U.S. Department of Housing and Urban Development

H O U S I N G

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Special Attention of: Notice H 95-14 (HUD)

Issued: March 13, 1995

Secretary\'s Representatives

Area/State Coordinators Expires: March 31, 1996

Housing Directors Housing
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Development and Management Cross References:

Division Directors; Handbooks

Chief Appraisers; Chief Architects 4585.1, 4480.1

of Loan Management and 4350.6

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Subject:

Production Branch Instructions to Process Section 241

Loan Applications Pursuant to Title VI of the Low

Income Housing Preservation and Resident Homeownership

Act of 1990 Plan of Action Stage

I. Introduction.

This Notice provides Area/State Office (ASO) Multifamily

Division, Production Branch instructions to process Section

241(f) equity loans and acquisition loans applicable to

Plans of Action (POA) being processed under the Low Income

Housing Preservation and Resident Homeownership Act of 1990

(LIHPRHA). This Notice is a continuation of: HUD Notice

H92-54, which describes Production\'s responsibilities under

LIHPRHA\'s Notice of Intent stage (NOI); incorporates

amendments to LIHPRHA by the Housing and Community

Development Act of 1992 (Housing Act) which are in effect

because of implementing regulations published July 13, 1993;

and incorporates amended LIHPRHA instructions published

recently in Notices H94-22 (Mid-Course Correction I) and

H94-42 (Mid-Course Correction II).

A NOI indicates whether the owner intends to request

incentives for extending the low income affordability

restrictions, transfer the project to a new owner who agrees

to maintain such restrictions or prepay the mortgage and

terminate the low income affordability restrictions. The

POA compliments the NOI objective and it is the owner\'s

proposal for improving the physical condition of the project

and/or determining the ownership for the following 20 years

or less. The POA submission also contains the owner\'s

choice of incentive(s) pending eligibility. The most

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

R-3-1,R-3-2,R-3-3,R-6,R-6-2,R-7,R-8, Special

Distribution to Field Offices and State Agencies

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

GPO 871 902

frequently requested incentive is a Section 241(f) equity loan that

may also finance repairs. Underwriting the Section 241(f) loan is the

Production Branch\'s primary service under the POA stage.

This Notice provides underwriting instructions for the Production

disciplines of Architectural, Engineering and Cost (AE/C) and

Multifamily Valuation (Valuation). Mortgage Credit (MC) Section

241(f) processing instructions are provided in HUD Handbook 4470.1,

Chapter 27. In addition, basic Section 241(f) program requirements

are discussed, as well as, points at which processing information is

exchanged or assistance is required between the ASO Asset Management

(AM) and Production staffs.

II\. Overview of the POA Process.

A.POA Submission Options - At the end of the NOI process (H92-54),

HUD provides information to the owner. The owner must review the

information and decide on its next step. Production\'s role

varies depending on the owner\'s actions.

1.If the owner seeks to prepay the mortgage and terminate the

low income affordability restrictions, a POA must be

submitted by the owner. Valuation will review the POA and

provide whatever data is already available on rents for

comparable, unsubsidized housing in the area to both AM and

the Economic Market Analysis Staff (EMAS) to assist these

departments in reaching a conclusion on the POA request.

2.If the owner decides to extend the low income affordability

restrictions through retention of the project, a POA must be

submitted by the owner. Production reviews the POA and

processes the Section 241(f) equity loan application, if

submitted.

3.If the owner decides to extend the low income affordability

restrictions through sale of the project, a Second NOI must

be submitted to HUD. There is no Production involvement

with the Second NOI. After the project is offered for sale

and an acceptable offer is made, a POA must be submitted by

the owner and purchaser. Production reviews the POA and

processes the Section 241(f) acquisition loan application,

if submitted.

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B.Production Review of POA Submission and Application Exhibits for

Completeness - Upon receipt of the POA application, AM will

immediately disseminate to Production the POA submission

documents to check for completeness (only). Production will

forward any resulting comments to AM within 5 working days.

Within 10 working days AM must state by letter to the owner

whether or not the package is complete. A complete POA

submission is required to start the POA processing clock.

III\. Basic Section 241(f) Program Requirements.

A.Consent of Mortgagee - The mortgagee holding the insured first

mortgage cannot withhold its consent to a Section 241(f) loan and

cannot charge a fee as a condition of its consent to such loan.

B.A Preapplication Conference is not required since there will have

been frequent contact with the owner during the NOI phase.

C.Applications for Section 241 Mortgage Insurance - A Form

HUD-92013, the standard application for mortgage insurance, with

a fee, is a required component of all Title VI POAs, where the

owner is proposing to use Section 241(f) or 241(a) mortgage

insurance. If the owner or purchaser proposes financing other

than mortgage insurance, the application is not required.

Owners/purchasers submitting POAs must submit the Section 241

mortgage insurance application simultaneously with the POA if the

owner/purchaser request a Section 241(f) acquisition loan, a

Section 241(a) rehabilitation loan, a Section 241(f) equity loan

that includes rehabilitation costs, or a Section 241(f) equity

loan that the owner expects to close at POA implementation.

Section 241(f) mortgage insurance applications used exclusively

to provide equity take-out may be submitted at any time after the

owner\'s preservation equity has been determined.

D.Exhibit List for Loan Application - The ASO must provide the

owner and mortgagee a list of required exhibits to be completed

and submitted with the Section 241(f) loan application. Refer to

Appendix 5.

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E.Processing Stages.

1.There is no Feasibility or SAMA stage for Section 241(f).

2.Conditional Commitment Stage will be bypassed for all

Section 241(f) loans.

3.Firm Commitment Stage:

a.All projects shall submit combined Conditional/Firm

Commitment applications.

b.Production staff must provide completed Section 241(f)

processing to AM within 45 days receipt of the

application. Meeting this time frame will provide AM

the necessary lead time to complete their processing

and notify the owner of any deficiencies in the POA

that would prevent its approval (LIHPRHA requires a

Notification of Deficiencies to be mailed to owner

within 60 receipt of POA).

F.Processing Fees - shall be calculated as instructed under VI.

below, Valuation Processing under the POA Stage, paragraphs D and

E.

G.Application Numbering - Follow outstanding instructions in

Handbook 4410.1 REV-2, Project Fiscal Procedures.

H.Previous Participation Clearance - Form HUD-2530 must be

submitted for the Borrower and each Principal of the Borrower

entity, and for the Contractor if substantial rehabilitation is

required.

I.Davis-Bacon Prevailing Wage Requirements - Davis-Bacon applies to

the PCNA when all or any portions of the repairs are financed by

the Section 241(f) equity or acquisition loan. This rule applies

to LIHPRHA eligible low income housing as defined in HUD Handbook

4350.6, Chapter 2.

J.Bond Finance Loans shall comply with the requirements of HUD

Handbooks 4430.1 and 4470.1.

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K.Production Processing Forwarded to AM - Upon completion of MC

Section 241(f) processing, Production will forward a copy of the

complete firm commitment processing of the Section 241(f) loan

(i.e., Forms HUD-92264, HUD-92264-A, PCNA, etc.) to AM. With

this information, AM will reassess incentive eligibilities,

funding limitations, etc. and complete the POA processing.

L.Commitments - When a Section 241(f) equity or

equity/rehabilitation loan is an incentive under the POA, the POA

cannot be approved until the Section 241(f) processing (estimated

operating costs, debt service requirements, etc.) is completed.

Similarly, a Section 241(f) commitment cannot be made, for

example, until the POA Transfer of Physical Asset (TPA)

processing is completed. Accordingly, the Section 241(f)

commitment and POA approval should occur simultaneously to assure

that each document reflects the others finalized processing.

Also, the 241(f) commitment should be issued conditioned upon

verification of Section 8 funding and grant availability (if

applicable) since these processes are completed after POA

approval.

The project closing will include the execution and recordation of

the POA, amended Housing Assistance Payments contract, Use

Agreement, 241(f) loan closing and other documents.

Since AM must complete processing of the POA within 180 days of

receipt of the complete POA submission, the Section 241(f) loan

processing must be completed (approved or rejected) within that

same time frame.

M.Disbursement of Mortgage Proceeds - Funds will be disbursed at

closing to the owner, after establishment of required escrow

deposits, as follows:

1.Repair or substantial rehabilitation costs - Disbursement of

loan proceeds will depend on the nature and extent of the

repair/rehab required:

a.If the scope of work is substantial rehabilitation, and

\(1\) a commitment for insurance of advances was

requested, the substantial rehabilitation portion of

the loan amount will be disbursed in accordance with

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basic 207 requirements; (2) insurance upon completion

was requested for substantial rehabilitation, all rehab

must be completed before initial/final closing.

b.If the scope of the repairs is less than substantial

rehabilitation and all repairs are completed and

accepted by HUD after issuance of the firm commitment,

but prior to initial/final closing, no escrow will be

required for the repair items.

c.If the scope of the repairs is less than substantial

rehabilitation and repairs will be completed after

initial/final closing, an escrow will be established at

closing in an amount equal to 110 percent of the HUD

estimated cost of those repairs to assure completion.

2.Extension Preservation Equity 5-Year Escrow. To assure

continued compliance with Housing Quality Standards (HQS)

during the loan term, an additional escrow will be

established for Section 241(f) equity loans based on 10

percent of the total loan amount. This escrow may be

released upon the expiration of the 5-year period beginning

on the date of initial closing, subject to compliance with

the HQS.

3.Operating Deficit Reserves. Anticipated contingencies, such

as, loss of income due to the construction/repair of units

and limitations in rent contributions for current tenants

(due to rent phase-in requirements) may be covered by

operating deficits funded under Section 241(f).

N.Prepayment Privileges and Charges - Same as those for a Section

207 insured mortgage with the exception that a provision for an

additional charge in the event of prepayment may not be included

in a loan of \$200,000 or less.

O.Latent Defects Guarantee - The owner must provide satisfactory

evidence that repair work is covered by a guarantee, running for

a period of 15 months from the date all repair work is completed,

against defects due to faulty materials or workmanship.

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P.Mortgage Insurance - All projects involving repairs which do not

meet the definition of substantial rehabilitation shall have

commitments for insurance upon completion with a joint

initial/final closing. Projects with substantial rehabilitation

have the option of requesting insurance upon completion or

insurance of advances.

1.Insurance of Advances - Form FHA-2432 will be used for

insurance of advances (at least \$200,000). Special

conditions of the commitment will be addressed in the

processing instructions for each technical discipline.

a.Equity loans - A firm commitment to insure advances

shall be effective for a period of 60 days. This may

be extended in 30-day increments at the discretion of

the State/Area or a total period not to exceed a 180

days from the date of issuance.

b.Acquisition loans - A firm commitment to insure

advances shall be effective for a period of 60 days and

may be extended for up to 30 days at the discretion of

the ASO. However, the commitment shall expire upon

expiration of the POA if the transfer of physical

assets is not completed (within 90 days of approval of

the POA).

2.Insurance Upon Completion - For projects with or without

PCNA repairs, modify Form FHA-2453-MM. Form FHA-2453 shall

be used for substantial rehabilitation projects. A firm

commitment shall be effective for a designated term (2

months beyond estimate to complete repairs) within which the

Borrower is required to begin the rehab/ construction. If

repairs have begun as required, the commitment shall be

effective for an additional period, estimated by the

Commissioner to allow for completion of the rehab.

IV\. Section 241(a) as it Relates to LIHPRHA.

The Housing Act amended Section 241(f) to authorize the Department to

insure Section 241(f) equity and acquisition loans in amounts

sufficient to cover 100 percent of the

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costs to rehabilitate the project plus all related charges. The

inclusion of rehabilitation costs and related charges under Section

241(f) is only permitted in tandem with an equity or acquisition loan.

If a POA does not include an equity or acquisition loan, owners may

apply for a Section 241(a) Supplemental loan to cover 90 percent of

the costs of rehabilitation.

V.Architectural, Engineering and Cost Processing.

Except as modified herein, basic processing shall be in accordance

with the instructions contained in HUD Handbooks 4460.1 REV-1,

Architectural Analysis and Inspections for Project Mortgage Insurance,

4465.1, Mortgage Insurance for the Purchase or Refinancing of Existing

Multifamily Housing Projects Section 223(f) (for projects with or

without repairs), and 4450.1 REV 1, Cost Estimation for Project

Mortgage Insurance.

A.POA Application Processing (Extension or Transfer). Sections

241(f) and 241(a) application exhibits are to be screened to

determine the following:

1.Have all required AE/C processing exhibits been submitted?

2.Has 12 months or more elapsed since the NOI PCNA was

completed?

3.Has there been an occurrence such as a natural disaster

which may have caused damage to the property requiring

reinspection?

4.Are the owner\'s/purchaser\'s scope of repair work and cost

estimates comparable to those included in the NOI PCNA?

5.Have all or a portions of the NOI PCNA repairs been

completed?

6.Has a List of Proposed Improvements been provided?

7.Have existing reserve for replacement account funds been

used to complete NOI repairs?

8.Have waivers been requested which impact the NOI PCNA

results?

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9.Are there outstanding audit findings or findings of

noncompliance with the provisions of the Fair Housing Act,

Section 504 of the Rehabilitation Act, etc., which impact on

processing?

B.Section 241(f) Equity Loan Application Processing.

1.General. AE/C processing of Section 241(f) applications

shall begin immediately upon receipt of a complete

application and the results provided to the Appraisers

within 30 days. Processing shall include a review of the

application submission exhibits. Unless significant

differences, e.g., PCNA repairs and estimated costs, are

noted and require reprocessing, processing will be limited

to modifying the work performed under the NOI stage in

accordance with the instructions contained in attachment 4

of Notice H92-54 and as modified by other outstanding

instructions.

a.Exhibit Review. The AE/C processor must conduct a

review of the required exhibits to determine the

following:

1)Has 12 months or more elapsed since the NOI PCNA

was completed? If so, the property must be

reinspected to determine if the NOI PCNA scope of

repairs are still adequate to place the property

in \"good\" condition. When modifications are

required the NOI PCNA shall be revised

accordingly.

2)Does the owner propose changes to the NOI PCNA?

The decision to modify NOI PCNA processing (work

write-up, cost estimates, replacement reserve

estimate, etc.,) must be based on the validity of

the proposed changes in accordance with program

requirements and standards.

3)Has the appropriate exhibits been submitted to

support proposed changes to the NOI PCNA?

Additional exhibits and/or documentation may be

required at the discretion of the AE/C processor.

4)Has NOI PCNA repairs been completed by the owner?

If so, the PCNA must be modified accordingly. See

b below for further instructions.

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5)Does the owner\'s proposal comply with Section 504

requirements? If not, all appropriate

modifications must be made to assure compliance.

It should be noted that the ultimate decision to

make an inspection and to determine the required

modifications shall be the responsibility of the

Production Chief.

b.ACM Testing. With the exception of abatement repairs

completed prior to the POA submission, projects assumed

to contain ACM at the NOI stage shall be tested. A

Small Purchase Contract for testing shall be procured

upon receipt of the POA. A sample Statement of Work is

being prepared and will be provided to Multifamily

Housing Director.

The AE/C processor shall rely on the expertise and

recommendations of the contractor performing the test.

c.NOI PCNA Repairs (including LBP, asbestos and 504

items) and Replacements Completed Prior to Submission

of a POA Application. Notice H94-42 describes in

detail HUD\'s policy and requirements regarding

commencement of repairs, the applicability of Federal

Labor Standards Provisions, conducting a

preconstruction conference, and using existing project

replacement reserve funds to complete repairs. AE/C\'s

processing responsibilities regarding these matters are

as follows:

1)Reinspect the property to verify the extent of

completion and to determine whether repairs were

made in accordance with acceptable construction

and program standards and practices. If the

inspection reveals that repair(s) work is

unacceptable, the Production Chief shall advise

the owner of such repairs and set a time frame to

correct deficiencies.

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2)Repairs started and completed by an owner without,

1\) requesting and attending a preconstruction

conference, and 2) getting HUD approval of a

written plan for completing repairs are subject to

the provisions of federal labor standards.

a)In such cases, AE/C technical staff shall be

responsible to notify labor relations staff

in writing of noncompliance and of the amount

of unpaid Davis-Bacon wages (see e below). A

copy of the notification letter shall be sent

to labor relations staff and the preservation

coordinator.

b)Labor relations staff shall be responsible

for enforcement of labor standards coverage.

c)PCNA processing shall not be modified to

delete the cost and scope of repairs not

completed (100 percent) in accordance with a

written plan.

d)Valuation will not make an upward adjustment

to the value and equity established during

NOI processing for repairs (including

contracts) not completed in accordance with a

written plan.

e)Supplemental cost estimates (with and without

Davis-Bacon) of repairs completed without

meeting the requirements of 2) above shall be

made. The estimates shall be used to

determine what amount, if any, is needed to

cover the costs of Davis-Bacon wages not paid

to labors performing the work. The amount of

unpaid wages shall be identified in the

Section O, Remarks of Form HUD-92264.

3)When all repairs (required and regulatory) have

been completed and are approved by AE/C, the

provisions of Davis-Bacon are not applicable, even

when the requirements of 2) above are not met.

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a)The PCNA shall be modified to delete the

costs and scope of repairs successfully

completed (100 percent).

b)The value and equity established during NOI

processing will be adjusted upward by

Valuation staff.

4)Distinct and separate repairs identified for

advance completion that were started but not

completed shall be treated as a noncompliance.

This requirement shall include deleting items

completed under separate contract(s) even when

other related and unrelated work items of the

contract have not been completed.

Example:

A separate contract was let by an owner to have 5

distinct and separate repair items completed.

Three of the 5 were completed prior to POA

submission. Only the cost and scope of repairs

for the items completed shall be deleted. The 2

items not completed shall remain in the work

write-up and estimated costs.

The provisions of Davis-Bacon are applicable to

all 5 items.

a)AE/C technical staff shall notify labor

relations staff in writing of noncompliance.

A copy of the notification shall be sent the

Preservation Coordinator.

b)Labor relations staff shall be responsible

for enforcement of labor standards coverage.

c)The PCNA shall be modified to delete the

costs and scope of repairs not successfully

completed (100 percent).

d)Supplemental cost estimates (with and without

Davis-Bacon) of repairs not successfully

completed shall be made.

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The estimates shall be used to determine what

amount, if any, is needed to cover the costs

of Davis-Bacon wages not paid to labors

performing the work. The amount of unpaid

wages shall be identified in the Section O,

Remarks of Form HUD-92264.

e)No adjustment to the value and equity

established during NOI processing will be

made by Valuation staff for repair work not

successfully completed.

5)Repair work successfully completed before

submission of the POA application in accordance

with the written plan shall be excluded from the

scope of repairs and estimated costs. Davis-Bacon

is not applicable.

a)The PCNA shall be modified to delete the

costs and scope of repairs successfully

completed (100 percent).

b)The value and equity established during NOI

processing will be adjusted upward by

Valuation staff.

d.Repair work completed prior to POA submission using

existing replacement reserve funds. An owner may use

funds from a project\'s existing reserve account to

replace items scheduled to be replaced or repaired in

the PCNA work write-up. The AE/C processor must assure

that:

1)Replacements made using these funds are completed

before the owner submits the POA application.

2)Repairs and replacements not completed before the

owner submits the POA application are subject to

the provisions of Davis-Bacon.

a)Labor relations staff shall be notified in

writing of noncompliance.

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b)AE/C and Valuation must adjust the results of

previous PCNA repair and reserve for

replacement processing to include the scope

and costs of work not successfully completed

using reserve funds.

e.Proposals to improve a property. HUD Handbook 4350.6,

chapter 8, provides a method for funding Federal

incentives requested by an owner. HUD may approve

insured rehabilitation loans up to the cost of the

improvements. The intent of the Department is to

permit an owner or purchaser to propose improvements to

improve the economic life of the project and its

livability for the tenants.

Proposals to improve a property are required to contain

a List of Proposed Improvements and estimated cost with

the POA application.

1\) This list may include items that:

a\) Enhance living conditions,

b\) Make a property more marketable,

c\) Extend the life of material,

d\) Enhance security, and

e\) Reduce maintenance cost.

2)Examples of the types of items and improvements

that may appear on the list and should be

considered are as follows:

a)Amenities that do not exist in the project

that are acceptable to HUD.

(1)Items included in HUD\'s List of

Acceptable Amenities are eligible and

will be approved.

(2)Valuation must review items not included

in the preapproved list for

acceptability.

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b)Replacing items that are operational and

functional may be included in the PCNA as a

required repair or may be included in the

computation of the initial deposit to the

reserve account if these items are nearing

the end of their useful life.

c)Upgrading items that currently exist in the

project such as lighting to enhance project

security.

d)Modernization of unit space, i.e., common

areas, kitchens and bathrooms and new

flooring is permitted.

e)Energy upgrades not proposed as a required

repair, i.e., utility conversions, energy

efficient windows, boilers, etc.

3)The list of proposed improvements may not include:

a)Items required by local codes or Housing

Quality Standards that were included in the

NOI PCNA. They must be included in PCNA

required and regulatory repair lists.

b)Known Code violations and other repairs that

inevitably must be made to correct a

condition(s) that threaten or endanger the

successful operation of a project and/or

safety and welfare of the residents. These

are items that were known by an owner or

tenant purchaser, but not disclosed at the

time of the NOI PCNA or certified to.

c)Items completed prior to submitting an

application for a NOI including items

completed using existing project reserve

account funds.

d)New buildings and structural additions to

existing buildings.

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e\) New wallpaper in units.

f)Administratively it has been determined that

certain items shall not be included in the

list of acceptable amenities for any market

area. Ineligible items are,

\- Swimming pools;

\- Jacuzzi;

\- Saunas;

\- Bowling alleys;

\- Decks;

\- Dishwashers;

\- Trash compactors; and

\- Washers and dryers in

individual units.

4)AE/C is responsible for reviewing and approving

the items included in the list of improvements.

Approval will be made at the discretion of the

processor based on, 1) eligibility, 2) benefit to

the project, tenants and HUD, 3) cost

effectiveness, and availability of funds.

5)AE/C determines the reasonableness of the cost

estimate of the items approved by HUD.

a)Estimate the costs (with Davis-Bacon) of

approved improvements.

b)Accept reasonable costs and modify

unreasonable costs.

6)Prepare a separate list of HUD approved proposed

improvements and cost estimate.

f.Substantial Rehabilitation Determination. The AE/C

processor must make a determination of whether the HUD

approved scope of repairs and cost estimate (with

Davis-Bacon) constitutes substantial rehabilitation.

The determination will be used in determining

disbursement of loan proceeds for repair costs, timing

of repairs, inspection fees, escrow requirements, etc.

The definition of substantial rehabilitation included

in HUD Handbook 4460.1, REV-1 shall be used to make the

determination.

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g.Contingency Reserve.

1)When preparing PCNA and HUD approved improvement

estimates include:

a)Substantial Rehabilitation Projects.

Estimate a percentage of 0 to 10 percent in

accordance with the provisions of HUD

Handbook 4450.1 REV 1.

b)Repair Projects. A 10 percent contingency

for all repairs and improvements in nonprofit

transfer projects (Titles II and VI).

c)Substantial Rehabilitation Nonprofit Transfer

Projects. Estimate the contingency reserve

as prescribed in 1) above.

2)Compute the contingency reserve using the cost of

PCNA repairs, the HUD approved Owner\'s List of

Improvements, and appropriate fees. Do not

include the reserve for replacement estimate in

the computation.

h.Prepare Forms HUD-92264, Rental Housing and Project

Income Analysis and Appraisal and FHA-2326, Project

Cost Estimate for each cost estimate (with and without

Davis Bacon when applicable), except Section M, in

accordance with outstanding instructions. Section G of

the 92264 shall include the cost of PCNA required and

regulatory repairs including appropriate fees for

repair and substantial rehabilitation projects.

i.The results of processing shall be forwarded to

Valuation thru the Preservation Coordinator.

1\) Forms 92264 and 2326.

2)Summary of PCNA repairs including processing

modifications.

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3)Revised scope of repairs and estimated costs (with

Davis-Bacon) of required and regulatory repairs,

when applicable.

4)Separate list of required and regulatory repairs

completed by the owner prior to submitting POA.

Identify those completed using existing reserve

for replacement funds.

5)Revised analysis of reserve for replacement

building components and systems, when applicable.

6)List of proposed improvements and estimated costs.

j.Estimate of Progress Schedule. The owner submits an

Estimate of Progress Schedule as part of the submission

requirements. AE/C evaluates the schedule to serve the

needs of the project regarding construction planning.

1\) The schedule shows:

a\) The anticipated start of construction,

b\) The estimated construction time and

c)Whether construction will be performed by a

contractor or project maintenance staff.

2)Owners choosing to start repairs before submitting

an application for a POA should have provided the

Estimate of Progress Schedule with the letter to

HUD requesting a preconstruction conference.

2.Acceptable Amenities. In accordance with the instructions

contained in MCCII, Valuation will develop a List of

Acceptable Amenities for each market area within the ASO\'s

jurisdiction. The POA submission may include a proposed

list of such amenities.

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3.Construction Period - Estimate the length of the

repair/substantial rehabilitation period in months, but not

to exceed 12 months, except for substantial rehabilitation

projects.

4.Property Insurance Schedules - Prepare Form HUD-92329, using

outstanding Section 223(f) instructions to establish the

minimum amount of property insurance required in connection

with the project.

5.Commencement of Repair Work. Work shall begin immediately

after initial endorsement for cases involving substantial

rehabilitation, and firm commitment/final endorsement for

repair projects.

6.Inspection of Repair Work. Inspections are to be performed

and approved by AE/C staff. Inspection of the work shall be

completed as follows:

a.Progress inspections. Where the scope of the repairs

dictates, inspection of work in progress shall be

conducted as follows:

1)In cases where substantial rehabilitation does not

apply, AE/C staff shall determine the need for and

frequency of progress inspections based on the

scope of work to be performed. A minimum of 1

progress inspection shall be made each month and a

final inspection as described in b below.

2)In cases of substantial rehabilitation, it is

required that a supervisory architect be employed

by the owner to perform inspection services in

accordance with the instructions contained in

Chapter 3 of HUD Handbook 4460.1.

b.Repair Completion and Final Inspection Report. Upon

completion of the repair work, a final inspection

report (Form HUD-5379) must be made which indicates

that the work has been satisfactorily completed and is

in compliance with the work write-up, and plans and

specifications, as applicable.

1)In cases where substantial rehabilitation does not

apply, the requirements of Handbook 4565.1,

paragraph 3-10, are applicable.

19

2)In cases with substantial rehabilitation, the

requirements of paragraphs 3-15 and 16 of HUD

Handbook 4460.1, REV-1 are applicable.

7.Escrow Requirements. For all cases not involving

substantial rehabilitation, an escrow account equal to 110

percent of the cost of PCNA repairs shall be established at

closing (see mortgage credit instructions contained in HUD

Handbook 4470.1 REV-2).

8.Cost Certification. The cost certification requirements of

HUD Handbook 4450.1 REV-1, apply to cases involving

substantial rehabilitation.

9.Section 241(f) Endorsement Review. A review shall be

conducted to assure that changes have not been made that

will affect previous AE/C processing.

C.Section 241(a) Rehabilitation Loan Processing. Basic Section

241(a) processing and underwriting requirements apply, except

that the PCNA work performed at the NOI stage shall be used and

testing for asbestos shall be performed.

Unlike Section 241(f), Davis-Bacon applies to all repairs under

Section 241(a) even when completed before the 241(a) submission.

Processing, including the requirements for certifications

(including asbestos), shall be performed accordingly.

VI\. VALUATION PROCESSING OF THE SECTION 241(f) Loan.

A.PURPOSE. The purpose of Valuation processing under the Section

241(f) program for either an equity or acquisition loan is to

determine the gross residential rents required to support:

Equity Loan.

1.debt service on the:

a.equity portion of loan;

b.repairs/rehabilitation portion of loan including

related charges/fees on:

20

1\) PCNA repairs costs with Davis-Bacon,

2)shortfall, if any, in the replacement reserve

account (initial deposit to reserves as determined

by AE/C less the current account balance,

c.Federally-assisted mortgage, and

2.operating expenses, vacancy allowance and debt service

coverages.

Acquisition Loan.

1.debt service on the:

a.acquisition portion of loan (including related

charges/fees for nonprofits);

b.repairs/rehabilitation portion of loan including

related charges/fees on:

1\) PCNA repairs costs with Davis-Bacon,

2)shortfall, if any, in the replacement reserve

account,

c.reimbursement of reasonable transaction expenses

relating to the acquisition of the property, loan

closing and implementation of the POA incurred by

priority nonprofit purchasers including related charges

and fees, and (See E. 1. a. 1) below).

d.Federally-assisted mortgage;

2.operating expenses, vacancy allowance and debt-service

coverages.

B.PROCESSING FORMS.

1.Form HUD-92264, \"Rental Housing Project Income Analysis and

Appraisal\" - Complete following the instructions under D.2.d

and E.3. below to derive the gross annual preservation rent

from residential income to support the operating costs of

the project and the various debt services. At the top of

page 1 indicate \"subsidized\" processing.

21

Under Section O. \"Remarks\", Valuation will provide MC the

net income for the Annual Authorized Return (from line 5e

trial Form HUD-92264A) and the repair/rehabilitation

component before applying the applicable percentage. If the

intent is to sell, Valuation will provide the net income

necessary to support the acquisition loan which will include

rehabilitation costs, transaction costs, etc., if

applicable. Omit under Section O. net income for the

existing Federally-assisted loan(s).

2.Form HUD-92274, \"Operating Expense Analysis Worksheet\", is

used to estimate the project operating expenses based on a

subsidized use. See D.2.d. below for further instructions.

Indicate \"subsidized\" processing at the top of the page.

3.Form HUD-92264-A trial, \"Supplement to Project Analysis\"

(trial), is used to document and derive the Maximum

Insurable Section 241(f) mortgage amount. Follow the

instructions below C. through G. and the appendices 1 to 4

to determine the mortgage amounts based on preservation

value and debt service.

4.Replacement Costs By Formula Rehabilitation Projects

(without BSPRA) to calculate the (trial) maximum extension

rehabilitation loan including related soft costs and the

(trial) maximum acquisition loan including soft costs for

nonprofit purchasers.

C.REVIEW OF PRIOR NOTICE OF INTENT PROCESSING. Key processing

conclusions reached under the NOI stage are reflected on the Form

HUD-9607 (9607) in the project case file. Under the POA stage

the following 9607 estimates should be reviewed for possible

change:

1.Extension and Transfer Preservation Values.

Preservation values were derived under the NOI stage by

deducting PCNA \"required repairs\", hypothetical improvements

and net discounted conversion costs from the unsubsidized

value. The Department has determined that the NOI PCNA

estimate must be reduced to reflect any PCNA required

repairs acceptably completed (as determined by AE/C) prior

to the POA submission. NOI preservation values must be

increased accordingly. Changes in hypothetical improvements

and net discounted conversion costs are not permitted.

22

If as a result of AE/Cs review of the PCNA, repair items

previously identified have further deteriorated, or were

underestimated, and/or new repair items that meet PCNA

criteria have developed, having the effect of increasing the

overall costs of repairs, Valuation will not reduce the NOI

extension and transfer preservation values. However, the

additional PCNA costs will be funded under the

rehabilitation loan.

An exception to this instruction would be warranted if a ASO

had probable cause to believe that a project owner or

representative intentionally did not divulge property

conditions that would otherwise be identified as PCNA

repairs. In such a case, NOI PCNA repairs will be adjusted

to include these repairs. The preservation value will then

be reduced and rehabilitation loan increased accordingly.

For transfer POAs, the level of incentives is based on the

lower of the transfer preservation value, or the purchaser\'s

offering price.

2.Extension and Transfer Preservation Equity. The unpaid

balance of the debt used to determine the extension and

transfer preservation equity at the NOI stage must be

reverified since mortgage payments will have been made. The

equity should be adjusted accordingly.

The appraiser, with input from MC and AM, should project a

target date that the POA and Section 241(f) loan can

foreseeably close. The preservation equity should be based

on the mortgage balance that coincides with the target date.

In the event that a target date is significantly delayed,

the applicant may request that the preservation equity be

reprocessed. The ASO will have the same option when a

target date is significantly expedited.

3.Repairs/Rehabilitation Component of the Section 241(f) Loan.

As mentioned under C.1. above, the owner obtains a larger

preservation value by completing repairs before the POA

submission. Since these repairs should no longer have to be

funded, the previous 9607 rehabilitation component must be

23

adjusted downward or may be altogether deleted. Conversely,

additional PCNA costs identified under the POA stage (also

indicated under C.1), will increase the previously estimated

rehabilitation loan amount.

4.Estimated Operating Expenses based on Subsidized Use. Total

project operating expenses based on a subsidized operation

were estimated under the NOI stage and recorded on the 9607.

Under the POA the previous estimate must be updated if for

time only. Follow the instructions under D.2.d below.

D.DETERMINE EXTENSION PRESERVATION RENTS.

1.Calculate the maximum Section 241(f) equity loan based on

value which may include a rehabilitation loan component.

Enter the results under Criteria 3 of the trial Form

HUD-92264-A or facsimile (see Appendix 1).

a.Calculate the maximum equity component - Use the NOI

extension preservation equity as a beginning point and

adjust if necessary in accordance with C.1 and 2 above.

Multiply this amount by 70 percent to derive the

maximum equity component. Soft costs on the equity

component are not funded under Section 241(f).

b.Calculate the maximum repairs/rehabilitation component

Under extension processing the rehabilitation loan

component will include 100 percent of the PCNA repairs

costs (required and regulatory repairs with Davis-Bacon

and any reserve for replacement shortfall), less any

grants/loans attributable to the repair work or

shortfall, plus soft costs or related charges and fees

on the PCNA total that must be paid at loan closing.

Interest, taxes, and insurance soft cost will be paid

from Section 8 rents as they become due.

Use the Replacement Cost by Formula Rehabilitation

Projects (without BSPRA) provided in the Multifamily

Underwriting Forms Catalog (HUD Notice 93-93) and the

supplemental instructions immediately below on

fees/charges

24

to compute the rehabilitation loan amount including

related soft costs. Complete Section G of Form

HUD-92264 using the formula derived mortgage amount

rounded to the next lower \$100 multiple. The Total

Estimated Replacement Costs (PCNA repairs, replacement

reserve shortfall, if applicable, and related soft

costs) should correspond approximately to the total

project costs found by formula. Record the (trial)

maximum rehabilitation loan component under Criteria 3

of the trial Form HUD-92264A following Appendix 1

format as a guide. If a Section 241(f) equity loan is

not requested, PCNA repairs (not shortfall in

replacement reserve) may be funded under Section 241(a)

outstanding instructions.

PCNA Repairs less than substantial rehabilitation.

The following fees/charges are calculated based on the

total costs of PCNA repairs only.

1\) G 50 and 52 completed by AE/C.

2)G 56 - Mortgage Insurance Premium (MIP) - MIP

shall be calculated on the basis of .5 percent.

3\) G 57 - Examination Fee is 0.3 percent.

4)G 58 - FHA Inspection Fee is 1 percent of total

repairs Line 50 with a minimum fee of \$500.

5)G 59, Financing Fee and G 61 FNMA/GNMA Fee -

Aggregate fee can not exceed 3.5 percent.

6)G 62 - Title and Recording - costs associated with

the repair loan.

7)G 64 thru G 66, Legal, Organization and Audit -

Audit costs are not covered since a cost

certification of repairs is not required.

8)Relocation Costs - if applicable are limited to

\$500/unit. Insert in Line G. 68 in lieu of

Builder and Sponsor Profit Risk.

25

9)Shortfall in Reserve for Replacement Account -

Insert in Line G. 70 in lieu Supplemental

Management Fund.

10)G. 71 - Contingency Reserve - The amount is

provided by AE/C under the \"Remarks\" section of

the Form HUD-92264 for nonprofit purchasers only.

PCNA Repairs Equal Substantial Rehabilitation Projects

To compute soft costs on substantial rehab repairs

costs follow the above instructions except for the

following exceptions:

1)G 56 & G 58 - MIP & FHA inspection fee computed

in accordance with the Multifamily Underwriting

Forms Catalog instructions for a substantial

rehabilitation project.

2)G 64 thru 66 - Legal, Organization, Audit - audit

costs associated with certifying PCNA sub rehab

repairs are an eligible soft costs.

3)G 71 - Contingency Reserve - The amount is

provided by AE/C under the \"Remarks\" section of

Form HUD-92264 for both extension and transfer

substantial rehabilitation POAs.

2.Calculate the total net income including debt service

coverages required to support the Section 241(f) equity

component, rehabilitation component and debt service on the

existing loan. Enter the results under Criteria 5 of a

trial Form HUD-92264-A or facsimile (see Appendix 2).

a.Equity Component. Valuation will insert in 5e, the

requested Annual Authorized Return (maximum is 8

percent times the Extension Preservation Equity).

Multiply that result by 90 percent and place in 5e, Col

2\.

Divide that result by the debt service rate based on

the requested interest rate and a loan term up to a

maximum of 40 years, but not less

26

than 20 years, which will support the amount determined

in Criterion 3. If the term is 26 years and 5 months,

round up to 27 years for the term. Insert that result

in 5, Col. 3. Record the amortization terms in the

Remarks Section of the Form HUD-92264.

b.Repairs/Rehabilitation Component. Valuation will add

to the amount in 5, Col.3, 100 percent of the

replacement costs less any grants/loans attributable to

the repair work and/or shortfall as entered in Criteria

3\. Using the same debt service rate used in the

calculation of the equity portion of the loan, multiply

the repair portion of the loan and add that result to

the amount in 5e, Col.2. Divide the debt service

amount for the repair loan by 95 percent and add it to

the amount already in 5e. Place this total figure in

the remarks section of the Form HUD-92264 and label it

for MC \"Net Income for Section 241(f) loan.\"

c.Debt Service on Existing Loan. Obtain the annual debt

service on the existing loan (without the subsidy

payment) from AM and enter this amount on a separate

line under Col. 2. Divide the existing debt service by

95 percent and add the results to the amount already in

5e.

d.Calculate the gross monthly residential rents required

to support the total debt service and debt service

coverage under a through c above, operating expenses

and vacancy/collection losses less commercial income.

This is chiefly primarily a mechanical process that

entails backing into the gross monthly residential rent

(Section C of Form HUD-92264). The only analysis

involved in this process will be the estimation of

project operating expenses.

Occupancy Rate

The occupancy rate is always 97 percent. A high

occupancy percentage is anticipated due to the

significant number of Section 8 eligible tenants at

each project. Additionally, moderate income tenant

rents are capped at the Project Specific Rents (see I.

below) which should also sustain a high project

occupancy rate.

27

Operating Expenses

Project operating expenses based on a subsidized

operation were estimated under the NOI stage and

recorded on the 9607. Under POA processing the

previous estimate must be updated if for time only.

Again, the Form HUD-92274, Operating Expense Analysis

Worksheet, is used to estimate the project expenses.

Project historical expenses and market rate comparables

should be considered to derive the subsidized expense

estimate.

The rate of annual deposit to the replacement reserve

account is estimated by a collaborative effort between

AM and AE/C. The annual deposit to the replacement

reserve estimate will take into consideration the

status of the reserve account, condition of the

property, management\'s track record, etc., as opposed

to the a formula of .006 multiplied by the total PCNA

costs.

Tax Abatement

In the unlikely event that a property is granted a tax

abatement for some period(s) commencing with or within

the amortization term of loans approved in association

with the POA, contact the Valuation staff of

Headquarters Technical Support Division for processing

instructions.

E.DETERMINE TRANSFER PRESERVATION RENTS.

1.Calculate the maximum Section 241(f) acquisition loan based

on value, which may include rehabilitation and transaction

loan components. Enter the results under Criteria 3 of the

trial Form HUD-92264-A or facsimile (see Appendix 3).

a.Calculate the maximum Section 241(f) acquisition loan

including soft costs for nonprofit purchasers.

Use the Replacement Cost by Formula Rehabilitation

Projects (without BSPRA) to calculate the (trial)

maximum acquisition loan amount including soft costs.

Soft costs identified under D.1.b. above, for extension

28

repair/rehabilitation loans, may also be applied to

calculate the soft costs on acquisition loans. The

acquisition loan is comprised of 95% of the

preservation equity, 100% of any nonprofit transaction

costs, and PCNA repairs if applicable, less any

grants/loans for mortgageable items. The current

balance in the replacement reserve account stays with

the project, accordingly, the PCNA or the Section

241(f) loan may only include a shortfall in the

replacement reserve.

Interest, taxes and insurance soft costs are not funded

under the acquisition loan but will be paid from

Section 8 rents as they become due. Under the

Replacement Cost by Formula 95% of the transfer

preservation equity and 100% of any transaction costs

are \"known costs\". \"Total for All Improvements\" should

reflect 100% of PCNA repairs costs plus any reserve

shortfall. The Subtotal of Unknown Fees are carried

forward at 100%.

Complete Section G of Form HUD-92264 using the formula

derived mortgage amount rounded to the next lower \$100

multiple. The Total Estimated Replacement Costs, line

74, should correspond approximately to the total

project costs found by formula. Record the (trial)

maximum repairs/ rehabilitation loan component under

Criteria 3 of the trial Form HUD-92264A following

Appendix 3 format as a guide.

1)Determine transaction expense to include on Line

53 (eligible for nonprofits only).

Loans for Priority Purchasers. HUD will fund

approved transactional expenses (reasonable

expenses associated with the acquisition, loan

closing and implementation of the POA) and soft

costs associated with the transactional costs.

Listed below are reasonable transaction costs and

how they are handled:

Reasonable Transactional Costs included in the

Section 241(f) Loan but not normally included in

HUD Processing.

29

a.Bond Fees and Discounts Included in the

Mortgage Transaction.

1)Where a project is to be financed

through the sale of either taxable or

tax-exempt bonds, the maximum financing

fees allowable in the mortgage

computation and recognizable for cost

certification purposes is 5.5 percent of

the mortgage amount. Any cost beyond

the 5.5 percent must be paid from

sources outside the mortgage.

A typical but not inclusive list of bond

fees would contain, Trustee setup,

underwriter\'s fee, underwriter\'s

counsel, bond counsel, issuer\'s initial

fee, bond printing expense, rating

agency fee, negative arbitrage and a 1

percent assignment escrow.

The maximum financing fee the mortgagee

may retain for its own account is 3.5

percent. This 3.5 percent covers the

costs of origination, processing,

underwriting, closing and delivery

(including the mortgagee\'s legal fees),

escrow monitoring, permanent placement,

etc. The remaining 2 percent (or such

greater percentage as may result from

the lender reducing its maximum

retainable 3.5 percent fee) may be used

to offset the cost of bond fees.

2)Discounts will be recognized only for

those actual costs charged by the

permanent lender which are determined to

be eligible.

a)Discounts charged for warehousing a

mortgage for future delivery as

well as those which may be charged

by the interim lender are not

eligible for inclusion in the

determination of the maximum

insurable mortgage.

30

b)Discounts must be reasonable based

on current market conditions. In

some cases, discounts are used to

buy down the permanent rate to a

below market rate. This has the

affect of inflating a project\'s

value and mortgage while placing an

undue risk on the insurance fund.

Therefore, do not include in the

mortgage computation discounts

incurred in a buy down situation

that exceed reasonable discounts

based on current market interest

rate levels.

b.Environmental studies prepared for the

purchaser\'s benefit.

c.Operating Deficit Reserves for anticipated

contingencies, such as, loss of income due

to:

1)construction/repair of units - this is

more of a consideration for substantial

rehabilitation cases where tenants must

be temporarily housed away from the

project.

2)limitations in rent contributions for

current tenants (due to rent phase-in

requirements) - preservation law

requires rent increases of more than 10

percent resulting from preservation

processing to be phased in. The project

owner completes the calculation of

tenant rent phase-in accordance with

Notice H92-100, Phase-in Tenant Rents

After Plan of Action Implementation. AM

reviews the phase-in calculation for

accuracy and compliance and will

indicate to Valuation and MC the

appropriate phase-in amount to include

in the acquisition loan.

31

d.Relocation Allowance. The priority purchaser

must submit a relocation plan. The Community

Planning and Development relocation

specialist will review and analyze the plan.

An allowance for relocation costs (not to

exceed a total of \$500 per household to be

relocated) may be included in the loan.

e.Construction manager/clerk of the works where

there is a repair program. The scope of this

function is detailed in AIA Document B352

under \"Duties, Responsibilities and

Limitations of Authority of the Architect\'s

Project Representative.\"

f.Organizational costs incurred in establishing

the nonprofit purchasing organization.

g.Tenant training and education costs incurred

by a priority purchaser which is not a

resident council purchasing the project under

a homeownership plan, may be reimbursed

depending on the need for the training and

the reasonableness of the costs.

NOTE: Seller financing is not permitted to

cover these transaction costs.

2)Determine PCNA repairs costs to include on Line

53\.

The total of PCNA repairs and any shortfall in the

replacement reserve account.

b.Calculate the maximum Section 241(f) acquisition loan

including soft cost for profit purchasers.

Soft costs on the PCNA repairs and/or shortfall in the

replacement reserve account are covered under the

Section 241(f) loan for profit purchasers.

Charges/fees on the acquisition loan are not covered.

Compute the soft costs on the PCNA repairs and/or

shortfall as instructed under D.1.b above for extension

preservation

32

rents. Add the rehabilitation component with soft

costs to the acquisition component without soft costs

to derive the maximum acquisition loan for profit

purchasers.

2.Calculate the total net income including debt service

coverages required to support the maximum acquisition loan

(includes acquisition and rehabilitation, transaction loan

components if applicable) and debt service on the existing

loan. Enter the results under Criteria 5 of a trial Form

HUD-92264-A or facsimile (see Appendix 4).

a.Maximum Acquisition Loan - Valuation will insert in 5h,

Col.3 the maximum Section 241(f) acquisition loan

amount computed in accordance with E.1.a.or b.

immediately above for Criterion 3. Multiply that

amount by the debt service rate based on the requested

interest rate and a loan term of 40 years. Place that

result in 5e, Col.2. Divide that amount by 95 percent

to determine the net income required to support the

Acquisition loan and place in 5e.

b.Debt Service on Existing Loan. Obtain the annual debt

service on the existing loan (without the subsidy

payment) from AM and enter this amount on a separate

line under Col. 2. Divide the existing debt service by

95 percent and add the results to the amount already in

5e.

3.Calculate the gross monthly residential rents required to

support the total debt service and debt service coverage

under 2 above, plus operating expenses and

vacancy/collection losses less commercial income. If tax

abatement is involved, contact Headquarters for further

direction. To derive the gross monthly residential rents

follow the instructions under extension processing (D.2.d.).

The only exception would be to add oversight costs

(discussed below) as an operating expense if applicable.

4.OVERSIGHT COSTS.

Section 307(b) of the 1992 Housing and Community Development

Act added Oversight Costs as an allowable annual expense for

nonprofit purchasers of

33

Preservation properties. The regulation published July 13,

1993, defined oversight costs to include staff, overhead, or

third-party contract costs for ensuring adequate

participation by the board of directors, facilitating

long-range planning by the board of directors, and assisting

owners in complying with regulatory, use, loan and grant

agreements. It is the intent of the regulations to provide

the nonprofit sponsor with financial/ technical assistance

so that the board of directors can make reasonable,

informed, ownership decisions, primarily as they relate to

overseeing the management company.

The Department believes that oversight staff should not be

duplicating activities that are the responsibility of the

management agent, but acknowledges that owner/board

training, capacity building and expert assistance, as well

as supportive service coordination to the residents are

required in these situations.

Therefore, limitations on oversight costs will be set as

follows:

a.The annual oversight costs may not exceed the greater

of:

1\) \$10,000, or

2)One percent of the project\'s preservation value.

b.Additional expenses may be occasionally allowed, as

required, for maintenance of the nonprofit organization

itself, including changes in organizational documents

(articles and by law amendments). Tax returns, audits,

or other required annual filings will be allowed as an

annual expense.

The Director of Multifamily Housing has the authority

to adjust these standards based on the actual and

demonstrated costs for these services.

AM will provide Valuation with the determination of the

oversight costs to be included in the estimate of total

project operating expenses.

34

Whoever is hired to provide the oversight function may

not have any identity of interest with the seller, the

former or present management agent, nor with any member

of the board of directors of the mortgagor entity.

Upon a 90-day notice project oversight funds will be

disallowed as an annual expense if there is less than

satisfactory management or maintenance or physical

maintenance of the project.

F.Subsidy Layering Review (SLR) Instructions - Preservation and Low

Income Housing Tax Credits (LIHTCs).

See Notice titled Subsidy Layering Review Authority - Special

Instructions which will be issued shortly. For cases that need

to be processed before instructions are available request

guidance from Headquarters Technical Support Division.

G.Partially Assisted Projects.

Title VI eligibility also extends to certain projects wherein

only a portion of the units may benefit from a form of HUD

assistance at the time of the POA submission. A partially

assisted project, for the purpose of this discussion, is a

project that HUD does not insure, but typically contracts with a

State agency to provide Section 236 mortgage interest subsidy and

rental assistance under the Rent Supplement or Rental Assistance

Payments programs for a specified number of units. The HUD

assisted tenants pay the Section 236 Basic Rent (covers 1 percent

of the mortgage interest rate on existing loan, operating

expenses and return) up to the Section 236 Market Rent (same as

Basic but covers the total interest rate). If the HUD assisted

tenant cannot pay the Basic Rent HUD rental assistance covers the

difference. Rents paid by HUD assisted tenants in excess of the

Basic Rent belong to HUD. The State agency provides financing

for the project and determines the unassisted unit rent amounts.

While the entire partially assisted project is eligible for a

Section 241(f) equity loan, preservation program incentives

approved in exchange for extension of affordability restrictions

are awarded proportionately

35

to the assisted units only. The assisted portion of the project

is represented by the \"Assisted Unit Fair Share Factor\" (see 1.

below). To assure that HUD subsidies do not support a

disproportionate share of the operating costs and Section 241(f)

loan debt service, the following instructions apply.

1.Calculate the assisted unit fair share percentage factor.

The date of the POA submission shall be the effective date

of the processing. The effective date must be stated in the

Remarks Section of the Form HUD-92264. AM will provide

Valuation the Basic unit rent amounts for the HUD assisted

bedroom types and the State agency unassisted unit rents as

of the POA submission. This rent data will either be on

file in AM or the State agency must be contacted. HUD

assisted rents in excess of the Basic Rents are not used to

determine incentives since they are in excess of the owners

operating costs or as indicated above belong to HUD. The

appraiser will determine the percentage of gross monthly

residential income attributable to the HUD assisted units.

This percentage will be used to determine the fair share of

vacancy/collection losses, operating costs and Section

241(f) debt service to be supported by the new subsidized

rent structure under the POA and establishes the basis for

proportionality.

For example:

10 Assisted (236) 1 BRs @ \$454/mon. = \$ 4,540

30 Assisted (236) 2 BRs @ \$504/mon. = 15,120

10 Assisted (236) 3 BRs @ \$554/mon. = 5,540

25 Unassisted 1 BR\'s @ \$515/mon. = 12,875

25 Unassisted 2 BR\'s @ \$605/mon. = 15,125

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

Monthly Gross Residential Income (MGRI) \$ 53,200

\$25,200/\$ 53,200 = 47% Assisted Unit Fair Share

Factor

53% Unassisted Unit Percent

of Operating Expenses

2.Calculate the debt service mortgage supported by the fair

share percentage of assisted unit net income and unassisted

unit net income.

36

Step 1. Calculate the assisted unit net income without

adjustment for fair share percentage.

No. of Assisted Gross Monthly

Assisted Units Unit Rent Assisted Rent

10 1BRs (236) @ \$454/mon. = \$ 4,540

30 2BRs (236) @ \$504/mon. = 15,120

10 3BRs (236) @ \$554/mon. = 5,540

1\. Gross Monthly

Assisted Rent\...\...\...\...\...\...\.... \$ 25,200

2\. Annualized\...\...\...\...\...\...\...\.... x 12

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

3\. Gross Annual Assisted Income\...\.... \$ 302,400

(Line 1 multiplied by Line 2)

4\. Assisted Occupancy Factor\...\...\.... x .97

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

5\. Effective Gross Income

Assisted Units\...\...\...\...\...\...\... \$ 293,328

(Line 3 multiplied by Line 4)

6\. Total Project Oper. Exp\...\...\...\... 270,000

7\. Assisted Unit Exp. Factor\...\...\.... x .47

(as Fair Share Percentage) \_\_\_\_\_\_\_

8\. Oper., Exp., Applicable to

Assisted Units\...\...\...\...\...\...\... 126,900

(Line 6 multiplied by Line 7)

9\. Assisted Unit Net Income Without

Adjust. for Fair Share Percentage

(Line 5 minus Line 8)\...\...\...\..... \$ 166,428

Step 2. Calculate the unassisted unit net income.

The unassisted units rents are set by the State agency.

AM will provide Valuation this information.

No. of Unassisted Gross Monthly

Unassisted Units Unit Rent Unassisted Rent

25 - 1 BRs @ \$515 = \$ 12,875

25 - 2 BRs @ \$605 = \$ 15,125

37

1\. Gross Monthly

Unassisted Rent\...\...\...\...\...\..... \$ 28,000

2\. Annualized\...\...\...\...\...\...\...\.... x 12

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

3\. Gross Annual Unassisted Income\..... 336,000

(Line 1 multiplied by Line 2)

4\. Unassisted Occupancy Factor\...\..... x .93

(based on market data) \_\_\_\_\_\_\_

5\. Effective Gross Income

Unassisted Units\...\...\...\...\...\.... 312,480

(Line 3 multiplied by Line 4)

6\. Total Project Oper., Exp.,\...\...\... \$ 270,000

7\. Unassisted Percentage\...\...\...\..... x .53

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

8\. Oper., Exp., Applicable to Unassisted

Units\...\...\...\...\...\...\...\...\...\... 143,100

(Line 6 multiplied by Line 7)

9\. Unassisted Unit Net Income\...\...\... \$ 169,380

(Line 5 minus Line 8)

Step 3. Calculate the fair share percentage of

assisted unit net income.

1\. Assisted Unit Net Income\...\...\..... \$ 166,428

2\. Unassisted Unit Net Income\...\...\... 169,380

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

3\. Total Project Net Income\...\...\..... 335,808

(Line 1 plus Line 2)

4\. Fair Share Percentage Factor\...\.... x.47

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

\* 5. Fair Share Percentage of Assisted

Net Income (Line 3 multiplied by

Line 4)\...\...\...\...\...\...\...\...\.... \$ 157,830

\* Use the lower of Line 1 or Line 5.

Step 4. Calculate the debt service mortgage reflecting

the fair share percentage of subsidized net

income.

38

1\. Fair Share % of Assisted Unit

Net Income\...\...\...\...\...\...\...\.... 157,830

(From Step 3)

2\. Unassisted Unit Net Income\...\...\... 169,380

3\. Total Project Net Income\...\...\..... 327,210

(Line 1 plus Line 2)

4\. Section 241(f) Loan Ratio\...\...\....

x .90

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

5\. Total Project Net Income

Available for Debt Service\...\...\... \$ 294,489

6\. Existing Mortgage Debt Service\..... 60,000

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

7\. Debt Service Available for

Section 241(f) Loan\...\...\...\...\.... \$ 234,489

(Line 5 minus Line 6)

8\. Section 241(f) Loan Debt Service

Rate\...\...\...\...\...\...\...\...\...\.... /.109138788

9\. Criterion 5 Debt Service Mtge Based on

Fair Share % of Subsidized Net Income

and Unassisted Unit Rents\...\...\.... \$ 2,148,500

10\. Criterion 3 Mtge Based on Equity Value

and Total Costs of PCNA Repairs (not

previously presented)\...\...\...\..... \$ 2,300,000

H.Personal Benefit Expenses.

On a separate page, provide AM a calculation of the tenant paid

expenses (utilities) both monthly and annual for both extension

and transfer cases.

I.Project Specific Rents (PSRs)

The PSRs were created to prevent the flight of moderate income

tenants that have been required to pay the FMR even when it was

higher than the local market rent for a comparable unit.

In instances where the owner advises AM that he/she believes the

FMRs or the tenant\'s adjusted monthly income exceeds the PSRs,

the owner must submit

39

comparables as justification. AM will request Valuation to make

a determination. This determination may be made before POA

approval and continue annually with each general project rent

increase.

PSRs are derived from a market comparability analysis that is

based on the actual project characteristics (as opposed to

prevailing amenities), including any PCNA/POA repairs that are to

be completed. In lieu of starting this analysis from scratch,

Valuation may use the NOI HUD contract appraisal unsubsidized

rents (or FCL PMRs if they were done) substituting hypothetical

upgrade improvements or prevailing amenities for the subject\'s

actual characteristics plus any PCNA improvements.

J.Commercial Leases - Conclusions reached under the POA stage with

regard to estimates of commercial income, occupancy and the

effect of commercial leases on project expenses are incorporated

in the \"subsidized\" processing.

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

Assistant Secretary for Housing-

Federal Housing Commissioner

40

APPENDIX 1

CALCULATE THE MAXIMUM SECTION 241(f) EQUITY LOAN

BASED ON VALUE

FORM HUD-92264A (TRIAL)

Criteria 3

NOI Extension Preservation Value\...\...\...\...\...\...\...\.... \$
4,650,000

NOI PCNA Required Repairs 100% Complete

at POA Submission\...\...\...\...\...\...\...\...\...\...\...\...\.... +
100,000

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

POA Adjusted Extension Preservation

Value\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\...\....
4,750,000

Less All Debt Secured by Property

Updated as of the POA Submission\...\...\...\...\...\...\...\....
1,000,000

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

Extension Preservation Equity\...\...\...\...\...\...\...\...\.... \$
3,750,000

Extension Loan Ratio\...\...\...\...\...\...\...\...\...\...\...\.... x
.70

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

Maximum Equity Loan Component\...\...\...\...\...\...\...\...\.... \$
2,625,000

Maximum Repairs/Rehabilitation Loan Component:

Includes 100% Cost of PCNA Required Repairs,

Regulatory Repairs w/Davis-Bacon, Replacement

Reserve Shortfall and Related Charges/Fees\...\...\...\...\... + 250,000

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

Maximum Section 241(f) Equity Loan\...\...\...\...\...\...\..... \$
2,875,000

41

APPENDIX 2

CALCULATE THE MAXIMUM SUPPORTABLE SECTION 241(f) EQUITY LOAN

BASED ON DEBT SERVICE

FORM HUD-92264A (TRIAL)

Criteria 5

Line 5e. Col. 2. Col. 3.

Net Income

Loan Before Debt Mtge.

Net Income Ratio Service DSR Amount

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

(Equity Component)

\* \$300,000 x .90 = \$ 270,000 /.10221891 = \$ 2,641,300

(Rehab. Component)

26,900 x .95 = 25,555 /.10221891 = \$ 250,000

(Existing Debt Serv)

\# 73,685 x .95 = 70,000

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

\$400,585\...\...\.... Total Net Income Needed to Support Debt

Service and Debt Service Coverage.

\*Net Income is equivalent to the Annual Authorized Return (AAR) or 8

percent of Extension Preservation Equity in Appendix 1.

#Included to derive the total extension preservation rent to compare to

the Federal Cost Limits.

Adjusting the Debt Service Rate (DSR) to Support a Maximum 70 Percent of

Preservation Equity

The owner was able to obtain financing at 9%. However, the DSR based on
9%

@ 40 years has the effect of capitalizing the net income before debt

service into a loan amount that far exceeds the maximum equity component
of

\$2,625,000 derived in Appendix 1. In this situation adjust the term

(rounded to the nearest whole year but not less than 20 years) to
compute a

DSR that most nearly results in the maximum equity loan component. In
the

above example, the AAR is sufficient net income, based on a term of 29

years, to service a loan slightly in excess of the maximum. Accordingly,

it will be adequate to debt service \$2,625,000.

42

APPENDIX 3

CALCULATE THE MAXIMUM SECTION 241(f) ACQUISITION LOAN

BASED ON VALUE

FORM HUD-92264A (TRIAL)

Criteria 3

NOI Transfer Preservation Value\...\...\...\...\...\...\...\..... \$
4,650,000

PCNA Required Repairs 100% Complete

at POA Submission\...\...\...\...\...\...\...\...\...\...\...\...\.... +
100,000

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

POA Adjusted Transfer Preservation Value\...\...\...\...\..... 4,750,000

Less Debt of All Federally-Assisted

Mortgages Updated at POA Submission\...\...\...\...\...\...\....
1,000,000

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

Transfer Preservation Equity\...\...\...\...\...\...\...\...\..... \$
3,750,000

Transfer Loan Ratio\...\...\...\...\...\...\...\...\...\...\...\..... x
.95

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

Acquisition Loan Component\...\...\...\...\...\...\...\...\...\.... \$
3,562,500

Repairs/Rehabilitation Loan Component:

Includes 100% Cost of PCNA Required Repairs,

Regulatory Repairs, Replacement Reserve

Shortfall

Purchaser\...\...\...\...\...\...\...\...\...\...\..... \$ 240,000

Less Grants/Loans for reserves for

replacement not transfer by seller\...\...\.... 50,000 190,000

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

Transaction Expense Loan Component:

Provides Reimbursement of Specific

Transaction Expenses Relating to the

Acquisition of the Property, Loan Closing

and Implementation of the POA\...\...\...\...\...\...\...\...\.... 9,000

Related Charges/Fees on 3 Loan Components\...\...\...\...\.... 11,000 \*

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

Maximum Section 241(f) Acquisition Loan\...\...\...\...\...\... \$
3,772,500

\*Soft costs do not have to be broken out in actual processing.

43

APPENDIX 4

CALCULATE THE MAXIMUM SUPPORTABLE SECTION 241(f) ACQUISITION LOAN

BASED ON DEBT SERVICE

FORM HUD-92264A (TRIAL)

Criteria 5

Line 5e. Col. 2. Col. 3.

Net Income

Loan Before Debt \* Mtge.

Net Income Ratio Service DSR Amount

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

\$387,429 x .95 = \$ 368,058 /.09756338 = \$ 3,772,500 \*\*

(Existing Debt Serv)

\# 73,685 x .95 = 70,000

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

\$461,114\...\...\.... Total Net Income Needed to Support Debt

Service and Debt Service Coverage.

\*Each component of the acquisition loan is based on the same

amortization term of 40 years and debt service rate.

\*\*Example mortgage amount reflects combined acquisition,
rehabilitation

and transaction loan components and associated soft costs derived

under Appendix 3.

#Included to derive the total transfer preservation rent to compare to

the Federal Cost Limits.

44

APPENDIX 5

SECTION 241(F) APPLICATION EXHIBIT LIST

UNDER

LOW INCOME HOUSING PRESERVATION AND

RESIDENT HOMEOWNERSHIP ACT OF 1990

1.APPLICATION FORM HUD-92013 SUBMITTED BY HUD APPROVED MORTGAGEE

FOR FIRM COMMITMENT. THE FORM HUD-92013 MUST BE SIGNED BY THE

MORTGAGEE.

2.APPLICATION FEE OF \$3 PER THOUSAND OF THE REQUESTED MORTGAGE

AMOUNT FOR FIRM.

3.ANALYSIS OF BALANCE IN ALL PROJECT ESCROW ACCOUNTS.

4.FORM HUD-2530 FOR MORTGAGOR ENTITY AND ALL PRINCIPALS.

5.FORM HUD-92013 SUPPLEMENT FOR MORTGAGOR ENTITY AND ALL

PRINCIPALS.

6.FORM HUD-92013-E SUPPLEMENT TO HUD-92013 (IF APPLICABLE).

7.ORIGINAL CREDIT REPORTS ORDERED BY MORTGAGEE ON MORTGAGOR ENTITY

(COMMERCIAL) AND ALL PRINCIPALS (INDIVIDUAL).

8.WORK WRITE-UP DESCRIBING THE SCOPE OF REPAIRS AND/OR REHAB. IF

DIFFERENT FROM PCNA PERFORMED BY HUD, IDENTIFY ITEMS ADDED AND

DELETED WITH JUSTIFICATION AND SUPPORTING DOCUMENTATION (e.g.,

plans and specifications).

9.PLANS AND SPECIFICATIONS IF REQUIRED BY HUD AE/C STAFF.

10.COST ESTIMATES. IF DIFFERENT FROM PCNA PERFORMED BY HUD,

IDENTIFY DIFFERENCES AND PROVIDE JUSTIFICATION AND SUPPORTING

DOCUMENTATION (e.g., unit cost, quantities, etc.).

11.RESERVE FOR REPLACEMENT ANALYSIS. IF DIFFERENT FROM PCNA

PERFORMED BY HUD, IDENTIFY DIFFERENCES AND PROVIDE JUSTIFICATION

AND SUPPORTING DOCUMENTATION (e.g., descriptions, unit cost,

quantities, etc.).

12.LIST OF PCNA REPAIRS COMPLETED PRIOR TO POA APPLICATION

SUBMISSION INCLUDING:

45

A.STATEMENT THAT A PRECONSTRUCTION CONFERENCE WAS HELD AND

DATE OF CONFERENCE AND COMMENCEMENT OF REPAIRS;

B.COPY OF OWNER\'S WRITTEN PLAN FOR COMPLETING REPAIRS APPROVED

BY HUD; AND

C.LIST OF REPAIRS COMPLETED USING EXISTING PROJECT REPLACEMENT

RESERVE FUNDS.

13.LIST OF PCNA REPAIRS STARTED BUT NOT COMPLETED. IDENTIFY THOSE

STARTED BUT NOT COMPLETED USING EXISTING RESERVE FOR REPLACEMENT

FUNDS.

14.LIST OF PROPOSED IMPROVEMENTS IF RECOMMENDED.

15.ESTIMATE OF PROGRESS SCHEDULE.

16.THE FOLLOWING EXHIBITS ARE REQUIRED AS PART OF THE OWNER\'S POA

SUBMISSION.

A.LAST 3 YEARS FINANCIAL STATEMENTS (FORMS HUD-92410).

B.OUTSTANDING BALANCE OF EXISTING MORTGAGE.

C.ANNUAL PHYSICAL INSPECTION REPORT IF SUBSEQUENT TO THE

NOTICE OF INTENT SUBMISSION.

D.COMPLETE DESCRIPTION OF ASSISTANCE PROVIDED BY STATE AND

LOCAL GOVERNMENTAL AGENCIES.

E.CERTIFICATION OF THE OWNER\'S INTENT TO USE LOW INCOME

HOUSING TAX CREDITS.

F.AVAILABILITY OF TAX ABATEMENT AND DETAILS, IF KNOWN.

17.PRODUCTION BRANCH MUST OBTAIN A COPY OF THE PLAN OF ACTION

INCLUDED WITH THE SUBMISSION AND A COPY OF THE APPROVED PLAN OF

ACTION IDENTIFYING ALL TERMS AND CONDITIONS PRIOR TO COMPLETION

OF PROCESSING OF THE SECTION 241(F) LOAN.

18.PHASE IN RENT SCHEDULE.

19.FOR GENERAL CONTRACTORS OR FOR PURCHASERS THE REQUIRED EXHIBITS

LISTED IN PARAGRAPH 2-1 B.2. OF 4470.1.

A complete POA copy must be provided AE/C, Valuation and MC.

46