted projects without new or additional HUD mortgage insurance, and

financed through LIHTC proceeds, or through some other combination of
HHA or

OGA may be reflected below. The estimated cost for such improvements
should

be analyzed and approved by HUD regardless of whether an HCA (911) or
HUD

\(102\) performs the SLR. In TPA cases, see HUD Handbook 4350.1 REV-1,

paragraph 13-12D, which may be satisfied through the submission

79

of a financing plan in conformance with mortgage credit requirements

described above and in HUD Handbook 4470.1 REV-1, Chap. 18. Repair
Escrows

may be similarly funded by projected financing plan proceeds in Workout
cases

pursuant to paragraph 11-10H of 4350.1 REV-1. Note that additional HUD

contributions described in paragraph 11-10E(2) including flexible
subsidy

funds, LMSA, approved Section 8 rent increases, and debt service relief,
may

not be necessary if enough LIHTC assistance is awarded to a project by
an

HCA. The sale of HUD-held projects subjects purchasers to the repair and

repair escrow requirements included in PD terms of sale; and the sale
Price

may be substituted on the HUD-approved debt line. In non-TPA cases, see
also

HUD Handbook 4350.1 REV-1, paragraphs 16-16, 16-20b. For PIH Section 8

Moderate Rehabilitation proposals, see HUD Handbook 7420.3 REV-2,
Appendices

31, 33, 40, and 41 as applicable; Form HUD-52580A cost estimates may be
used.

7\. In PD cases, Line 16 or 18, as applicable, Form HUD-9650 represents
the

rehabilitation and reserve cost estimates which should be transferred to
this

line.

8\. In PD sales, no conventional debt reflected here; just the Sales
Price

as reflected on Line 40, Form HUD-9650.

9\. Already included in cost estimate above in P.D. cases.

10\. Already included in cost estimate above in P.D. cases.

11\. New deposits only; do not include existing reserve balances unless
the

project is being transferred.

12\. Already included in cost estimate above in P.D. cases.

13\. See RSLG standard 1 for alternative funding standards.

14\. See RSLG Standard 2 for alternative funding standards.

15\. Such reserves as are paid for by Non-HHA Sources may be included
here,

and Sponsors may use at period expiration to pay off soft second loans
or pay

back grants or fund additional Replacement Reserves. Escrow Agreement
must

contain such a limitation provision.

16\. Already included in cost estimate above in P.D. cases.

80

Addendum 6

REQUIRED SOURCES AND USES FORMAT FOR

PRESERVATION PROCESSING

PROJECT SOURCES:

Debt Sources: Program: Mortgage:

Existing HUD loans/program - \_\_\_\_\_ \_\_\_\_\_

Existing Non-Insured Mortgages- \_\_\_\_\_ \_\_\_\_\_

Preservation Equity & Rehab loan(s) 1/- \_\_\_\_\_

Any other Debt-related

Other Govt. Asst.(specify)- \_\_\_\_\_

SUBTOTAL DEBT \_\_\_\_\_\_

Equity Sources:

Grants available for project uses- \_\_\_\_\_

Estimated Net Syndication Proceeds- \_\_\_\_\_

Additional Required Sponsor Equity

Contribution /Non-LIHTC Sources- \_\_\_\_\_

SUBTOTAL EQUITY \_\_\_\_\_\_

TOTAL PROJECT SOURCES \$\_\_\_\_\_

PROJECT USES

Uses Payable through Section 8 Rental Assistance or Grants

(excluding project expenses, annual reserve payments, etc.):

Existing HUD mortgage (from above) \_\_\_\_\_

Existing Non-Insured mortgages \_\_\_\_\_

Section 241 Loan (5) Title II or VI

(sum of Equity & Rehab components): \_\_\_\_\_

Initial Repl. Reserve Deposit Shortfalls

(Title VI only) \_\_\_\_\_

Transfer Transaction Expenses (Title VI): \_\_\_\_\_

Replacement of Replacement Reserve

upon Transfer (Title VI NP only): \_\_\_\_\_

Resident Initiatives (if funded through

HUD grant only): \_\_\_\_\_

5% Equity Position (Title VI NP-Grant): \_\_\_\_\_

SUBTOTAL- \_\_\_\_\_\_

Uses which may be funded separately:

HCA Fees: \_\_\_\_\_\_

Remaining Equity Position (%s depend on Sponsor) 2/

10% of Equity Component (Title II): \_\_\_\_\_\_

30% of Equity Component (Title VI

Extension Cases only): \_\_\_\_\_\_

5% of Eq. Comp. (if no HUD grant) : \_\_\_\_\_\_

Commitment, Marketing Fees, Discount: \_\_\_\_\_\_

Initial RR Deposits Shortfall(Title II): \_\_\_\_\_\_

Initial Repl. Reserve Deposit Shortfalls

(Title VI only if not funded by HD) : \_\_\_\_\_

81

Transfer Trans.Exps(if not fund.by HUD): \_\_\_\_\_\_

Closing Costs (less than sub rehab): \_\_\_\_\_\_ 4/

Owner\'s Appraisal Fees for processing: \_\_\_\_\_\_

Procedural Costs (Title VI Extension): \_\_\_\_\_\_ 5/

Additional Costs of Acquisition

(Title VI Non-Profit Purchasers Only): \_\_\_\_\_\_

Developer\'s Overhead and Profit: \_\_\_\_\_\_ 6/

Res. Initiatives (if not funded by HUD): \_\_\_\_\_\_

Working Capital Reserves: \_\_\_\_\_\_

Addtnl. Rent Reserves (See Comment 19)- \_\_\_\_\_\_

Other (Specify)\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_:
\_\_\_\_\_\_

SUBTOTAL- \_\_\_\_\_\_

TOTAL PROJECT USES- \$\_\_\_\_\_\_\_\_\_

1\. Subject to reduction if HUD performs Section 102 SLR.

2\. See Chapter 26, HUD Handbook 4470.1, REV 2.

3\. Line 2, Part B, Section II, Form HUD-92264-A

4\. See Paragraphs 26-16A2a (Title II) and 26-33A2a of HUD Handbook
4470.1,

REV-2.

5\. These are administrative costs associated with submission of the
Plan of

Actions provision of project information to appraisers, and consultation
and

negotiation with HUD concerning the program and preservation value(s).
They

may be included in Extension cases.

6\. Builders Overhead and Profit may appear above in the Preservation

processing. Developer\'s Overhead and Profit must be Alternatively
funded in

accordance with RSLG Safe Harbor or Ceiling standards.

82

Addendum 7 Summary S & U Format Completion Instructions

The HCA under 911, or FO under 102, will follow the same basic sequence
in

the completion of the S & U format:

1\. Identify which format applies to the combination of HHA and OGA

involved.

2\. Complete the Uses portion of the format first. FOs will assist HCAs
in

this task for 911 SLRs by completing all known items which the HUD

assistance involved will pay for, or for which cost estimates have been

analyzed. HCAs can complete the Uses portion by deciding whether to

Alternatively fund fees, and/or allow Net Syndication Proceeds to be

available to fund other project costs, e.g., HCA Fees and project

reserves.

3\. Before approval of HA or OGA when performing SLR:

a\. Under 911, HCAs will complete the other known Sources of debt or

equity financing. If Total Project Uses exceed other known

Sources, the funding Gap may be filled through estimated Net

Syndication Proceeds, i.e., the Gap is capitalized at the Market

Rate to calculate the maximum Allocation.

b\. Under 102, HUD will complete the other known Sources including the

actual Net Syndication Proceeds, or, an estimate thereof. The Gap

which is left for the HUD-assisted Source becomes an additional

limitation in project-based Section 8 HA cases. In mortgage

insurance cases the actual or estimated Net Syndication Proceeds

available for mortgageable items reduces the Replacement Cost

criterion, and possibly the maximum insurable mortgage.

83

Addendum 8

Processing HUD Insured Projects

Involving Low Income Housing Tax Credits

Housing Form HUD-92264-T

A. Purpose. This attachment provides modified underwriting instructions

for processing projects where owners will receive low income housing tax

credits (LIHTCs).

B. Background. -The Tax Reform Act of 1986 amended the Internal Revenue

Code to create new Federal Tax Credits for owners of low income rental

housing. In Public Law 101-239, dated December 19, 1989, the applicable

maximum affordable monthly rents for most apartment sizes are to be

based on the program income limits by household size assuming an

occupancy of 1.5 persons per bedroom and efficiency units without a

separate bedroom would have income limits based on occupancy by one

person. In order for a household to qualify as tax credit assisted they

must have an income at or below the program income limit for their

respective household size.

The calculation of the maximum affordable monthly rents for tax

credit units is based on tenants paying at least 30 percent of income

for rent. Analysis of program participation has shown that few

households in tax credit projects spend more than 40 percent of income

for rent. This means that, if rents are set at the maximum, the

potential market is restricted to income-eligible households with

incomes between 75 and 100 percent of the respective income limit. Most

households with incomes lower than this would be unable to afford the

statutory maximum rents. As a result, when the proposed rents are set

at the statutory maximums, the market for a tax credit assisted project

is comprised of a relatively narrow band of income eligible renters,

which can result in a problem with the market feasibility of the

project. Therefore, depending on the particular market area and the

rental market conditions in that area, there may be an insufficient

number of potential renters that meet the income limit criteria and who

are also willing and able to pay the maximum allowable rent.

Program data show that this potential marketability problem has

been dealt with either by charging lower rents or obtaining other

subsidies to lower the rent. The available information on tax credit

assisted units shows that most projects have established rents below the

maximum permitted by the statute. In addition, over 80 percent of

projects funded had some other form of assistance to further reduce

tenant rents.

84

The extent to which there is an adequate supply of units with rents

at or below those proposed would also limit the market. An analysis of

the market prospects of a proposed project, therefore, requires

information on the current market conditions for this type of project,

and information on the marketability of the proposed project relative to

other options available to those income-eligible households.

Thus, market demand for tax credit units depends on several

factors: the number of income qualified households and the willingness

of those same households to pay the proposed rents; the supply of

comparable units at rents equal to or less than the proposed rents; and,

the marketability of the proposed units in comparison to the existing

supply.

Therefore, if the FO determines that there is insufficient demand

for the units at the proposed rents the FO should set the rents at lower

amounts, as necessary to broaden the market band sufficiently to attract

the potential tenants needed to ensure market feasibility. This

determination should take into consideration the current and anticipated

supply/demand conditions in the overall rental market, and potential

depth of the market of income eligible households in comparison to the

number of units at the proposed rents, and the marketability of the

proposed units taking into account the project\'s amenities, rents and

location relative to comparable and competitive projects and other

options available to those income eligible households.

C. Special Processing Instructions. In order to make the rent estimates

based on income limits as close as possible to the income limits

described in the legislation, the following instructions for processing

HUD-insured projects involving LIHTCs using revised Form HUD-92264-T

shall be used. Using this form and the following directions, the

Department will determine the appropriate processing rents for the low

income units required by the Tax Credits. (In the case of projects with

\"deep skewed\" rental units, it may be necessary to complete two
separate

revised Forms HUD-92264-T, since two different qualifying income limits

may apply to lower income units of the same size.)

1\. Line 1 of Form HUD-92264-T for each affected unit size, enter the

market rental estimates from Form HUD-92273.

85

2\. Line 2 - If Utility costs are to be paid by the tenant, enter an

estimated Personal Benefit Expense (PBE) for services or utilities

not included in the market rental estimate.

3\. Line 3 - Enter the applicable income limit. For Purposes of this

rent estimation exercise, the applicable income limits by unit size

are as follows:

Column A\* Column B\* Column C\*

Applicable Limit if Applicable Limit if Applicable Limit if

20%/50% Restriction 40%/60% Restriction 15%/40% Restriction

Applies Applies Applies

Eff. 1 Person Section 8 120% of Column 80% of Column

Very Low Income Limit A Limit A Limit

1-BR 1.5-Person Section 8 120% of Column 80% of Column

Very Low Income Limit\*\* A Limit A Limit

2-BR 3-Person Section 8 120% of Column 80% of Column

Very Low Income Limit A Limit A Limit

3-BR 4.5-Person Section 8 120% of Column 80% of Column

Very Low Income Limit\*\* A Limit A Limit

4-BR 6-Person Section 8 120% of Column 80 % of Column

Very Low Income Limit A Limit A Limit

\*The use of these limits by HUD for underwriting purposes is not meant

to imply that the Internal Revenue Service will necessarily use the same

limits in determining whether tenants will qualify as low income for

purposes of the Tax Credit.

\*\*The one and one-half-person Section 8 very low income limit is

computed by adding the one person Section 8 very low income limit to the

two-person limit, then dividing the sum by 2. Likewise, the four and

one-half-person Section 8 very low income limit is the sum of the four-

person limit and the five-person limit, divided by 2.

4\. Line 4 - Compute and enter the estimated maximum affordable monthly

rent for each affected unit size. Compute that rental estimate as

follows:

a\. Multiply the income limit on line 3 of the form by 30 percent

(.30);

b\. Divide the Product obtained in step a by 12;

86

c\. Subtract the monthly PBE (if any) on Line 2 from the quotient

obtained in step b.

5\. Line 5 - Where the Valuation staff has evidence that the project\'s

tax credit assisted units would not be marketable to income

eligible households at the lesser of the maximum affordable monthly

rents (Line 4) or the rent by market comparison (Line 1), based on

the market analysis review by the EMAS, enter the recommended

estimated monthly rent obtainable for the restricted units, as

approved by the Director, HD Division. For Section 223(f) cases

involving projects with existing Section 8 contracts, use this line

to enter the processing rents calculated in accordance with the

outstanding instructions involving the refinancing or purchase of

Section 8 projects with outstanding project based contracts.

6\. Line 6 - Monthly Rent Estimate for Restricted Units. Enter the

least of lines 1, 4, or 5.

7\. Line 7 - Enter the number of each unit type with income limits

shown on line 3.

8\. Line 8 - Enter the number of each unit type shown on another Form

HUD-92264-T with other income limits.

9\. Line 9 - Enter the number of each unit type with no income limits

using unsubsidized market rents from line 1.

D. For Further Information - Any questions concerning this attachment
and

completion of revised Form HUD-92264-T which follows should be directed

to the Office of Insured Multifamily Housing Development, Technical

Support Division, Valuation Branch, (FTS 8-202-708-0624).

87

FORM HUD-92264-T

Rent Estimates for Low or Moderate Income Units in Non Section

8 Projects Involving Tax Exempt Financing or Low Income Housing Tax
Credits

THIS FORM MAY BE DOWNLOADED FROM THE FORMS DATABASE OF HUDCLIPS.

88

BLANK

89

Addendum 9

Sponsor Authorization, Acknowledgement,

Consent and Release Regarding

Multiple Assistance Requests for

a Multifamily Project

Project Name:

HUD or HCA #:

The undersigned acknowledges that two copies of this form have been

executed, and agrees to simultaneously (as the applicable agency\'s tax
credit

reservation/allocation rounds permit) submit one to a Housing Credit
Agency

(HA) together with all other required application materials in order to

request an allocation of low income housing tax credits, and the other
to the

Department of Housing and Urban Development (HUD) Multifamily Insuring
Office

together with all other required application materials in order to
request

some form of FHA-Housing assistance. The Sponsor represents that

substantially identical design, cost, and underwriting details regarding
the

multifamily proposal contemplated are included in both sets of
application

materials and, therefore, that there are no material differences in such

details in both sets of application materials.

The undersigned authorizes HUD and the HA to jointly review the

assistance requests, i.e., HUD and HCAs may share with each other any
and all

relevant information related to the parties, and proposed or past real
estate

developments or business transactions involving the parties, as such

information relates to and has an Act upon the proposed development
requests.

The undersigned waives the right to confidentiality with respect to HUD
and

the HCA\'s joint review of this transaction and its principals (waivers
of all

parties identified in HUD Handbook 4470.2 REV-2, paragraph 18-4.G.1.
must be

attached hereto), and understands and consents to HUD and the HCA\'s
thorough

and open discussion with each other relating to any information deemed

relevant regarding these application requests. The undersigned
understands

and acknowledges that information exchanged between HUD and the HA may
result

in the adjustment or reduction of assistance by one or both; approval or

rejection of application assistance requests; substitution of General
and/or

Sub-Contractor (5); and agrees to release forever \'HUD and the HA, and
their

successors, from all action(s) based in contract or tort, debts and sums
of

money due, claims and demands, in law and equity, which the undersigned
has

had or may have relating to these assistance requests, regardless of the

results of assistance application processing, including claims that the

information was wrong fully released.

The undersigned agrees to provide the HCA identical copies of the Forms

HUD-92013 and HUD-2880 submitted to HUD in mortgage insurance cases, the
SAMA

letter if and when issued, the Firm Commitment if and when issued, Forms
HUD-

92264 and 92264-A, and authorizes HUD, as it deems necessary in its sole

90

discretion, to share these or additional forms with the HCA in such
cases,

including but not limited to the \"Previous Participation Certificate\"
(Form

HUD-2530) and Credit Investigation findings, Financial Analysis results,

Construction Contract adjustments and other Cost Certification results
(Forms

HUD-92330, \"Mortgagor\'s Certificate of Actual Cost,\" 92330-A,
\"Contractor\'s

Certificate of Actual Cost,\" 92331, \"Summary of Cost Certification
Review,\"

and FHA-2331A, \"Cost Certification Review- Mortgage Credit Staff,\" and
2580,

\"Maximum Insurable Mortgage\") and monthly or annual financial
statements,

e.g., Form HUD-92410, \"Statement of Profit and Loss\". The undersigned
agrees

to provide all HCA-approved documentation including Reservations or

Allocation Agreements as is consistent with Form HUD-2880 updating

requirements, and also authorizes the HCA to forward the results of its

application processing to HUD. In Property Disposition cases, the

undersigned authorizes HUD to provide Form HUD-9650 to the HCA, and

acknowledges that it is also under a duty to advise HUD and HCAs
promptly of

any assistance changes through Form HUD-2880 Updates. The undersigned

understands and acknowledges that Section 8 rental assistance contracts
are

subject to subsidy layering requirements, and terms may be modified

accordingly if new other government assistance is being requested to be

combined with HUD assistance for debt coverage and repairs. The
undersigned

acknowledges that specific conditions and requirements contained in the
HCA\'s

Allocation Agreement, HUD\'s Regulatory Agreement, and/or HUD\'s Section
8

Contract Agreement may apply, and that the Sponsor\'s non-compliance
with any

of the relevant terms of these agreements may trigger future HCA or HUD

adjustments or requirements relating to their respective assistance.

Sponsor/Owner/General Partner

(represents she/he has authority to

bind the single-asset mortgagor

entity in mortgage insurance cases,

or is the party subject to HUD\'s

Regulatory Agreement or Section 8

Contract)

Date

91

Addendum 10 Form HUD-2880

92

Addendum 11 Procedural and Sequential Descriptions

for Combining LIHTC-OGA with

Various Forms of HHA

I. HCA INTENT TO CONDUCT 911 SLRs IN LIHTC CASES- An interested HCA must

signal its intent to conduct Section 911 SLRs to the FO with
jurisdiction

(i.e., the applicable HUD Office which performs full Multifamily
functions

for the area) by sending a brief letter executed by an authorized
official

stating it: 1) has reviewed the Section 911 statute and RSLGs; and 2)

understands its responsibilities under Section 911 and the RSLGs; and 3)

certifies it will perform Section 911 SLRs in accordance with all
Statutory,

Regulatory (See 24 CFR Part 12), and RSLG requirements.

An individual HCA\'s questions or requests for clarification relating to

Section 911 implementation should be addressed to HUD Headquarters, and

should be answered by HUD prior to that HA\'s notification to the FO of
its

intent to accept Section 911 authority. Where there are no outstanding

issues affecting an individual HCA\'s understanding of the Guidelines,
and in

all States or areas where a qualified HCA having LIHTC Allocation
authority

has so notified HUD of its intention to participate, HUD will delegate
the

authority to perform Section 911 SLRs, and shall confirm its delegation
by

the FO\'s written acknowledgement to the HCA. HCAs may subsequently re-

delegate 911 authority back to the FO, whereupon the FO must perform 102
SLRs

for LIHTC cases.

II\. PROCEDURAL DESCRIPTION FOR COMBINING LIHTC-GENERATED EQUITY
FINANCING AND

MORTGAGE INSURANCE DEBT FINANCING UNDER SECTION 911 - See Addenda 3, 4,
or 6

for appropriate S & U Statement Format.

A. Typical Sequence of Events: the Sponsor\'s first steps- Sponsors
should

simultaneously apply for assistance from both the FO and HCA. In states

where LIHTC Application for Reservation or Allocation cycles are

infrequent, Sponsors should probably obtain at least a SAMA letter from

the FO before making application to the HCA. An executed Release Form

and fully completed Form HUD-2880 are required exhibits supplementing

Form HUD-92013 (See Addenda 9 and 10). Where application procedures

allow developers to initially submit their proposals for comment,

Sponsors are strongly encouraged to participate in a Pre-Application

Conference at the FO (no charge) before applying for a SAMA Letter

(\$1.00 per thousand of mortgage sought), and simultaneously obtain a

Preliminary Evaluation/Feasibility Analysis from the HCA. This reduces

up front costs incurred, since assistance is not assured from either

agency.

B. Debt and Equity Underwriting Cooperation- FOs and HCAs must
communicate

with each other regarding applications received requiring a SLR. The

93

underwriters of the debt and equity components must thoroughly review

and jointly discuss every aspect of all proposed developments.

Detailed, and otherwise confidential, information will be shared between

FOs and HCAs, as each assures itself that an applicant\'s request for

project assistance may proceed.

C. Specific HCA and HUD Interaction and Processing of the Sponsor\'s

Application for Assistance-

1\. SAMA/Feasibility Findings- SAMA Letters are non-binding commitments

from HUD to further consider the proposal for insurance if the

fundamental details are agreed upon for new construction proposals.

HUD\'s substantial rehabilitation equivalent is called a

\"feasibility analysis\". Both refer to the first stage of HUD\'s

processing. SAMA findings verify whether marketability, rental

mix, and land valuation conclusions economically support pursuit of

further FO mortgage insurance, and by extension LIHTC, assistance

processing. An environmental \"finding of no significant impact\" is

also necessary for the development to proceed. SAMA Letters will

reflect set-aside assumptions proposed in the LIHTC application.

Note that Form HUD-2880 requires both Disclosure and Updating from

Sponsors regarding any proposal changes. If HUD determines that a

project is suitable in design, marketable as conceived, and

environmentally acceptable, a SAMA Letter is issued to the Sponsor

for the number of units proposed at obtainable rents. Projects

which seek LIHTC assistance must also obtain an HCA\'s preliminary

approval, as required.

2\. Insurance Commitments- FOs will process applications for insurance

commitments for projects which are found preliminarily acceptable.

The Sponsor must pay an additional \$2.00 per thousand in Firm

Commitment Application fees. A FO will complete the architectural

review of all firm drawings and specifications, cost analysis of

the construction contract submitted, appraisal of the real estate

security, mortgage credit analysis of estimated cash requirements,

investigation of Sponsor and General Contractor credit worthiness,

and analysis of financial capacity of the principals involved to

meet cash requirements. HUD WILL MAKE ITS BEST EFFORTS WITH ALL

AVAILABLE QUALIFIED STAFF TO PROCESS SUCH ASSISTANCE REQUESTS IN A

TIMELY MANNER. HUD will qualify its mortgage commitments, making

them dependent upon the assumption of previous and subsequent HCA

LIHTC determinations.

94

3\. Reservations- HCAs may reserve LIHTCs for a project at any time in

this sequence, but 911 SLRs cannot be made until after HUD issues

a commitment. HUD\'s commitment processing contains cost and debt

underwriting conclusions the HCA needs to complete the S & U

Statement supporting its LIHTC award and 911 Certification.

Therefore, an HCA should not generally enter into a specific

written agreement until a HUD commitment has been issued, so that

the difference between supportable debt and total project cost is

more clearly defined 5/. FOs will assist HCAs by partially

completing and forwarding the appropriate S & U Statement with

processing results relating to cost and supportable debt.

4\. Section 911 SLR- An HCA completes the S & U Statement and 911

Certification anytime after HUD issues its commitment. LIHTC

Reservations made prior to the FO\'s commitment may have to be

adjusted to balance the Statement. This \"front end\" 911 SLR is all

that is required unless: 1.) Source(s) not previously considered in

the front-end SLR are subsequently requested or a mortgage increase

is requested, or, 2.) certified Project Uses (costs) decrease by

more than 2% from estimates used in the front-end SLR, e.g., change

orders to the construction contract cumulatively reflect a decrease

of over 2%. If new types of assistance are involved or costs

decrease, then the 911 SLR must be repeated after HUD\'s cost

certification at Placement in Service, i.e., Placement in Service

will be delayed, and Final Endorsement (the permanent loan take-

out) will also be delayed in order to complete the triggered \"back-

end\" 911 SLR. HCAs accepting 911 SLR authority must include as

either an Addendum or added condition to their Reservation and

Allocation Agreements the following provision:

\"If the Sponsor retains this Reservation/Allocation of Low

Income Housing Tax Credits (LIHTCs) in combination or

conjunction with some form HUD Assistance, then it is subject

to Section 911 Subsidy Layering Review requirements related to

such transactions and may be reduced, as necessary, to satisfy

HUD in accordance with its established subsidy layering

guidelines.\"

5/ Sponsors can contribute to efficiency of 911 SLRs by being as

accurate as possible -in their cost and mortgage estimations, even at
SAMA

and preliminary LIHTC Application stages. If Sponsors do not receive
LIHTCs

and/or the proposal does not go beyond SAMA processing, the Sponsor does
not

benefit from paying non-refundable mortgage insurance application fees
(\$1.00

per thousand) on an insupportable mortgage request.

95

In completing the S & U Statement, HCAs may elect to Alternatively

fund Builders Profit and Developer Fees according to Standards 1

and 2 (See Comments 10 and 11 of Addendum 1). HCAs may estimate

and allow the funding of HUD\'s \"Operating Deficit Escrow,\" or

include \"Rent Reserves\" to be commingled and administered by HUD

after rent-up begins (See Comment 19). HCAs may consider Sponsor

requests to allow Net Syndication Proceeds to fund any legitimate

project costs incurred which are not included in HUD\'s Replacement

Cost estimate of mortgageable items, and which would otherwise

reduce the Developer\'s net fee. Nevertheless, if an HCA\'s policy

requires that certain costs or reserves be paid out of the

Developer\'s Fee, then such costs will not be recognized on the

Statement to avoid duplication.

After all allowable project uses have been defined, HUD\'s mortgage

and other Sources may be subtracted from the total to determine the

equity gap financing the LIHTC may support. If a determination has

been made to award the project LIHTCs for the full Gap, the Gap is

simply capitalized by an appropriate Market Rate to establish the

maximum LIHTC Allocation (See Comment 13-If the HCA\'s calculation

through other administrative criteria results in a lower

Allocation, then the HA will award the lesser amount). If the HCA

does not have sufficient resources to fund all of the competing

requests, and/or Profit-Motivated Developer/Applicants have enough

other Sources, and the HCA wishes to provide at least a modicum of

subsidy to more applicants, or require an equity stake on projects,

it may require a specified percentage equity contribution by

reflecting it on the \"Additional Required Sponsor Equity

Contribution\" Source line (may be relabelled \"Deferred Developers

Fees Left in Project\") for a proportion of the Gap, capitalizing

only the remainder of the Gap by the Market Rate to establish the

maximum LIHTC Allocation.

911 SLRs must generally be performed in accordance with one of two

basic standards: 1) Safe Harbors- These are HUD processing,

allowances, or if alternatively funded, amounts which are

recognized as reasonable allowances for the typical multifamily

proposal (but can be reset by the HCA through \"sunshine\"

procedures); 2) Ceilings-Ceiling amounts represent absolute caps

which may not be exceeded through HCA QAP provision or Board

Resolution, but may be exceeded in a limited number of

\"Applicability Exception\" cases: see \"Guideline Standards\" in

Addendum 1.

96

5\. Initial Endorsement- Sponsors may submit Letters of Intent for the

purposes of 102 or 911 SLRs, if non-LIHTC Sources of Funds are

available to meet estimated cash requirements. But the Sponsor

must execute and enter into binding Syndication and Limited

Partnership Agreements, if non-LIHTC Sources are not available to

meet all cash requirements, prior to the pre-construction

conference. Also, the FO will not schedule Initial Endorsement

without an acceptable Financing Plan 6/. The Sponsor must

calculate Net Present Value of installments as of the Placement in

Service date by compounding and discounting in accordance with the

HCA\'s selected rates and method for the transaction, and HUD will

review it Project Costs, Mortgage Amount assumptions, and all terms

regarding the transfer of ownership interests must be clearly

disclosed within the Letter of Intent OR Syndication Agreement.

All relevant conditions to Reservations, or other HCA written

agreements, must be met. The Sponsor must also submit revised

LIHTC Allocation, Syndication Expense, and Net Proceeds information

on its Form HUD-2880 Update to assure compliance with Standard 3.

D. Potential Problems Caused by Lack of Communication- Several problems
may

occur to disrupt the orderly flow and combination of these forms of

assistance. The underwriters of the debt and equity components may not

agree on every detail relating to the design, construction, and

operational compliance of a multi-unit, multi-million dollar housing

project. FO and HCA workloads and application timing also affect. how

they relate to each other and the Sponsor. Designated FO and HCA staff

should occasionally meet with one another in their respective offices to

discuss the combined underwriting challenges associated with these

6/ The projected Net Syndication Proceeds, added to the Sponsor\'s

Required Equity Contributions from Non-LIHTC-generated Sources, if any,
must

be sufficient to meet estimated cash requirements for Initial
Endorsement,

i.e., presumably the sum of these two must equal at least the Gap Filler

amount on the S & U Format, and HUD\'s \"Front Money Escrow\" cash
requirement

must be met, as well as bringing the land to closing \"free and clear.\"
Either

the initial pre-construction syndication installment must be large
enough to

satisfy the FO\'s estimated cash requirements, or, the sum of the first

installment and subsequent installments pledged to obtain bridge loan

financing, adding also any non-LIHTC Sources, must be adequate to meet
all

cash and escrow requirements.

97

projects, and learn more about each others\' programs and processing

needs. This should occur before problems develop in individual cases

pursuant to delegated SLR activities, or in the Risk Sharing enterprise

between HUD and HFAs.

HUD Assistance Adjustments- If HUD has issued a commitment, but the

project does not receive the Allocation anticipated and assumed in HUD

processing of the original request, or the Sponsor changes intentions

regarding the set-aside; for example, now only 40 percent of the units

will receive LIHTCs and be set aside for low income use, while the HUD

processing assumption was 100 percent; then HCAs should advise FOs of

the change, revise its Section 911 Certification and Addenda 3 or 4 S &

U Format. The Sponsor should also advise the FO of the change and

submit a Form HUD-2880 Update, and amended Form HUD-92013. In the case

of a Sponsor\'s changing to a lower set-aside than previously assumed,

HUD will re-calculate income assuming the rents reflected on Line 1 of

Form HUD-92264-T, \"Rent Estimates for Low or Moderate Income Units in

Non Section 8 Projects Involving Tax Exempt Financing or Low Income

Housing Tax Credits,\" Addendum 8, for units not being set aside. This

Form HUD-92013 application revision does not constitute a \"significant

deviation,\" and no new fees will be required.

If a higher set-aside than that assumed by HUD in processing is awarded

(again, with the HCA and Sponsor both advising the FO of the change),

then HUD will similarly re-calculate income assuming the rents reflected

on Line 6 of Form HUD-92264-T for the additional rent restricted units.

Operating Expense estimates may be affected slightly by varying set-

aside assumptions. Revised set-aside assumptions can result in either

an increase or a decrease in the maximum insurable mortgage depending on

whether the set-aside proportion assumption has been decreased or

increased, the relative differential between set-aside and market rents,

and any effect on expenses.

More significantly, projects with set-aside assumptions different from

those initially assumed and approved by HUD at SAMA may be subject to

different overall market need or economic feasibility conclusions. SAMA

letters and Commitments are conditioned upon certain set-aside

assumptions, and may be unilaterally modified or cancelled if those

assumptions are altered. Therefore, communication between HUD and the

HCA at the earliest stages of underwriting is critical to everything

which follows. HUD and the HCA must coordinate their actions and be

attuned to potential changes in the Sponsor\'s building or marketing

plans and set-aside intentions throughout assistance application

processing to avoid subsequent dramatic revisions in debt or equity

financing. As noted several times Sponsors are responsible, and will be

held accountable, for advising HUD and HCAs of changes through amended

Forms HUD-2880 and 92013.

98

HCA Allocation Adjustments- Adjustments relating to \"back-end\" 911
SLRs

will only be necessary if costs decrease or assistance increases during

construction. HCAs must use FO cost certification processing results to

complete its Placement in Service review and added 911 SLR in such

cases.

E. A Sample Smooth Sailing Scenario for Sponsors, HUD, and HCAs in 911
SLRs

1\. HCA accepts and HUD delegates 911 SLR authority.

2\. Sponsor submits Addenda 9 and 10 with its Form HUD-92013 to FO

seeking SAMA Letter, pays \$1.00 per thousand in Section 221

mortgage insurance application fees for new construction proposal

(acquisition and substantial rehabilitation requires \"Feasibility

Analysis\" instead), and provides photocopies of everything to HCA

together with its LIHTC Application for a Preliminary Evaluation.

3\. HUD and HCA communicate regarding marketability, and agree the

proposal is marketable at the mix of market and set aside rents

contemplated. HUD conveys its opinion of property value and

previous participation of the Sponsor (Form HUD-2530). HUD issues

SAMA Letter. HCA completes its Preliminary Evaluation and verbally

conveys approval to the Sponsor or invites future application, and

considers whether HUD SAMA Letters will qualify as securing

construction and/or permanent financing for scoring purposes. If

not, then the HCA does not accept LIHTC Application until a

commitment is obtained from HUD.

4\. Sponsor pays \$2.00 more per thousand to HUD to process Firm

Commitment stage application. HUD processes application and

provides commitment to Sponsor, conditioned upon the receipt of the

LIHTC Allocation. HUD forwards results to HCA (Cost based on

Construction Contract, Commitment, Appraisal, Financial Analysis of

Cash Requirements and Sources, and S & U Format partially

completed). HUD and HCA communicate regarding what is included in

FHA underwriting analysis, including detailed cost review and

reserve estimation. HCA performs 911 SLR and Certification, and

execute\'s Reservation for necessary amount of assistance, revising

earlier estimates as necessary.

99

5\. Sponsor provides executed Syndication and Partnership Agreements

reflecting all cost, debt, and equity details of the joint

underwriting to HUD and HCA prior to the Pre-Construction

Conference. Sponsor uses the HCA\'s indicated rates for required

compounding and discounting of installments to be received, and

estimates Net Present Value of the Syndication Proceeds as of

Placement in Service.

6\. Sponsor\'s Financing Plan indicates satisfactory funding of all cash

requirements necessary to proceed to Initial Endorsement, i.e.,

Sponsor arranges to obtain the preconstruction Syndication

installment before closing, and as necessary, bridge financing

funds secured through pledging subsequent installments to meet

estimated cash requirements of the closing and construction start.

Construction begins within one month following closing.

7\. Construction change orders and insurance of advance draws handled

in accordance with HUD requirements. There is less than 2% decrease

in the construction contract overall, and no new Sources of

assistance are sought or substituted. Estimated construction

completion date met on time to trigger equity installment(s) due.

Certificate of occupancy obtained on units (in phased or un-phased

Construction) and cash flow starts (and Placement in Service of

LIHTC buildings, or, Owner elects 1 year delay as necessary). Cost

Certification completed and Final Closing held without delay

(installment earned at Final Closing in some cases). Absorption

rate is good, and the final installment is earned within the

estimated period.

III\. BRIEF DISCUSSION REGARDING COMBINATIONS OF LIHTCs WITH
NON-MORTGAGE

INSURANCE FORMS OF HHA- See Addendum 5 for S & U Format and Chapter 17,
HUD

Handbook 4350.1, REV-1 for instructions.

A. Types of Non-Mortgage Insurance HHA Available- LIHTCs are one of the

chief forms of OGA currently available to support production and

rehabilitation of multifamily units. Very few comprehensive forms of

Non-mortgage insurance HHA are presently available to support new

construction or substantial rehabilitation of units. (Section 202

Capital Advances, one of the few examples of such assistance, cannot be

combined with LIHTCs.) Examples of Non-mortgage insurance HHA which may

be combined with LIHTCs include the Section 8 Community Investment

Demonstration and Loan Management Set Aside (LMSA) programs. There are

also a few Non-mortgage insurance forms of HHA available to portfolio

projects to support rehabilitation of units requiring attention: LMSA,

Flexible Subsidy Capital Improvement Loans, and increases to existing

project-based Section 8 contracts to fund repairs (e.g., Title II or VI

Preservations cases to fund repairs (e.g., Title II or VI Preservation

cases, and, Section 8 rental assistance provided pursuant to PD property

sale terms).

100

B. Chronology Associated with Applying for Non-Mortgage Insurance Forms
of

HHAs and LIHTCs- Sponsors may simultaneously seek non-mortgage insurance

HHA and LIHTCs, but may not know the results relating to either request

during the application and competition process. For example, consider

HUD\'s process for awarding assistance in protracted Notices of Fund

Availability (NOFAs), or other competitive, short-term, or limited

funding programs including:

1\. Section 201 Flexible Subsidy Capital Improvement Loans (See HUD

Handbook 4355.1);

2\. Section 8 LMSA (additional project-based units- See HUD Handbook

4350.2), whether to support existing construction and repairs, new

construction, or moderate or substantial rehabilitation;

3\. Project-based Section 8 Rental Assistance Increases and Section 241

Supplemental Loans (For project eligibility, a HUD-insured loan and

an existing project-based Section 8 contract must be in place- See

Chapter 7, -Handbook 4350.1, REV-1);

4\. Section 8 provided in certain Property Disposition (PD) Sale

Offerings (of up to a 15 year term; see Handbook 4315.2);

5\. Preservation Assistance (See Handbook 4350.6);

6\. Section 8 Community Investment Demonstration Program.

Assuming the Sponsor indicates its intentions to both HUD and HCAs,

fully disclosing the types and amounts of assistance needed on Form HUD-

2880, the HUD Housing office (sometimes Headquarters) administering the

HHA, and the HCA office administering the LIHTC, must make special

efforts to communicate with each other regarding the Sponsor\'s specific

project repair and reserves needs, if allowed, i.e., HUD may not

communicate HHA conclusions under some programs in accordance with HRA

\'89 prohibition against disclosures during the selection process. The

guiding principles each must follow in performing SLRs are: 1.) Approved

Sources may not exceed Allowable Uses; and 2.) available program

subsidies may not be duplicated to pay for the same Project Use.

101

C. Timing of SLRs

1\. 911 SLRs- HCAs may perform 911 SLRs at any time after HUD has

calculated and preliminarily approved non-mortgage insurance HHA,

assuming Gap equity needs remain which Net Syndication Proceeds may

fill. HCAs must contact the HUD office which calculates and awards

the HHA to determine details relating to how much HHA is provided

(known Sources), distribution terms and conditions associated with

the Source Type, and which Costs are or will be paid for through

the HHA (Uses HUD has already considered).

2\. 102 SLRs- The timing of FO 102 SLRs will depend on the form of HHA

involved, and the stage of the HCA\'s LIHTC processing: Application/

Reservation/ Allocation/ Placement in Service. For example,

Sponsors who purchase PD properties and receive Section 8 rental

assistance to rehabilitate the projects, but, subsequent to HUD\'s

acceptance of their bid, or closing, obtain a LIHTC Reservation or

Allocation, are nevertheless subject to an SLR, because the Section

8 rental assistance may help pay for acquisition or rehabilitation

costs, thereby creating excess compensation when combined with the

LIHTC. HCAs accepting 911 authority can perform the SLR to assure

no overlap in such cases (whenever potential overlap comes to light

during the 18-year LIHTC compliance period), or the FO can perform

a 102 SLR, consider the Net Syndication Proceeds raised, and reduce

Section 8 assistance as necessary, or require that excess rental

assistance fund Replacement Reserves or otherwise stay with the

project (whenever potential overlap comes to light during the term

of Section 8 contract, or use restriction period).

102

Addendum 12 SECTION 102(d) CERTIFICATION

REGARDING THE AMOUNT OF HUD

ASSISTANCE PROVIDED FOR PROJECTS UTILIZING

LOW-INCOME HOUSING TAX CREDITS AND/OR

ANOTHER FORM OF OTHER GOVERNMENT ASSISTANCE

Pursuant to Section 102 of the Department of Housing and Urban

Development -Reform Act of 1989, regulations at 24 CFR Part 12, and the

Revised Subsidy Layering Guidelines, all of which address the prevention
of

excess project \"subsidy layers,\" I certify that the assistance
provided by

the U.S. Department of Housing and Urban Development to

project number

located in

is not more than is necessary to provide affordable housing after taking
into

account other government assistance, including low-income housing tax

credits. This certification is based on detailed processing information

contained in Multifamily Housing files and available for inspection in
the

Insurance Office.

Housing or Multifamily Director Date

103

Addendum 13 ACRONYM LIST:

BSPRA Builders and Sponsors Profit and Risk Allowance

DHMF Director of Housing or Multifamily

EMAS Economic & Market Analysis Section of FOs

FO HUD Field Office

HCA Housing Credit Agency

HCDA \'92 The Housing and Community Development Act of 1992

HD Housing Development (obsolete division name)

HHA HUD Housing Assistance (programs administered by FHA-Housing)

HRA \'89 The HUD Reform Act of 1989

LIHTCs Low Income Housing Tax Credits

LMS Loan Management Servicer

LMSA Loan Management Set-Aside (of project-based rental assistance

units)

MCE Mortgage Credit Examiner

MHR Multifamily Housing Representative (FO)

MIM Maximum Insurable Mortgage

OBRA Omnibus Budget Reconciliation Act of 1989

OGA Other Government Assistance

QAP Qualified Allocation Plan

RSLGs Revised Subsidy Layering Guidelines

SAMA Site Assessment and Market Analysis (the first and least

expensive/intensive stage of mortgage insurance processing)

S & U Sources and Uses

SLR Subsidy Layering Review

104