**Special Aftention of:**

Multifamily HUB Directors

Multifamily Program Center

Directors

Project Managers

Secretary\'s Representatives

All Section 236 Project

Mortgagors and Management Agents

**U.S. Department of Housing and Urban Development**

Office of Housing

**Notice** H 99-28 (HUD)

**Issued:** 10/04/99

Expires: 10/31/2000

**Cross References:**

Subject: **CALCULATING AND RETAINING SECTION 236 EXCESS INCOME**

> **APPLICABILITY:** This Notice applies to all Section 236 projects
> whose mortgages are insured or held by HUD, noninsured State Agency
> projects whose mortgages are assisted under the Section 236 program
> and former non-insured State Agency Section 236assisted projects whose
> mortgages were refinanced under the Section 223(f) program.
>
> **I.** **[PURPOSE]{.underline}**
>
> This Notice replaces Notice H-98-10 and implements Section 227 of the
> Department\'s Fiscal Year 1999 Appropriations Act, which permits
> former non-insured State Agency Section 236-assisted projects whose
> mortgages were refinanced under the Section 223(f) program prior to
> July 30, 1998, to participate in retaining some Excess Income. These
> projects are known as the Mitchell-Lama properties located in New
> York. This Notice also clarifies the calculation used to prorate the
> excess income.
>
> **II.** **[RETAINING SECTION 236 EXCESS INCOME]{.underline}**
>
> Section 227 of the Department\'s Fiscal Year 1999 Appropriations Act,
> P.L. 105-276, amended Section 236(g) of the National Housing Act, as
> amended by Section 221(c) of the Department of Veterans Affairs and
> Housing and Urban Development, Independent Agencies Appropriations
> Act, 1997, permits project owners with mortgages insured under Section
> 236 and former non-insured State Agency Section 236assisted projects
> whose mortgages were refinanced under the Section 223(f) program prior
> to July 30, 1998, to retain some or all of their Excess Income if
> authorized by HUD and under such terms and conditions as established
> by HUD.
>
> Distribution: W-3-1,

Previous Editions Are Obsolete HUD 21 B(3-80)

> GPO 871 902

2

> The wording of the statute does not permit other projects with State
> Agency non-insured Section 236-assisted mortgages or HUD-held Section
> 236 mortgages to retain Excess Income. **The non-insured State Agency
> Section 236-assisted projects whose mortgages were refinanced under
> the Section 223(f) program may implement this requirement
> retroactively to October 21, 1998,**
>
> All Section 236-assisted projects will continue to use Form HUD-93104
> dated February 1998.

**A.** **[Procedures:]{.underline}** Excess Income consists of cash
collected as rent from the residents by the mortgagor, on a unit-by-unit
basis, that is in excess of the HUD-approved Basic Rent.

The unit-by-unit requirement necessitates that if a unit has Excess
Income, it must be returned to HUD. It is impermissible to do an
aggregate calculation of the Excess Income for all occupied rent-paying
units, and then to setoff or subtract from that figure any unpaid rent
from occupied or vacant units, before remitting Excess Income to HUD.
Set-offs are statutorily impermissible. Form HUD 93104, Monthly Report
of Excess Income, dated February 1998 and its accompanying instructions
must be used to show the amounts collected, the amounts authorized to be
retained, and the amounts due HUD monthly.

> **NOTE: For projects with project-based Section 8 assistance, Section
> 8 vacancy and damages claims are not considered when computing Excess
> Income.**
>
> The Secretary is authorized to allow deserving and reliable owners of
> projects whose mortgages are presently insured under Section 236 and
> former non-insured State Agency Section 236-assisted projects whose
> mortgages were refinanced under the Section 223(f) program (a/k/a the
> New York Mitchell-Lama projects) to retain Excess Income in order to
> maintain adequately the low-and moderate-income character of the
> projects and for other purposes deemed to benefit the project and its
> tenants.

**B.** **[Who May Participate and Retain Excess Income.]{.underline}**
In general, The mortgagors of all Section 236 projects with mortgages
insured by HUD and the eligible Mitchell Lama projects are allowed to
retain Excess Income unless:

> 1\) They owe HUD Excess Income from prior periods. All past due,
> unpaid Excess Income must be paid in full to HUD before future Excess
> Income may be retained with the exception of the Mitchell-Lama
> projects that may have been holding onto such income while awaiting
> further instructions from HUD.

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> 2\) They are subject to administrative sanctions such as debarment,
> suspension, or any other form of denial of participation. Until
> sanctions expire or are terminated by HUD, project mortgagors must
> remit all Excess Income to HUD monthly.
>
> 3\) They have major unresolved audit findings or have not complied
> with requests by HUD to take other corrective actions. Examples
> include but are not limited to: management acceptable to HUD has not
> been provided; commingled funds have not been separated; loans to or
> from other projects have not been eliminated; or unauthorized
> distributions have not been restored to project operating accounts.
>
> It is necessary to obtain advance approval from HUD to retain Excess
> Income.

C. **[Usage of Excess Income:]{.underline}** Mortgagors who are
authorized by T-heir HUD Field Office to retain some or all of their
Excess Income may retain Excess Income to the extent it is or will be
used for one of the five purposes shown below:

> 1\) Project operating shortfalls, including repair costs;
>
> 2\) Repair cost identified such as in the Comprehensive Needs
> Assessment, including increasing deposits to tho Reserve Fund for
> Replacements to a limit necessary to adequately fund the reserve;
>
> 3\) Service coordinators;
>
> 4\) Neighborhood networks located at the project for
> project.residents;
>
> 5\) Enhanced supportive services for the residents.
>
> **D.** [Requesting HUD\'s \@roval to Retain Excess
> Income:]{.underline}
>
> **1)** Mortgagors who believe they may be eligible to retain future
> Excess Income and who would use it for one or more of the authorized
> purposes listed in Section II
>
> \(C\) must request in writing HUD\'s permission to retain their Excess
> Income to their local Field Office. The request should also outline
> and briefly describe the uses to which retained Excess Income would be
> put.
>
> 2\) Mortgagors of eligible Mitchell-Lama projects who may have been
> holding onto their Excess Income that accrued on or after October 21,
> 1998, while awaiting further instructions from HUD must submit a
> written request to retain the excess income to the local HUD office
> that has jurisdiction over the project. The

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mortgagor\'s letter to the HUD Field office should outline and briefly
describe the uses to which the Excess Income would be put. If the Field
Office approves the mortgagor\'s request, the mortgagor must prepare and
mail a revised Form HUD-93104, Monthly Report of Excess Income, to
Excess Rental Income, P.O. Box 360333M, Pittsburgh, PA 15250. A copy of
Form HUD-93104 should also be mailed to the Field Office.

> **Note: Mortgagors in the above category, who have not submitted
> updated reports to the above address and a copy to the Field Office
> must do so promptly.**
>
> 3\) Mortgagors of eligible Mitchell-Lama projects who have on a
> continual basis been remitting Excess Income to HUD, must submit a
> written request to the local Field Office if they are seeking to
> recover such income. Excess Income can only be recovered retroactive
> to October 21, 1998. The mortgagor\'s letter must contain the same
> information as required in paragraph D (2), but relate to the proposed
> uses for the Excess Income, which the mortgagor seeks to recover from
> HUD. If the Field Office approves the mortgagor\'s request and in
> order for the mortgagor to receive the refund, the mortgagor must
> forward a written request along with a revised HUD Form-93104 and a
> copy of the Field Office\'s approval letter to the Department of
> Housing and Urban Devel0 ment, Attention: Excess Rental Income, Room
> 3232, 451 7t hp Street, S.W., Washington, D.C. 20410; or fax the
> request to Wallace Garner, Director, Accounting
>
> must state the purpose of the refund, the period for which the Excess
> Income is requested and identify the mortgagor\'s tax identification
> number. In addition, the mortgagor should contact its financial
> institution and obtain a SF1199A, Direct Deposit Sign-up Form, and
> attach the form to its refund request.
>
> **NOTE: Whenever the intended purposes to which Excess Income would be
> used changes, mortgagors must notify their local HUD Field Offices of
> the proposed changes and obtain HUD\'s permission for such changes.**

**E. HUD** [Field Office Response:]{.underline} HUD staff will review
the mortgagors\' requests, issue letters of permission or denial and
update the Excess Income Section of the Loan Information Detail Screen
in the Real Estate Management System (REMS). For information on
accessing and using the Loan Information Detail Screen refer to Chapter
5 of the REMS User Guide. If a mortgagor\'s request is denied, HUD staff
must cite the specific reasons for denial and state what would be
required of the mortgagor to receive HUD\'s permission to retain Excess

Monitoring and Analysis, at (202) 401-2018. This request

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> Income. When the mortgagor has corrected the conditions to HUD\'s
> satisfaction, the Field Office must inform the mortgagor in writing so
> that it may begin to retain Excess Income on a prospective basis.

**F. HUD\'s** [Withdrawal of Approval to Retain Excess]{.underline}
**Income:** The retention of Excess Income by mortgagors is a privilege,
not a right, extended by the Department to responsible owners. If a
mortgagor becomes ineligible to retain Excess Income for any of the
reasons enumerated in Section II (B) or for not using the Excess Income
in accordance with purposes they had committed to, which are listed in
Section II (C) (without obtaining HUD\'s prior approval) the HUD Office
of jurisdiction will notify the mortgagor in writing that it has become
ineligible to retain Excess Income and that all future Excess Income
collected is to be remitted to HUD. This letter should be sent via
certified mail, and indicate the effective date, which should be the
date HUD determines that the owner is not in compliance with HUD\'s
requirements. The letter also should state the specific reasons for
HUD\'s withdrawal of approval, and indicate what actions the mortgagor
would need to take in order to participate again in the retention of
Excess Income in the future. Additionally, should the mortgagor fail to
provide the annual description of its uses of the retained Excess Income
as required by Section II (I), HUD may withdraw its approval to retain
Excess Income.

**G.** [Remitting Excess Income to]{.underline} **HUD:** All Excess
Income due HUD as calculated in accordance with these procedures is the
property of the Federal Government. It must be remitted to HUD monthly,
without any delay for any reason. Mortgagors are not entitled to keep
the Excess Income due HUD that is in excess of any amounts that are
authorized by HUD for them to retain. HUD may use any lawful means at
its disposal, including recovery against the required fidelity bonds, to
collect unremitted Excess Income that is improperly retained by
mortgagors, their managing agents, or others.

**H.** **[Accounting:]{.underline}** The collection and retention of
Excess Income by the mortgagor of eligible projects shall be treated as
**follows** in the required audited annual financial statements. Excess
Income that is retained by a mortgagor must be considered as Rent
Revenue and should be booked using Account No. 5194, \"Retained Excess
Income.\" Excess Income that is collected and remitted to HUD must be
disclosed by the auditor in Account No. 5191, \"Excess Rent\". Nonprofit
mortgagors subject to the Single Audit Act and OMB Circular A-133 need
to include retained Excess Income in the formula used to calculate
expended federal assistance. If an owner retains Excess Income without
prior authorization from HUD, or uses Excess Income for unauthorized
purposes, it should be reported as a finding in the annual financial
statements.

6

1\. **[Other Reporting Requirements:]{.underline}** Within the deadlines
as may 7e established by HUD for the submission of the annual audited
financial statements, the mortgagor of eligible projects shall provide
the local HUD Office on an annual basis with two copies of a brief
narrative description of the amounts of Excess Income retained during
the prior fiscal year of the project and the uses made of that retained
Excess Income. The Department does not anticipate that this narrative
report would be more than one page in length. The Department does not
wish to receive an unnecessary or superfluous amount of detail about the
uses of the retained Excess Income, but failure to submit this brief
narrative report could jeopardize the privilege of retaining future
Excess Income. **Mortgagors are to certify the truth and accuracy of
their statements in this report under penalties provided by 18 U.S.C.
1001, 1010, 1012 and 31 U.S.C. 3729, 3802. The certification must be
written in the same format as shown below.**

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

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

**III.** **[PRORATION OF EXCESS INCOME]{.underline}**

When there are mid-month transactions, such as move-ins and move-outs,
the method for prorating Excess Income is the 30-day standard formula
for every month, regardless of the actual number of days in the month.

> **NOTE:** Mortgagors who have been using a different method for
> prorating Excess Income should comply with the above procedures when
> completing future reports. Mortgagors may not make corrections to
> previously submitted reports.

**IV.** **[Effective]{.underline}** Date: This policy is effective as of
the date of the Notice; however, the owners of Mitchell-Lama projects
(which previously did not have the ability to retain excess

7

income) will, if qualifying under the Notice, be permitted to do so,
retroactive to October 21, 1998, the date Congress authorized these
owners to retain excess income.

William C. Apgar

Assistant Secretary for Housing

Federal Housing Commissioner