4571.1 REV-2

CHAPTER 5

CHAPTER 5. PRESUBMISSION ACTIVITIES, SUBMISSION AND PROCESSING OF

REQUEST FOR CONDITIONAL COMMITMENT FOR DIRECT LOAN FINANCING

SECTION 1. GENERAL

5-1. PROCESSING STAGE AND VARIATION. Once the Borrower has received a

Fund Reservation, and notified the Field Office of its acceptance,

each Borrower is required to submit a Request for a Conditional

Commitment for Direct Loan Financing, using HUD-92013.

a\. Exception for Projects Involving New Construction. If a

Borrower wants to by-pass the Conditional Commitment Stage and

proceed directly to the Firm Commitment Stage, it must request

permission to do so from the Housing Director and must provide

evidence in its request that it is capable of doing so.

b\. No Exception for Projects Involving Substantial Rehabilitation.

In all cases, Borrowers whose projects involve substantial

rehabilitation must submit a Request for a Conditional

Commitment and may not proceed directly to the Firm Commitment

Stage.

5-2. PRESUBMISSION ACTIVITIES.

a\. Project Design and Architectural Liaison. Prior to submission

of the Request for a Conditional Commitment for Direct Loan

Financing, the Design Representative designated at the Fund

Reservation Stage shall work closely with the Borrower\'s

architect to ensure compliance with HUD design and cost

containment requirements. The Design Representative must be

concerned with any design characteristics that could affect

project economics, and must assure that the project will not be

of elaborate design or extravagant materials. Many architects

will request and welcome assistance in architectural matters

affecting marketability and cost control. Such advice and

guidance shall be rendered to the fullest extent possible.

b\. Joint Inspection of the Project. For Requests involving

substantial rehabilitation, the Housing Director will schedule

a joint inspection of the project at the earliest possible

date. This inspection team will include representation from

the Architectural and Engineering, Cost and Valuation staffs.

A representative of the local building inspector\'s office

should also be present if possible. The Borrower may, at its

option, have a representative in attendance.

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4571.1 REV-2

CHAPTER 5

(5-2) c. Project Work Statement. For Requests involving substantial

rehabilitation, this will be accomplished as soon as practical

after the inspection of the project by the Architectural and

Engineering staff. Specifics on the following items will be

included to properly analyze the project.

\(1\) Physical condition of the building(s), including major

defects and/or signs of advanced deterioration or

obsolescence.

\(2\) The extent and nature of work needed to attain the level

of rehabilitation considered appropriate for its intended

use.

\(3\) The narrative portion of the work statement will be

specific as to the nature and extent of the work to be

done off-site or on-site, with respect to utilities,

roads, walks, fencing, etc. The physical repairs of

structures must be in a detailed format which can be given

consideration when costing out exactly what rehabilitation

work is to be accomplished.

d\. Inasmuch as Handbook 4381.5 requires that a project

administrator or resident manager (in the case of

self-management) or a management agent (in the case of contract

management) be paid \$25 per dwelling unit in the project in

return for the agent\'s management review of the project and

development of the management plan, the Borrower is encouraged

to submit draft copies of the management contract and other

exhibits pertaining to these parties to the Field Office prior

to submission of its Request for a Conditional Commitment

(unless these documents were previously submitted and approved

at the Fund Reservation Stage) in order that a review of the

qualifications of the agent, administrator or manager can be

made before any of the work described above is done.

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4571.1 REV-2

CHAPTER 5

5-3. DESCRIPTION OF CONDITIONAL COMMITMENT STAGE PROCESSING OF REQUESTS

INVOLVING NEW CONSTRUCTION. All technical decisions concerning

acceptable design and MPS compliance, the estimated cost of the

project, the as-is value and fully-improved value of the site, the

detailed estimates of operating expenses, the supportable cost, the

financial and credit acceptability of the general contractor, if

identified, the acceptability of proposed contract rents, the loan

amount and cash requirements are determined at this time. All

applicable processing, data, and documentation forms will be

completed in their entirety at this time. The management exhibits,

the Affirmative Fair Housing Marketing Plan and other Fair Housing

and Equal Opportunity exhibits also will be reviewed.

5-4. DESCRIPTION OF CONDITIONAL COMMITMENT STAGE PROCESSING OF

REQUESTS INVOLVING SUBSTANTIAL REHABILITATION. In addition to

the technical decisions described in paragraph 5-3 above, the

analysis of a project involving substantial rehabilitation will

include a determination of the feasibility of the project which

will involve a review of the description of proposed rehabilitation

to assure that it reflects agreements reached at the joint

inspection and is based on the work write-up as well as a review of

the economics of demolition weighed against the cost of

rehabilitation, and suitability of the rehabilitation to

accommodate the needs of the elderly or handicapped.

5-5. TARGET DATES. The Borrower shall be required to submit its Request

for a Conditional Commitment for Direct Loan Financing within 60

days, or for complex proposals, 90 days after it notifies the Field

Office of its acceptance of the Section 202 fund reservation. The

Conditional Commitment shall be targeted for issuance within 60

days after receipt of a complete Request.

5-6. DESCRIPTION OF REQUIRED EXHIBITS - FOR PROJECTS INVOLVING NEW

CONSTRUCTION. The exhibits required to be submitted at the

Conditional Commitment Stage are described below. If the Borrower

proposes to select a general contractor by competitive bidding

rather than negotiation, all exhibits required with respect to the

general contractor shall be submitted as soon as possible after the

contractor is selected, but in no event later than 30 days prior to

the initial closing. See Appendix 13 for a list of the required

submissions and number of copies.

a\. Form HUD-92013, Application - Project Mortgage Insurance

(Request for Direct Loan Financing, Section 202/8 completed in

its entirety. If the Borrower plans to contribute all or a

portion of its land draw to meet the minimum capital

investment, it should so indicate on this form under Source of

Cash to Meet Requirements.

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4571.1 REV-2

CHAPTER 5

(5-6) b. Form FHA-2013-E, Supplemental Application and Processing Form

\- Housing for the Elderly. Completed in its entity and

including any estimates for the operation of transportation

services, recreational facilities, etc.

c\. Form FHA-2013 - Supplement to HUD-92013 Application - Project

Mortgage Insurance, on the general contractor (if appropriate).

d\. Owner - Architect Agreement - AIA Document B181 with HUD

Amendment.

e\. Form HUD-5087 - Outline Specifications.

f\. Preliminary drawings drawn to scale which include:

\(1\) Site plan showing:

\(a\) Lot lines and dimensions;

\(b\) Adjacent buildings (show outline and number of

floors);

\(c\) Proposed buildings, outline and overall dimensions;

\(d\) Parking areas and total number of cars that can be

parked;

\(e\) Driveways;

\(f\) Adjacent streets and utilities and their sizes. If

public facilities are not available to the site, the

architect shall specify the manner in which sewer and

water facilities are to be provided and include the

on-site and off-site locations.

\(g\) Patios, recreation, and other areas;

\(h\) Living unit types, composition, and total;

\(i\) Contours when topography or drainage is a design

factor;

\(j\) North point, and

\(k\) Site and gross floor areas.

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4571.1 REV-2

CHAPTER 5

(5-6) (2) Basement plans or foundation plans where no basements are

provided - minimum 1/8 inch scale;

\(3\) A dimensional plan of each typical living unit - 1/4 inch

scale;

\(4\) Elevations of each typical building - minimum 1/8 inch

scales,

\(5\) A typical floor plan - minimum 1/8 inch scale;

\(6\) For elevator and complex construction types, the following

plans will also be included:

\(a\) Lobby floor;

\(b\) Floor showing mechanical, service, storage, and other

non-rent facilities;

\(c\) Floors showing commercial areas (limited to

5 percent), and

\(d\) Typical wall section for each building type.

g\. Topographical survey

h\. Soil test borings.

i\. Form HUD-51994, Comparative Analysis of Utility Costs. If the

prototype utility analyses are not available from the Field

Office or if the Borrower desires to vary from the prototype

furnished by the Field Office, the Borrower\'s architect shall

prepare an analysis of utility costs in accordance with

instructions contained in Chapter 5, Handbook 7417.1, Public

Housing Development Phase. The Borrower\'s architect shall

recommend the best combination, complete Form HUD-51994 and

submit them together with the required exhibits.

j\. Form HUD-2530, Previous Participation Certificate, on the

general contractor (if identified), management agent, Borrower,

Sponsor, and consultant, if not previously submitted.

k\. Current resume of construction experience on general contractor

which includes a list of the type, size, and location of

buildings constructed, geographic area of contractor\'s

construction business involvement, and the length of time the

contractor has acted in that capacity.

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4571.1 REV-2

CHAPTER 5

(5-6) l. Current financial statements on the general contractor (a

current financial statement is defined as one which is not more

than six months old). An exception would be an audited

financial statement, not more than 12 months old, containing an

unqualified opinion of an independent Certified Public

Accountant or Public Accountant. This exception applies,

provided that the audited statement is supplemented with

updated interim statements. If the financial statement is not

submitted on Form FHA-2417, it must contain original signatures

and the certification that appears in Chapter 4, paragraph

4-5d(3)).

m\. Current financial statements on the Borrower and Sponsor. (If

the most current financial statement submitted by the Borrower

and Sponsor at the Fund Reservation Stage meets the definition

of \"current financial statement\" as stated in paragraph l

above, new statements are not required.)

n\. Form HUD-935.2, Affirmative Fair Housing Marketing Plan (if the

project has 5 or more assisted units).

o\. Proposed Management Plan using Form HUD-52678.

p\. Form HUD-52678-A, Questionnaire for Owner.

q\. Form HUD-52678-B, Questionnaire for Management Agent.

r\. If Borrower proposes to contract with another entity for

management and/or maintenance services for the project, a copy

of the proposed contract(s), using Form HUD-52680 as a guide.

s\. Resume on the Manager or Management Agent which includes

qualifications and experience.

t\. Statement that the proposed management and maintenance services

typically provided for the type of housing contemplated will be

provided.

u\. The form of lease the Borrower proposes to use which shall be

in accordance with Appendix 21 of this Handbook.

v\. Contract Rents per unit, by size and building type.

w\. List of equipment, utilities, and services to be included in

the Contract Rents and those utilities and services not

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4571.1 REV-2

CHAPTER 5

(5-6) included. For each utility and service not included, provide

an estimate of the average monthly cost (for the first year of

occupancy) to the occupants by unit size and structure type.

x\. Evidence of tax abatement or exemption, if claimed:

\(1\) Full statement of the facts, a copy of the application and

supporting statements presented to the local authorities.

The application and supporting statements must describe

the project and the proposed method of operation on which

the claim for exemption is based.

\(2\) The opinion of the Borrower\'s attorney setting forth

the basis on which exemption or abatement is claimed

and stating that except for future changes in the

statute or material change in the operation, the

project will be entitled to exemption or abatement.

The opinion must cite the State statute involved and

include as attachments, any other material supporting

the claim, i.e., local administrative rulings or

court decisions, opinions of local private or public

counsel or the State\'s Attorney General.

\(3\) Evidence of tax abatement or exemption and the

Borrower\'s attorney\'s opinion must be current within

one year of the filing of the Request for a

Conditional Commitment.

\(4\) Documents supporting tax exemption regarding similar

projects in jurisdiction where abatement or exemption

was requested or granted.

y\. Evidence of site control - site option agreement(s),

contract(s) of sale, or other document(s) which evidences the

Borrower\'s effective control of the site(s). If site control

were established at the Fund Reservation Stage and such control

is still in effect at the time of submission of the Request for

a Conditional Commitment, new evidence of site control need not

be submitted. However, if, for example, an option were

furnished as evidence of site control at the Fund Reservation

Stage and the option has since expired, the Borrower must

furnish updated evidence of site control.

\(1\) If the sale evidenced above is not an arms-length

transaction, submit similar evidence of the previous

arms-length sale price, date, etc.

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4571.1 REV-2

CHAPTER 5

(5-6) (2) In the event other costs are shown on Form HUD-92013, Item

B-21, submit a full explanation.

\(3\) If the project involves substantial rehabilitation of

property owned or being purchased, which purchase is not

an arms-length transaction, submit evidence of the

existing indebtedness and the current \"as-is\" value.

z\. Evidence of Permissive Zoning.

\(1\) Provide a statement from the local zoning board indicating

that the proposed project complies with existing zoning,

unless such statement were submitted at the Fund

Reservation Stage.

\(2\) Any rezoning which may have been necessary as indicated in

the application submitted at the Fund Reservation Stage

must have been accomplished prior to submission of the

Request for a Conditional Commitment.

aa. Relocation plan, if site occupants are to be displaced.

bb. For projects for the nonelderly handicapped only where the site

was not identified at the Fund Reservation Stage, a map showing

the location of the site and the racial composition of the

neighborhood, with the area of racial concentration delineated.

cc\. A schedule covering the cost of all capital expenditures such

as furniture, supplies, equipment, and other items necessary to

the basic operation of the project and not covered by the

proceeds of the loan. The schedule should include the

Borrower\'s plan on how it will meet these costs\--through

donations, cash outlays, etc. The Borrower may propose to use

a portion of the project contingency to cover these expenses.

5-7. ADDITIONAL EXHIBITS - SUBSTANTIAL REHABILITATION. In addition

to exhibits described in paragraphs 5-6a through d and i through

cc, the Borrower shall submit the following exhibits (see

Appendix 13-1).

a\. Form FHA-2013-R, Application for Project Mortgage Insurance

(Rehabilitation), completed with regard to those items

describing the as-is condition and operation of the property;

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4571.1 REV-2

CHAPTER 5

(5-7) b. Authorization to inspect the property;

c\. Narrative description of rehabilitation proposed;

d\. Sketch plans of units as rehabilitated;

e\. Schematics of any structural changes or changes in floor plan

or other significant alterations;

f\. Survey/site plan sketch, as built, and

g\. Drawings and specifications of existing facilities, if

obtainable.

5-8. RECEIPT OF REQUESTS.

a\. Requests for Conditional Commitments shall be forwarded to

the PC&R staff upon receipt in the Field Office.

b\. The PC&R staff shall date-stamp and log-in each Request and

distribute it to the various technical disciplines for

screening for completeness (see Appendixes 14 and 14-1 for

distribution procedures and Appendix 15 for format for review

checklist).

5-9. SCREENING FOR COMPLETENESS.

a\. Each program and technical discipline shall review the

Request to determine whether all required exhibits pertinent

to its review have been submitted and are properly completed.

b\. For projects which will have construction contracts to be

awarded by competitive bidding, exhibits required in

paragraphs 5-6k and l need not be submitted until after the

construction contract has been bid and this should be

considered on the screening process.

c\. Comments shall be returned to the PC&R staff within one

working day after receipt of the Request for review.

d\. The PC&R staff shall be responsible for assuring the review

comments are received in a timely fashion.

e\. The PC&R staff shall compile the comments referenced above for

each Request and forward them to the MHR who shall prepare

the checklist summary (see Appendix 15).

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4571.1 REV-2

CHAPTER 5

5-10. ELIGIBILITY FOR TECHNICAL PROCESSING.

a\. A Request which is found to be complete as a result of the

MHR\'s review of the comments from the technical and program

staffs shall be eligible for technical processing. The MHR

shall advise the PC&R staff who shall, in turn, notify the

technical and program staffs to begin the processing of the

application. (All processing to be performed by the technical

and program staffs is described in Sections 2 thru 6 of this

Chapter except that to be performed by FH&EO, the Area Counsel,

and EMAD which is described in paragraphs 5-12, 5-13, and 5-14

of this Section, respectively.)

b\. For a Request which is found not to be complete, the MHR shall

prepare a letter for the signature of the Housing Director

which lists the deficiencies and invites the Borrower to

correct them by a specified date (generally within 15 days).

The letter shall state that if the additional information is

not received by the specified date, the Request will be

returned and may be resubmitted when it is complete.

c\. Additional information submitted in response to the letter

outlined in subparagraph b above shall be logqed-in by the PC&R

staff and forwarded to the MHR for review for acceptability. If

the MHR determines that a Request is complete, the procedures

outlined in subparagraph a above shall be followed. If the

Request is found to be deficient, the MHR shall prepare a

letter to the Borrower transmitting the Request, outlining the

deficiencies, and inviting a prompt resubmission of the

Request when it is complete.

5-11. COORDINATION OF TECHNICAL AND PROGRAM REVIEWS.

a\. The PC&R staff shall be responsible for keeping track of the

progress of a Request through processing in the various

technical and program disciplines and shall advise the MHR

when target dates are not being met.

b\. The MHR shall monitor the overall progress of a Request through

processing to identify problem areas and shall assist the

technical and program disciplines in securing additional

documentation or information which may be needed in order to

resolve any problems and permit completion of processing.

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4571.1 REV-2 CHG 2

CHAPTER 5

5-12. FAIR HOUSING AND EQUAL OPPORTUNITY REVIEW. The FH&EO

staff shall review the Affirmative Marketing Plan to

determine if it complies with HUD requirements. For

projects for the nonelderly handicapped where a site was

not identified at the Fund Reservation stage, the FH&EO

staff also shall review the Request to determine the

acceptability of the site(s) with respect to areas of

minority concentration (if the project is for new

construction), compliance with civil rights acts and

promotion of housing opportunities. The Housing Director

shall be advised of any deficiencies noted during the

review so that they may be corrected prior to issuance

of the Conditional Commitment.

5-13. FIELD COUNSEL REVIEW. If the Borrower\'s Request includes

provisions abatement or exemption of real property

taxes, the Field Counsel\'s concurrence in the validity of

the exemption must be obtained before the exemption can be

considered in determining the feasibility of the project.

The Housing Director, therefore, must receive such

concurrence before approving a request for financing on the

basis of the project receiving abatement or exemption.

The Field Counsel shall review all documents in the

Borrower\'s submission as described in paragraph 5-6x.

Outlined below are the procedures to be followed:

a\. Exemptions Based on Special Legislation. In some

States, special legislation has been passed granting

tax exemption to particular types of housing, e.g.,

housing located in urban renewal areas or housing for

low and moderate income groups or for other social

needs. Generally, tax exemption, pursuant to such

legislation may be safely assumed. If, after review,

the Field Counsel determines that the proposed project

meets the special criteria of the legislation, he/she

shall advise the Housing Director that the project may

be processed on a tax-exempt basis.

\* b. Exemption Based on General Charitable Statutes.

Exemption under a general statute exempting projects

for charitable purposes may not be assumed. However,

Field Counsel may determine that a proposal is eligible

for processing on a tax-exempt basis if either of the

following situations prevail:

\(1\) The opinion of the Borrower\'s attorney sets

forth the basis on which exemption is claimed

and states that, except for future change in

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4571.1 REV-2 CHG 2

CHAPTER 5

(5-13)\* the statute or material change in the operation,

the project will be entitled to exemption. This

is further supported by Field Counsel\'s knowledge

that the taxing jurisdiction has routinely granted

exemption to a Section 202 project.

\(2\) Statement from the local taxing authority

indicates that the exemption has been approved

or that it will favorably consider an application

for tax exemption for the Section 202 proposal.

c\. Where it has been determined that a proposal is

entitled to be processed on a tax exempt basis, Field

Counsel will advise the Housing Director whether such

exemption is effective during construction or after

project completion so that processing may be completed

accordingly.

d\. While a taxing jurisdiction may grant tax exemption,

it may impose a payment in lieu of taxes (PILOT) for

improvements, facilities or services rendered by the

local authority to the project. Where this situation

prevails, Field Counsel\'s advice will address the issue

so that processing will take PILOT into consideration.

e\. Should tax exemption be terminated by the local taxing

authority during project operation due to statutory

change or altered circumstances, the Borrower may submit

a request for rent increase to cover the added tax

burden as provided in the Regulatory Agreement.

f\. MANDATORY FILING REQUIREMENT FOR TAX EXEMPTION.

Whether there is existing special State legislation

or a general charitable statute governing tax exemption,

it shall be mandatory for the Borrower to file

with the local taxing authority. Such evidence of

filing, together with the response received therewith,

must be submitted at the time of Conditional or Firm

Commitment application.

5-14. ECONOMIC MARKET ANALYSIS DIVISION REVIEW.

Participation by the EMAD staff at the Conditional

Commitment stage will be limited to a review of a

Request submitted in connection with a project for

the nonelderly handicapped where the site was not

identified at the Fund Reservation stage.

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4571.1 REV-2

CHAPTER 5

(5-14) a. The EMAD staff shall review the Request to determine whether
or

not:

\(1\) Based on available data, a sustainable demand for assisted

occupancy for the number of dwelling units proposed

exists,

\(2\) In accordance with Section 880.112(d) Site and

Neighborhood Standards, the proposed site meets

requirements of promoting a greater choice of housing

opportunities and avoids an undue concentration of

assisted persons in areas containing a high proportion

of low-income persons.

\(3\) The proposed project is in conformance with any local

HAP. (See Chapter 4, Section 10 and Appendix 9.)

b\. Upon completion of the analyses set forth in subparagraph a

above, the EMAD Staff Shall prepare a memorandum to the HDD/CU

which sets forth its findings and states whether or not the

Request is acceptable or unacceptable to the EMAD.

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4571.1 REV-2

CHAPTER 5

SECTION 2. ARCHITECTURAL AND ENGINEERING ANALYSIS

5-15. GENERAL. All projects shall be processed in accordance with

outstanding architectural instructions in HUD Handbook 4460.1

REV., Architectural Analysis and Inspections for Project Mortgage

Insurance, Section 207, except as modified herein, including

compliance with the appropriate HUD Minimum Property Standards

(MPS). Where local codes and ordinances are more stringent than

requirements under HUD MPS, the local requirements shall prevail.

5-16. TYPES ()F HOUSING.

a\. Projects shall be designed in accordance with the appropriate

MPS and shall include only units which are designed for

elderly or handicapped persons. Proposals may include

efficiency and one-bedroom units. The mix of unit types

should relate to the market. At least 25 percent of the units

for the elderly must be efficiencies, unless the determination

was made at the Fund Reservation stage that such units are not

readily marketable in the community. Two-bedroom units will

not be approved except for the resident manager\'s unit.

(Note: The above limitation on two-bedroom units does not

apply to a project designed wholly for the nonelderly

handicapped. Additionally, such proposals may include three

and four or more bedroom units to meet the needs of larger

nonelderly handicapped families.)

b\. A units shall include a kitchenette, or a kitchen, even if

central dining is provided, except as provided below.

c\. Group homes for the mentally retarded or other developmentally

disabled or Chronically mentally ill groups are eligible.

Such projects shall be designed in accordance with the Minimum

Property Standards for One and Two Family Dwellings or Minimum

Design Standards for Rehabilitation for Residential

Properties, as appropriate. Although a private bathroom

need not be provided for each unit, to ensure privacy,

bathrooms should serve no more than four persons. Such

projects shall be processed in accordance with multifamily

Processing instructions for new construction or substantial

rehabilitation as described in this Chapter. The number of

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4571.1 REV-2

CHAPTER 5

(5-16) residents per site shall be limited to fifteen with no

continuous sites. Units may not provide for occupancy by more

than two persons. Further guidelines concerning group homes

are contained in paragraphs 1-5c through g of this Handbook.

d\. Nothing contained in subparagraph c above shall preclude a

Borrower which is serving the mentally retarded or other

developmentally disabled or chronically mentally ill groups

from providing apartments for independent living if the

proposed residents have been determined to have the capability

to live independently without endangering other residents. The

number of residents per site shall still be limited to twenty

with no continuous sites. In such cases, the design shall be

in accordance with the applicable HUD MPS for the building

type proposed.

e\. Medically-oriented facilities such as nursing homes, hospitals

and intermediate care facilities except for intermediate care

facilities for the mentally retarded (ICF/MRs), which require

prior Headquarters approval, are not eligible. However, a

small infirmary for emergency treatment may be included, but

there shall be no provisions for overnight care.

5-17. DESIGN CONSIDERATIONS.

a\. The Design Representative shall assure that amenities are

provided which are conducive to day-to-day activities of

elderly or handicapped tenants and that the design and

materials specified are related to the limited physical ability

of the occupants. The Design Representative shall also assure

that amenities are limited to those specified on the List of

Acceptable Amenities and that no amenities are included which

were not proposed by the Borrower at the initial application

stage. Amenities which are never acceptable include swimming

pools, saunas, dishwashers, individual unit trash compactors or

balconies. For health and sanitation reasons, a dishwasher and

\* garbage disposal may be included in a group home where one

kitchen serves a number of units.

b\. Design features which must be included (except for group homes)

are:

\(1\) A refrigerator, cooking facilities, sink, and storage

space for food and utensils in each dwelling unit; and

\(2\) A complete bathroom as defined in the MPS in each unit.

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4571.1 REV-2

CHAPTER 5

(5-17) c. Facilities and features which shall be provided, as

appropriate, are:

\(1\) Special spaces such as multipurpose rooms, game rooms,

libraries and reading rooms, hobby craft shops, barber and

beauty shops, lounges and snack bars, and central kitchen

and dining facilities;

\(2\) Grades which eliminate or reduce steps and steep inclines;

\(3\) Barrier-free access and egress for all persons;

\(4\) Nearby parking facilities for residents and visitors.

Borrowers should be encouraged to seek waivers where local

zoning requirements appear excessive in relation to the

intended market;

\(5\) Minimum length of travel between frequently used areas;

\(6\) Suitable outside areas for active and passive recreational

activities;

\(7\) Selection and use of materials which stress safety;

\(8\) Proper provisions for all utilities to be included in the

contract rents;

\(9\) Controlled access and egress tailored to the needs

established by the structures, the surrounding and the

adjacent thoroughfares, and

\(10\) Space and facilities for deliveries. Planning shall

include design features which will assist the management

function.

d\. The facilities enumerated in subparagraph c(1) above shall not

be classified as commercial spaces ana may be included if the

Borrower establishes the need and if rents can be maintained

within the Fair Market Rent Limits. Common areas shall be

restricted to those needed to serve the residents and should

normally not exceed 10 percent of the total project space.

e\. Dining space, when provided, shall be large enough to seat only

1/3 to 1/2 or the tenant body, since it is unlikely that all

residents will desire to eat at the same time.

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4571.1 REV-2

CHAPTER 5

(5-17) f. In providing special amenities for the comfort, health and

recreation or the elderly or handicapped, the continuing costs

of operating the amenities must be considered.

g\. Commercial areas may only be allowed where they are self

sufficient and provide service for residents. Such areas may

not exceed 5 percent of the total project space.

5-18. REVIEW AND ACCEPTANCE OF EXHIBITS. Architectural liaison is

required throughout the design stages. Architect\'s or preliminary

drawings and outline specifications will be reviewed and approved

by HUD. Architect\'s, engineers\' or designers\' certification are

not acceptable in the Section 202 Program.

5-19. ELIGIBLE EQUIPMENT. All fixed equipment which normally is part of

the realty may be included in the mortgage. In addition, stoves

and refrigerators in the individual units, heavy equipment in a

central kitchen, washers and dryers in a central laundry area,

normally are covered under the construction contract. Other major

moveable equipment, such as maintenance equipment and furnishings

for public areas may be paid for out of the Project Contingency to

the extent those funds are available. The Sponsor will be required

to submit evidence of the availability of any funds required for

equipment and furnishings over and above that provided in the loan.

(See also subparagraphs 5-27 and 5-44c.)

5-20. COMPARATIVE COST ANALYSIS OF UTILITIES. The Architectural staff is

responsible for reviewing Form HUD-51994 and all attendant

exhibits, if required, and for determining that the most economical

utilities, fuels, related mechanical equipment and methods of

purchase have been included in the drawings and specifications.

For example, where utility companies indicate that Power Demand

Controllers would result in cost savings, use of the Controllers

should be considered.

5-21. ARCHITECTURAL ANALYSIS: REHABILITATION PROJECTS. Requests

involving the rehabilitation of existing structures shall be

reviewed and processed in accordance with the instructions outlined

in paragraph 5-4 of this Chapter, Chapter 7 HUD Handbook 4510.1,

Rental and Cooperative Housing for Lower-Income Families.

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4571.1 REV-2

CHAPTER 5

SECTION 3. COST PROCESSING

5-22. GENERAL. In estimating project cost under Section 202, the

underwriting instructions and development procedures for new

construction and rehabilitation, as set forth in HUD Handbook

4450.1, Cost Estimation for Project Mortgage Insurance shall be

followed, except as modified herein. The Cost Analyst shall

collaborate with the Design Representative to assure that the plans

and specifications include all MPS requirements for housing for the

elderly or handicapped and do not include excess amenities or

common areas or commercial spaces which are not needed to serve the

residents.

5-23. COST NOT ATTRIBUTABLE TO DWELLING USE. The Supplemental Estimate

for Cost Not Attributable to Dwelling Use shall include the costs

for \"special spaces and accommodations\" and shall not normally

exceed 10 percent of total project cost.

a\. These improvements generally consist of additional

requirements, services and facilities not usually found to the

same extent in typical residential rental projects and provide

for the comfort, health and recreation of elderly or

handicapped residents.

b\. \"Special spaces and accommodations\" include, but are not

limited to:

\(1\) multi-purpose rooms;

\(2\) game rooms;

\(3\) libraries;

\(4\) reading rooms;

\(5\) hobby and craft shops;

\(6\) barber and beauty shops;

\(7\) lounges or sitting rooms;

\(8\) snack bars, and

\(9\) central kitchens and dining rooms.

c\. Income producing areas (except central dining facilities) are

classified as \"commercial\" in \"Costs Not Attributable,\" not

\"special spaces,\" and may not exceed 5 percent of total project

space without the prior approval of the Assistant Secretary.

d\. As with other \"Costs Not Attributable\" items, the costs of

foundations, plumbing, heating, air conditioning, water,

electric, and/or sewage facilities are prorated to the \"special

spaces and accommodations\" as appropriate.

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4571.1 REV-2

CHAPTER 5

(5-23) e. Any equipment not required by the MPS, but required by the

local municipalities or state building codes which pertain to

the elderly or handicapped, shall be included under this

category. For example, if the project under review were a

two-story structure with no living units above the first floor

intended for occupancy by wheelchair users and no central

dining facilities and if local or state building codes require

installation of an elevator in all projects for the elderly or

handicapped with two or more stories, the cost of these

elevators shall be included in the estimate of Cost Not

Attributable to Dwelling Use. (The MPS would not require

installation of an elevator for the project described above.)

f\. In group homes, the estimate of Cost Not Attributable to

Dwelling Use shall be performed in the same manner as in other

Section 202 projects. (See paragraphs 1-5c through h and 5-34

of this Handbook.)

5-24. COSTS NOT ORDINARILY ATTRIBUTABLE TO DWELLING USE. For projects

designed specially for the handicapped, a new category of

consideration has been added to those normally evaluated in

determining the amount of Cost Not Attributable to Dwelling Use.

This category \-- Costs Not Ordinarily Attributable to Dwelling Use

\-- includes the additional costs incurred for items which are

peculiar to projects for the handicapped.

a\. The Cost Analyst shall develop benchmark costs for such items,

using normal cost procedures, and shall include the appropriate

amount, designated as \"Costs Not Ordinarily Attributable\" in

his/her Supplemental Estimate described in paragraph 5-23

above.

b\. In a project designed specifically for the deaf, for example,

the Borrower may propose to include a closed circuit television

system in order to permit the resident manager to contact

tenants and communicate with them in case of emergency.

c\. Items such as wider doors and hallways, grab bars,

slip-resistant tubs and/or shower bottom surfaces, etc., which

are listed in the MPS for projects for the elderly or

physically handicapped, shall not be included as \"Costs Not

Ordinarily Attributable,\" as costs for these items have already

been considered in the per unit cost limits for Section 202

projects.

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4571.1 REV-2

CHAPTER 5

5-25. ADEQUACY OF ESTIMATES. It is imperative that the Cost Analyst

assure that his/her estimate of \"Cost Not Attributable to Dwelling

Use\" includes all items set forth in paragraphs 5-23 and 5-24 above

and in Handbook 4450.1. Section 202 projects are unique in

\"special spaces and accommodations\" and the Section 202 cost limits

are not designed, nor are they sufficient to cover the additional

costs created by these amenities. The Cost Analyst should contact

the Office of Multifamily Housing Development, Headquarters, if

he/she has any question regarding the eligibility of items \"special

spaces or accommodations, \"Costs Not Ordinarily Attributable,\" or

regarding the estimation process.

5-26. BUILDER\'S PROFIT. An allowance for a Builder\'s Profit shall be

included in the cost processing calculation (see paragraph 5-4 of

Handbook 4450.1).

5-27. SCHEDULE OF CAPITAL EXPENDITURES. The Borrower is required to

submit, with its Request for Conditional Commitment, a schedule of

all capital expenditures such as furniture, supplies, equipment,

and other expenditures necessary to the basic operation of the

project, including those not covered by the proceeds of the loan.

The Cost Analyst shall review this schedule for the purpose of

estimating the reasonableness of such costs. At the conclusion of

his/her review, the Cost Analyst will prepare a memorandum to the

Chief, Mortgage Credit Staff advising of his/her findings.

5-28. LESS THAN 25 PERCENT EFFICIENCIES. Projects for the elderly are

required to contain at least 25 percent efficiency units unless the

EMAD and valuation staffs determine that such units are not readily

marketable in the community. In cases where a determination has

been made that the market will support at least 25 percent

efficiency units but the Borrower chooses to include less than 25

percent efficiencies, the Borrower will be permitted to do so, but

development costs must be calculated as if 25 percent of the units

were efficiencies. The incremental increase in development cost

for the excess one-bedroom units must be paid by the Borrower as a

front money requirement and cannot be included in determining the

maximum loan or mortgage amount.

5-29. COST ANALYSIS: REHABILITATION.

a\. The Cost Analyst will base his/her analysis on the work

statement described in Section 1, paragraph 5-2(c) of this

Chapter and any other exhibits pertinent to the subject

project. The Analyst will make his/her estimate of land

improvement and any supplemental estimates on page two of

Form FHA-2325 and his/her estimate of structures on Form

FHA-2326-A. These costs will be summarized on Form FHA-2326,

and will also be included in the Form HUD-92264.

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4571.1 REV-2

CHAPTER 5

(5-29) b. Benchmark costs from the office data bank will be applied to

the rehabilitation requirements. In making adjustments to data

bank benchmark costs, care must be taken in projecting the

start of construction date. Factors such as the amount of

demolition required prior to the actual rehabilitation of the

subject structure must be given full consideration. The

benchmark costs for structures will be applied to the specific

requirements of the work statement, based on a gross square

foot cost, square foot cost, or per unit cost, as applicable.

The land improvement estimate will be based on a square foot

cost or per unit cost as applicable.

c\. Estimate of a New Structure. If the work statement indicates

that the required rehabilitation will be too costly, the

Analyst should make a second estimate based on complete

demolition of the existing structure. The replacement cost of

a new structure shall be determined in accordance with

outstanding processing instructions. A comparison of the two

estimates will be noted in Section \"O: Remarks,\" on Form

HUD-92264.

d\. Substantial Rehabilitation projects shall be exempt from the

requirement that at least 25 percent of the units be

efficiencies (paragraph 5-28) to the extent that such exemption

is dictated by the existing facility, i.e., where it would be

more expensive to comply with the requirement than to retain

the existing unit composition. In such cases, the Analyst

shall make a recommendation for exemption to the Director of

Housing for approval.

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4571.1 REV-2

CHAPTER 5

SECTION 4. VALUATION ANALYSIS

5-30. GENERAL-NEW CONSTRUCTION. Valuation processing at this stage will

be in accordance with HUD Handbooks 4465.1, Valuation Analysis for

Project Mortgage Insurance and 4480.1, Multifamily Underwriting

Reports and Forms Catalog, except as modified herein. Fee

appraisers may not be used for any portion of the Valuation

analysis. Valuation processing shall include the following:

a\. Land appraisal \"as-is\" and fully-improved (with offsite

improvements installed);

b\. Determination of the project replacement cost;

c\. Expense Estimate;

d\. Determination of the cost equivalent to the loan amount

allowable by the Section 202 cost limits;

e\. Rent Formula determination;

f\. Allocation of Formula Rents to Revenue Producing Dwelling

Units;

g\. Estimate of Allowances, if any;

h\. Determination if gross rents are in compliance with Fair Market

Rent Limits;

i\. Re-analysis of LUI determined at Fund Reservation Stage, if

required by changes in the Request;

j\. Re-analysis of evidence of permissive zoning, if necessary;

k\. In the case of applications for projects with less than all of

the rental dwelling units assisted under Section 8, a

determination that sufficient market demand is anticipated for

the unsubsidized dwelling units in order to assure the

feasibility of the project, and

l\. In addition to the determinations outlined in subparagraphs a

thru k above, in projects for the nonelderly handicapped where

the site was not identified at the Fund Reservation Stage,

Valuation processing also shall include:

\(1\) Determination of the LUI;

\(2\) Determination of the acceptability of the location;

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4571.1 REV-2

CHAPTER 5

(5-30) (3) Determination of the marketability of the dwelling units;

\(4\) Initiation of the Environmental Clearance; and,

\(5\) Analysis of evidence of permissive zoning.

5-31. LAND APPRAISAL. Site analysis and appraisal conclusions are

recorded on Page 3 of Form HUD-92264. The Project Site Analysis

and Appraisal, Section J, should be completed in its entirety at

this stage.

5-32. REPLACEMENT COST ESTIMATE. To determine HUD\'s estimates of the

Section 202 development cost, the Request will be processed as a

nonprofit project, using a replacement cost formula (See Appendix

16\) and Section G of Form HUD-92264, and completed in accordance

with Handbook 4480.1, except as modified below:

a\. Interest during construction is based on the interest rate at

which the direct loan is expected to be made initially. The

interest rate that HUD must pay on Section 202 loan funds

borrowed from the Treasury is based on the average interest

rate on all interest bearing obligations of the United States

forming a part of the public debt. The rate determined at the

end of the fiscal year establishes the Treasury\'s lending rate

for the funding of applications for which loans are made during

the succeeding year. The interest rate will be published in

the Federal Register and distributed in a Notice annually.

b\. Fees. Examination, Inspection, Financing, and GNMA/FNMA fees

shall not be included in Section 202 processing.

c\. Mortgage Insurance Premium (MIP). There is no MIP payable

since Section 202 is a direct lending program.

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4571.1 REV-2

CHAPTER 5

(5-32) d. Project Contingency. A project contingency allowance shall be

established equal to three percent of the loan amount. This

contingency may be used to cover the cost of necessary change

orders which are approved by the Field Office prior to final

closing, increased carrying charges occasioned by unavoidable

delays in construction, and increases in otherwise eligible

line items. It may not be used to provide additional profit or

fees to the architect, attorney, consultant or other

principals. Major movable furnishings and equipment

(non-realty items), including, but not limited to office

furniture and equipment and lounge and lobby furniture, may be

paid for from the project contingency. Dishes, cutlery, etc.,

are not eligible to be covered in the loan and must be paid for

out of the Sponsor\'s own funds or operating revenue. The

amount of the contingency allowance shall be entered on

line 60, on Form HUD-92264.

e\. Other Carrying Charges. Taxes, Insurance, and Title and

Recording expenses will be estimated in accordance with

Handbook 4480.1.

f\. Legal, Organization, and Cost Certification Audit Fee. These

items will be estimated in accordance with Handbook 4480.1.

When a consultant\'s fee is included in processing, the

allowance for organization shall be reduced accordingly so as

not to include the services performed by the consultant.

Similarly, the Borrower is required to furnish a fidelity bond

covering all persons authorized to sign checks drawn on the

Trust Account, if a Section 106(b) loan is made, and on the

Construction Account for the Section 202 loan. The appraiser

shall include sufficient funds in the allowance for

organization to cover the costs of the fidelity bond(s).

g\. Management Fund. Handbook 4381.5 establishes a Management Fund

of \$100 per residential unit which shall be included in the

loan amount.

h\. Consultant\'s Fees. If the consultant\'s contract and fee have

been approved by the Mortgage Credit staff, the appraiser shall

include the approved fee in the loan amount provided it does

not exceed the applicable amounts shown in the fee schedule

which appears in Chapter 1, paragraph 1-10 of this Handbook.

5-33. ANNUAL OPERATING EXPENSE ESTIMATE. Operating expense estimates are

made in accordance with instructions contained in Chapter 6 of

Handbook 4465.1, except as modified herein.

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4571.1 REV-2

CHAPTER 5

(5-33) a. The Borrower\'s Application, Form HUD-92013, should contain
only

those expenses estimated to be required to serve living

quarters, income producing commercial space and residential

accessory space, and those utilities furnished at no additional

expense to tenants.

b\. Form FHA-2013-E will be used to show estimated expenses and

income relating to meals and other services (see paragraph

5-45b). Except as provided in paragraphs 5-16 and 5-17 of this

Chapter, each dwelling unit shall contain, as a minimum, a

kitchen sink, a minimum size standard refrigerator, a \"cook

top\", adequate electric capacity and outlets for small

appliances, storage space for food and utensils, and complete

bathroom facilities.

c\. Congregate Housing. Congregate dining and other facilities and

services may be provided by an eligible Borrower. It may

propose to supply tenants with food, maid service, or other

personal services. However, in determining approvable Contract

Rents under Section 8, staffing and other operating costs of

such services may not be recognized. Purchase of personal

services shall not be required as a condition of occupancy.

Borrowers may charge for no more than one meal per day as a

condition of occupancy, provided the charge is determined by

HUD to be reasonable. It may be necessary for some services to

be covered from funds provided by the Borrower from other

sources. Where a Borrower proposes to furnish food or other

services, the Borrower shall clearly separate such charges from

the total charges for shelter and project-supplied utilities

which are entered on Form HUD-92013.

5-34. DETERMINATION OF LOAN AMOUNT ALLOWABLE UNDER SECTION 202 COST

LIMITS.

a\. The determination of the cost equivalent to loan amount

allowable by the Section 202 cost limits shall be made by

completing the format provided in Appendix 17, Loan Amount

Permitted by Section 202 Cost Limits Per Family Unit, allowing

a return on 100 percent of the cost at the debt service rate

at which the direct loan will be amortized.

b\. Group homes for the mentally retarded or other developmentally

disabled groups ordinarily will include units comprised only of

a bedroom and a shared bathroom. However, in determining cost

and rent limits, the bedroom shall be treated as a one-bedroom

unit if by allocating a proportionate share of the common areas

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4571.1 REV-2

CHAPTER 5

(5-34) to each bedroom there is space equivalent to a one-bedroom

unit. When double occupancy is anticipated, the bedroom shall

be sufficiently larger to accommodate two persons, but shall

also be treated as a one-bedroom unit. If space equivalent to

a one-bedroom unit is not provided, the 0-bedroom cost and rent

limits shall be used. These limits shall apply on a per unit

basis, not per person. For additional guidelines for group

homes and other facilities for the handicapped, see paragraphs

1-5c through g of this Handbook.

c\. In cases where the market will support at least 25 percent

efficiency units but the Borrower chooses to include less than

25 percent efficiency units, development costs will be

calculated as if 25 percent of the units were efficiencies.

The incremental increase in development cost for the excess

one-bedroom units will not be included in determining the

maximum approvable loan or justifying rents above comparables.

The efficiency unit cost and rent limits will be used for 25

percent of the units. (Expenses, however, shall be calculated

based on actual unit composition.)

5-35. DETERMINATION OF LOAN AMOUNT BASED ON DEBT SERVICE WHEN TERM OF
TAX

ABATEMENT IS LESS THAN TERM OF LOAN. When the tax abatement or

exemption is available only for periods less than the term of the

loan, it is required that any portion of the loan attributable to

the abatement be fully amortized during the abatement period. In

such cases the loan amount based on debt service will be computed

as follows:

a\. Determine the loan amount based on debt service assuming no tax

abatement.

b\. Divide the annual dollar amount of the tax abatement by the

level annuity debt service rate applicable to the abatement

period.

c\. Add together the results of Steps a and b to determine a loan

amount which is one upper limit on the maximum loan amount.

5-36. DETERMINATION OF ESTIMATED INCOME.

a\. Estimated income is derived from a rent formula calculation

based on the estimated operating costs and the lower of HUD\'s

estimate of the total replacement cost (paragraph 5-32) or the

amount of loan allowable under the Section 202 cost limits per

family unit (paragraph 5-34, above). However, estimates of

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4571.1 REV-2

CHAPTER 5

(5-36) income for commercial and residential accessory space must be

determined on the basis of market comparability in accordance

with basic valuation instructions for rental housing mortgage

insurance programs. It should be noted, if the rents obtainable

for commercial and residential accessory space are not

adequate to support its cost and the expense of its operation

at the debt service rate at which the direct loan will be

amortized, such space, except for space which provides

essential services for the benefit of the project occupants

(such as laundry and required parking facilities) must be

eliminated or reduced appropriately so that obtainable income

will adequately support its production cost and operating

expense.

b\. Determining Dwelling Unit Rentals. Complete a rent formula

calculation using the formula provided in Appendix 18, Rent

Formula Supplement to Form HUD-92264, to determine the total of

the rent based on the lower of the estimated replacement cost

from paragraph 5-31 or a cost equivalent to the loan amount

allowable by the Section 202 cost limits, criterion 4 of Form

FHA-2264-A. Assume 97 percent occupancy if supported by data

which demonstrates that other projects for the elderly or

handicapped in the same market area have occupancy rates above

97 percent and a reservoir of unsatisfied demand evidenced by

waiting lists of prospective tenants. Otherwise, 95 percent

occupancy rate shall be used. See also paragraph 5-33 for

determination of rentals for group homes. The rent formula

calculation is accomplished by the following computations:

\(1\) Multiply the lower of replacement cost or the maximum loan

based on Section 202 unit limits by the debt service rate

(principal and interest per annum);

\(2\) Add annual ground lease payments (leasehold projects

only). Note that for leasehold projects, the replacement

cost calculated in paragraph 5-31 must be the replacement

cost of the leasehold estate.

\(3\) Divide by .97 to allow for a 5 percent net income reserve;

\(4\) Add operating expenses;

\(5\) Divide by .95 to allow for a 5 percent vacancy and

collection loss (or, if appropriate, divide by .97 to

allow for a 3 percent vacancy and collection loss);

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4571.1 REV-2

CHAPTER 5

(5-36) (6) Divide by 12 to convert to a monthly basis;

\(7\) Subtract monthly income, if any, expected to be derived

from sources other than dwelling unit rentals, to come up

with total allowable monthly Rent from Revenue Producing

Dwelling Units.

c\. Determining Dwelling Unit Rentals for Projects with Tax

Abatement. If the Area counsel has determined that certain tax

abatement is assured (see paragraph 5-13), the appraiser shall

determine the amount of the tax abatement and term (in length

of time) of each abatement.

\(1\) When the duration of the tax abatement is equal to or

greater than the term of the loan, no variation in the

project processing described in subparagraph b above is

required except that the expense estimate will not include

that portion of the tax to be abated.

\(2\) In cases where the tax abatement term is less than the

term of the loan, the expense estimate shown in Form

HUD-92264, Section E, must include the full tax. Where

the abatement term is less than the total term of the

loan, a revised rent formula is used as shown in Appendix

18-1. The rent formula calculation is accomplished as

follows:

\(a\) Line 1(a) - Enter estimated cost of property with 100

percent loan as determined in accordance

with Appendix 16 (new construction) or

Appendix 20 (rehab);

Line 1(b) - Enter maximum loan based on Section 202

unit limitations as determined in

accordance with Appendix 17;

Line 1(c) - Self-explanatory.

\(b\) Line 2(a) - Enter the term of the abatement;

Line 2(b) - Enter annual amount of tax abatement;

Line 2(c) - Enter debt service rate (p and i per

annum) at the permanent interest rate for

the term of abatement. Since it is not

likely that the debt service rate for the

term of the abatement will appear in

published schedules, the appraiser should

call Mathematics Section, Multifamily

Mortgage Branch, OFA, at 755-5240 for the

applicable rate;

3/83 Page 5-28

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4571.1 REV-2

CHAPTER 5

(5-36) Line 2(d) - Divide Line 2(b) by Line 2(c) and enter

the result. Since the tax savings

provided by the tax abatement must be

used by the Borrower to pay a accelerated

mortgage amortization during the

abatement period, the result of this

computation will be the loan amount

attributable to the tax abatement which

will be completely amortized during the

abatement term.

\(c\) Line 3 - Self-explanatory.

\(d\) Line 4 - To determine the portion of the debt

service not attributable to the tax

abatement divide Line 3 by the debt

service rate (p and i per annum) for the

permanent loan.

\(e\) Line 5 - Self-explanatory.

\(f\) Line 6 - Self-explanatory.

\(g\) Line 7 - Self-explanatory.

\(h\) Line 8 - To allow for a 5 percent net income

reserve, divide the sum of lines 4, 5 and

6 by .95.

\(i\) Line 9 - Enter the annual expenses, reserves, and

taxes (excluding the amount of tax

abated).

\(j\) Line 10 - Self-explanatory.

\(k\) Line 11 - To provide for a 5 percent vacancy and

collection loss, divide Line 10 by .95

(or, if appropriate, divide by .97 to

allow for a 3 percent vacancy and

collection loss).

\(l\) Line 12 - Compute the monthly gross income by

dividing Line 11 by the number 12.

\(m\) Line 13 - Self-explanatory.

\(n\) Line 14 - To determine the total allowable monthly

rent from revenue producing units,

subtract Line 13(c) from Line 12.

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4571.1 REV-2

CHAPTER 5

5-37. ALLOCATION OF FORMULA RENTS TO REVENUE PRODUCING DWELLING UNITS.

complete the format provided in Appendix 19, to allocate the

resulting total monthly rents for dwelling units to the individual

revenue-producing dwelling units in the pattern of the maximum

contract rents permitted by the applicable Section 8 Fair Market

Rent Limits (FMRLs) and then round the resulting dwelling unit

amounts to the next higher whole dollar amounts.

5-38. UTILITY ALLOWANCES AND OTHER SERVICES.

a\. Estimate of these allowances shall be based on the utility and

service expenses typically incurred by tenants of comparable

living units. The appraiser shall prepare a Schedule of

Allowances patterned after Section I of Form FHA 2264B,

Cooperative or Condominium housing project Analysis. Note

that the resulting monthly amount for each item reflects the

monthly average of the expected annual expense.

b\. The appraiser shall compare his/her Schedule of Allowances

with the estimates contained in the application. Only when

the differences are minor may he/she find the Borrower\'s

estimates to be acceptable. Finding the proposed schedule

unacceptable need not necessarily result in rejection of the

application, unless the required use of the HUD-approved

Schedule of Allowances would cause the resultant gross rents

to exceed the applicable FMRLs. If the gross rents are still

within the FMRLs and the application otherwise is approvable,

issuance of a Conditional Commitment for Direct Loan Financing

must be conditioned on adoption of the HUD-approved Schedule

of Allowances.

c\. The Schedule of Allowances prepared by the appraiser and a

synopsis of his/her findings regarding the acceptability of

the Borrower\'s estimates shall be routed to the Office\'s

Utility Specialist (or the Housing Management Division

Maintenance Engineer) for prompt review and comment prior to

the completion of Technical Processing. A copy of any Housing

Management comments shall be attached to the Findings

Memorandum prepared by the Valuation staff.

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4571.1 REV-2

CHAPTER 5

5-39. DETERMINATION IF GROSS RENTS (CONTRACT RENTS) ARE IN COMPLIANCE

WITH FAIR MARKET RENT LIMITS.

a\. If the dwelling unit rentals from the rent formula calculation,

plus allowances for utilities, if any, are no higher

than the applicable FMRLs, they shall become the Contract

Rents approved for Section 8 and Section 202 direct loan

purposes.

b\. If the dwelling unit rentals from the rent formula calculations,

plus allowances for utilities, if any, are higher

than the applicable FMRLs, the applicable FMRLs less the

HUD-approved allowances, if any, shall become the Contract Rents

approved for Section 8 and Section 202 direct loan purposes

and the amount of the direct loan will be limited by the debt

service criterion, rather than the cost criterion, to an

amount supportable by 95 percent of the net income at the debt

service rate at which the direct loan will be amortized.

c\. Compliance with the Fair Market Rent Limits (FMRLs).

\(1\) While the published Fair Market Rents (FMRs) represent

gross rents which include all essential utilities and

services, the rents payable to the Borrower may be based

on the exclusion of some essential utilities and

services. It then is necessary to establish a Schedule

of Allowances for Utilities and Other Services

(Allowances) (see paragraph 5-38 above) for the cost

of utilities (except telephone) and charges for other

services payable directly by the tenants. Such expenses

payable directly by tenants are sometimes called Personal

Benefit Expenses (PBE). \"Total Housing Expense\" as

defined in Section 880.201 of the Regulations is \"the sum

of the contract rent and any utility allowance.\"

\(2\) The appraiser shall determine whether the total housing

expense is within the bounds permitted by the applicable

FMRs. These bounds, based on FMRs and project and

dwelling unit characteristics and parameters, are called

Fair Market Rent Limits (FMRLs) to distinguish them from

the base of raw, FMRs.

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4571.1 REV-2

CHAPTER 5

(5-39) (a) The total housing expense may not exceed the FMRs

except that the total housing expense may in some

circumstances be permitted to exceed the FMRs by up

to 10 percent (prerogative of the Area Manager) or by

up to 20 percent (prerogative of the Assistant

Secretary). The following documentation shall be

submitted to the Office of Multifamily Housing

Development, Attention: Technical Support Division

to support a request for the use of the Assistant

Secretary\'s prerogative: (Note: For projects

needing both a loan increase and the Assistant

Secretary\'s prerogative, requests should be submitted

in the same memorandum.)

\(1\) Area Manager/Field Office Supervisor\'s written

recommendation.

\(2\) Form HUD-92013, Application-Project Mortgage

Insurance.

\(3\) Form FHA-2013E, Supplemental Application and

Processing Form.

\(4\) Form HUD-92264, Rental Housing-Project Income

Analysis and Appraisal.

\(5\) Form HUD-92264A, Supplement to Project Analysis.

\(6\) Replacement Cost Formula (Appendix 16, Handbook

4571.1 REV).

\(7\) Criterion 4, Form HUD-92264A Format,

(Appendix 17, Handbook 4571.1 REV).

\(8\) Rent Formula (Appendix 18, Handbook 4571.1 REV).

\(9\) Allocation of Formula Rent, (Appendix 19,

Handbook 4571.1 REV).

\(10\) Form HUD-92274, Operating Expense Analysis

Worksheet.

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4571.1 REV-2

CHAPTER 5

(5-39) (b) The FMRLs are determined by multiplying the FMRs by

the following factors:

\(1\) Published FMRs x 1.05 elderly adjustment x 1.00

(No prerogative) = 1.05 x FMRs.

\(2\) Published FMRs x 1.05 elderly adjustment x 1.10

(Field Office Manager\'s Prerogative) = 1.155 x

FMR.

\(3\) Published FMRs x 1.05 elderly adjustment x 1.20

(Assistant Secretary\'s Prerogative) = 1.26 x

FMRs.

The above factors are applicable to elderly/handicapped

units to arrive at FMRLs for the 0,1 and 2-bedroom

dwelling units and are applicable to nonelderly/handicapped

units with large families to arrive at FMRLs for 0,

1, 2, 3 and 4-bedroom dwelling units.

\(3\) For the purposes of determining compliance with FMRLs.

Section 202/8 dwelling units shall be classified by

structure type in accordance with the definitions listed

below. (Note: the following definitions may differ in

very important respects from similar definitions currently

printed in other HUD Handbooks, forms and instructions.)

\(a\) Detached. A dwelling structure containing one living

unit, surrounded by permanent open spaces.

\(b\) Semi-Detached/Row. A dwelling structure containing

two or more living units separated only by vertical

divisions termed party or lot line walls.

Semi-Detached/Row dwelling units may not be enclosed

on more than two sides by common side (party) or lot

line walls and must have permanent open spaces

contiguous to no fewer than two sides. Multilevel,

Semi-Detached/Row dwelling units must provide private

stairway access to all levels within each dwelling

unit.

\(c\) Walkup. A multilevel structure containing two or

more living units separated horizontally by floor

and/or ceiling structural elements, which is not

required either by HUD MPS or by local building codes

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4571.1 REV-2

CHAPTER 5

(5-39) to contain an elevator(s). Note: structures

containing two or more dwelling units, whether

one-story or multistory, which do not comply with

the definitions herein of either a Semi-Detached/Row

or Elevator structure shall be classified as \"walkup\"

for purposes of determining compliance with FMRLs.

\(d\) Elevator. A multilevel structure containing an

elevator (or elevators) which either would be

required by HUD MPS to be included in a similar

structure or which is required by local building

codes. Elevators are required by HUD MPS in

structures of:

1 Three or more stories in housing for the elderly

or handicapped.

2 Two-story housing for the elderly or handicapped

where central dining facilities are located on a

3 Two or more stories in housing with living units

above the first floor intended for occupancy by

wheelchair users.

\(4\) Elderly or Handicapped FMRLs. An elderly and/or

\* handicapped dwelling units shall be defined as: A zero or

one-bedroom dwelling unit or two-, three- or four-bedroom

dwelling units to accommodate the nonelderly handicapped

with large families constructed in compliance with HUD MPS

and applicable local building codes, and ordinances,

specifically designed for the use and occupancy of elderly

or handicapped persons.

d\. If the amount of the direct loan is limited by criteria other

than cost, such as Section 202 cost limits, or debt service,

Section G of Form HUD-92264 will have to be amended accordingly

and the Contract Rents will have to be redetermined, based on

the amount of direct loan permitted by the controlling

mortgage-limiting criterion.

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4571.1 REV-2

CHAPTER 5

5-40. VALUATION ANALYSIS: REHABILITATION PROJECTS. Valuation processing

shall be completed in accordance with the preceding instructions

for proposed construction, except as modified below.

a\. The appraiser shall participate in the joint inspection

required by paragraph 5-2 of this Chapter.

b\. References to total estimated development cost shall be

construed to mean the summation estimate, the sum of the

\"as-is\" value and cost of rehabilitation including carrying

and financing charges. (See Appendix 20 for replacement cost

formula for rehabilitation projects.)

c\. The findings of market value after rehabilitation shall be

omitted.

d\. For projects where the estimated cost of the rehabilitation is

25% or more of the estimated value of the property after

rehabilitation, the total housing expense shall be determined

in accordance with the procedures outlined in paragraph 5-37 of

this Chapter.

e\. For projects where the estimated cost of the rehabilitation is

less than 25 percent of the estimated value of the property

after rehabilitation, the gross rents shall be determined in

accordance with the procedures outlined in paragraph 5-37 of

this Chapter except that the gross rents may not exceed 75

percent of the FMRLs for projects with rehabilitation costs

which are 25 percent of value after rehabilitation are

determined by multiplying the FMRs by the following factors:

.75 (no prerogative); .825 (Area Manager\'s prerogative); or

.90 (Assistant Secretary\'s prerogative). These factors are

properly applicable to dwelling units designed for occupancy by

the elderly/handicapped only when the FMRs for units designed

for the elderly/handicapped have been determined prior to their

application by multiplying the published FMRs for 0, 1, and

2-bedroom units (or 3 or 4-bedroom units) by 1.05.

Alternatively, the FMRLs for rents for the elderly/handicapped

may be determined directly by multiplying the published FMRs

for 0, 1, 2-bedroom dwelling units (or 3 or 4-bedroom units) by

the following composite factors: .7875 (no prerogative); .86625

(Area manager\'s prerogative); or .945 (Assistant Secretary\'s

prerogative).

Page 5-35 3/83

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4571.1 REV-2

CHAPTER 5

SECTION 5. MORTGAGE CREDIT ANALYSIS

5-41. GENERAL. The determination of the eligibility of the nonprofit

Borrower and the analysis of the Borrower\'s financial statements

will have been completed at the Fund Reservation Stage. Therefore,

the Mortgage Credit processing in these areas at the Conditional

Commitment Stage will consist of completing the credit

investigation and updating the financial statement analyses in

accordance with the requirements set forth in Handbook 4470.1.

5-42. ANALYSIS OF THE GENERAL CONTRACTOR. The MCE shall make an analysis

and review of the general contractor, if identified, in accordance

with the instructions contained in Handbook 4470.1.

5-43. SPONSORING ORGANIZATIONS. In making his/her analyses, the MCE must

keep in mind that the Borrower, in many cases, will be dependent

upon its sponsoring organization for evidence of financial

capacity. Therefore, in analyzing the Borrower\'s capability, the

MCE must evaluate the capability of the sponsoring organization as

well.

5-44. DETERMINATION OF THE FINANCIAL REQUIREMENTS TO COMPLETE THE

PROJECT. The development of the financial requirements to complete

the project is essential to the evaluation of the Borrower\'s

financial capacity to provide the required funds. This analysis

involves:

a\. The determination of the net amount of cash required over and

above the loan proceeds to construct the project, which is

established by deducting the maximum amount of the loan from

the total HUD-FHA replacement cost of the property or project.

This is called \"front-end money\".

b\. The determination of the amount of the minimum capital

investment, which is defined to be one-half percent of the loan

amount or \$10,000, whichever is lesser.

c\. The determination of amount of capital needed to defray

costs of placing the project into immediate operation, which

would include the costs of any capital expenditures such as

furniture, supplies, equipment and other expenditures necessary

to the basic operation of the project which are not covered by

proceeds of the loan. A determination shall also be made as to

which items may be covered by the Project Contingency and which

must be paid for by the Borrower. The Borrower is required to

submit a schedule covering these items which will be reviewed

by the Cost Staff for the purpose of estimating the

reasonableness of such costs. The Cost Staff shall advise the

Mortgage Credit Staff of the results of its review.

3/83 Page 5-36

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4571.1 REV-2

CHAPTER 5

5-45. DETERMINATION OF BORROWER\'S FINANCIAL CAPACITY TO CLOSE THE

TRANSACTION AND OPERATE THE PROJECT. Projects for the elderly or

handicapped involve more extensive financial consideration than

other multifamily projects.

a\. The MCE must determine that the Borrower has sufficient

capacity to:

\(1\) Provide any required \"front-end money\" as determined in

accordance with paragraph 5-44a above,

\(2\) Provide the minimum capital investment, which may be

satisfied by the nonprofit Borrower establishing a cash

escrow no later than the initial closing or contributing

all or a portion of the land draw available to it at

initial closing as determined by the MCE in accordance

with Handbook 4470.1 (see paragraph 7-14), and

\(3\) Provide the funds needed to meet the costs of all capital

expenditures. In addition to the schedule of the costs of

all capital expenditures, the Borrower also must submit a

plan outlining how it will meet these costs. In most

cases the Borrower will indicate that funds will be

provided from the Project Contingency. In some cases, the

Borrower may indicate that it plans to raise the money to

cover these costs through fund-raising drives,

contributions from Sponsors, its membership, or

benefactors, or that the furniture, equipment, or supplies

will be donated. The MCE\'s responsibility at this point

is two-fold. He/She shall review the plan to determine

its feasibility, based on evidence in the application

regarding the Borrower\'s past capability of raising funds,

etc., and also shall make a determination as to whether or

not the Borrower would be able to furnish its own monies

in the event it could not raise the funds or secure

donations.

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4571.1 REV-2

CHAPTER 5

(5-45) b. The Borrower is required to submit, on Form FHA-2013-E,

estimates of operating costs not directly related to the

project which have not been included on the application form,

such as operating transportation, community dining and

recreation facilities, maid service, etc. This Form shall be

reviewed by the Valuation Staff (see paragraph 5-33), whose

findings will be recorded on the Form and forwarded to the

Mortgage Credit Staff. The MCE shall review this Form to

determine if the operations are self-sustaining or if the

Borrower will be required to invest its own funds to meet the

expenses of these operations. If an investment will be

required of the Borrower the MCE must determine that the

Borrower has the resources to provide the needed capital. As

in the case described in subparagraph a above, a determination

that the Borrower does not have adequate resources shall not

constitute rejection by the Mortgage Credit staff at the

Conditional Commitment Stage. The MCE shall include in its

memorandum to the Housing Director (see paragraph 5-46 below) a

request that a condition be added to the Conditional Commitment

which sets forth the requirements and requires the Borrower to

submit information on how it plans to meet the requirements

with its Request for a Firm Commitment.

5-46. RECORDING THE RESULTS OF THE MORTGAGE CREDIT ANALYSES. All

determinations made as a result of paragraphs 5-45 a and b above,

shall be recorded on Form FHA-2264-A, Supplement to Project

Analysis, Section II, which shall be completed in accordance with

Handbook 4480.1. If the Mortgage Credit Analysis does not indicate

that the Borrower is capable of providing the funds required by

subparagraphs 5-45a(1) and (2) above, the project may be rejected

by the Mortgage Credit staff. (See also paragraph 5-34 concerning

determination of cost limits for group homes and paragraph 5-35

concerning determination of loan amount based on debt service when

term of tax abatement is less than term of loan.) In addition, the

MCE shall prepare a memorandum stating his/her opinion, based on

the available data, as to the ability of the Borrower to provide

all of the capitalization, debt service, and continuing operating

expenses of the project.

3/83 Page 5-38

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4571.1 REV-2

CHAPTER 5

SECTION 6. MANAGEMENT PROCESSING

5-47. GENERAL. The HM staff shall review the Request to determine the

management capability of the Borrower or management agent, the

approvability of the management plan, and the approvability of the

proposed lease. The HM staff also shall review the operating

expenses for adequacy from a management viewpoint. Reviews shall

be completed in accordance with Handbook 4381.2, Management

Requirements on Processing Insured Multifamily Housing Projects,

except as modified herein.

5-48. REVIEW OF MANAGEMENT AGENT\'S QUALIFICATIONS AND THE MANAGEMENT

CONTRACT. The Borrower may propose to manage the project itself or

contract with a management agent. If the Borrower determines to

contract with a management agent, (project administrator or

resident manager, if self-managed), it must submit the proposed

management contract using Form HUD-52678, as an instructional

guide, a resume on the management agent, Form HUD-2530 on the

management agent and Form HUD-52678-B. The HM staff shall review

these documents for compliance with HUD requirements and in order

to determine the acceptability of the management agent.

a\. Management Agent Qualifications. Using the written reply to

the \"Questionnaire for Managing Agent,\" the Management

Specialist shall evaluate the capacity of the Management Agent

to manage a multifamily project successfully. Particular

attention should be given to the Management Agent\'s capacity to

handle the problems inherent in managing low-income housing.

In the event the information on the statement is not sufficient

to make a reasonable determination, the Management Agent should

be required to submit supplemental information. A history of

poor management practices in defaulted projects would quite

obviously disqualify a Management Agent, but the acceptability

of the Management Agent will generally be a judgment based on

the experience, motivation, financial capacity, and potential

of the Management Agent. If the reply to the questionnaire or

the Form HUD-2530 indicates the Management Agent has had

pertinent difficulties with projects under the jurisdiction of

another Field Office, the Management Specialist shall obtain a

written report from that Office relative to the performance of

the Management Agent.

b\. Certification by the Management Agent. The Management

specialist will make certain the management Agent has submitted

an unqualified certification that he/she considers the project

feasible from a management standpoint and has reviewed the

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4571.1 REV-2

CHAPTER 5

(5-48) management exhibits in the Request. The certification must be

substantially in the form of the sample certification provided

by the Field Office.

c\. Management Contract. The management contract shall be reviewed

by the HM staff using Form HUD-52680 as a guide.

5-49 REVIEW OF MANAGEMENT PLAN. The management plan shall be reviewed

by the HM staff for sufficiency and compliance with HUD

requirements as outlined in Form HUD-52578.

5-50. REVIEW OF FORM OF LEASE. The form of lease shall be reviewed by

the HM staff for sufficiency and compliance with HUD requirements.

The Model Lease for Section 202 Projects is provided in Appendix

21\.

5-51. REVIEW OF FORM HUD-92013 AND FORM HUD-92264. The operating expense

estimates which are prepared by the Borrower and entered in Section

E of Form HUD-92013 and prepared by the Valuation staff and entered

in Section E of Form HUD-92264 shall be reviewed by the HM staff.

The expense estimates shall be checked against known operating

expenses for successfully operating similar projects in order to

assure that the estimates are adequate from a management

viewpoint.

5-52. Report to Housing Director. At the conclusion of its reviews, the

HM staff shall prepare a memorandum to the Housing Director stating

whether or not the proposed management, the form of lease and the

operating expense estimates are acceptable.

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4571.1 REV-2

CHAPTER 5

SECTION 7. PREPARATION AND ISSUANCE OF

CONDITIONAL COMMITMENT

5-53. HOUSING DIRECTOR FUNCTIONS. The Housing Director shall review the

underwriting and program determinations and amend or modify

conclusions as he/she deems necessary (with appropriate

documentation). If he/she determines that a Conditional Commitment

should be issued, he/she shall direct the MHR to prepare the

Conditional Commitment in accordance with the format which appears

in Appendix 22 and schedule a Conditional Commitment Conference,

5-54. CONDITIONAL COMMITMENT CONFERENCE. The Borrower shall be invited

to a Conditional Commitment Conference to discuss the conclusions

reached as a result of processing. Upon agreement being reached

between the Borrower and the Field Office, the commitment shall be

issued.

5-55. AMENDMENTS TO RESERVATIONS OF SECTION 202 AND SECTION 8 FUNDS.

a\. Amendment of Section 202 Reservation.

\(1\) Decreases. No decreases to outstanding fund reservations

shall occur until completion of cost certification and

final closing, except where the outstanding fund

reservation exceeds the maximum approvable mortgage by

\$100,000 or more. In such cases, the Form 718 should be

decreased to the firm commitment loan amount. This action

should only occur prior to the initial loan closing when

it is determined that the loan will close based on the

firm commitment loan amount. The decrease (deobligation)

of a portion of a outstanding fund reservation shall be

accomplished following the procedure set forth in

paragraph 4-51b(1) and 4-55a. In addition, field offices

must transmit the authorizing document (i.e., either the

firm commitment letter or the FHA Form-2580, Maximum

Insurable Mortgage, in the case of projects that proceed

to cost certification and final closing) along with the

Form 718 which is transmitted to the RAD. For each such

action a copy of the amended Form HUD-718 with the RAD

confirmation (signature in Block 10) must be forwarded to

Headquarters, Attention: Direct Loan Branch.

\(2\) Increases. A memorandum requesting the increase, with

supporting justification, shall be prepared by the MHR for

the signature of the Area Manager. It shall be submitted

to the Office of Multifamily Housing Development

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4571.1 REV-2

CHAPTER 5

(5-55) Attention: Direct Loan Branch, through the Regional

Director of Housing. If approved by Headquarters, a Form

HUD-185 will be issued assigning the funds to the Regional

Office, which will in turn issue a Form HUD-185.1 to the

Field Office. Upon receipt of the fund assignment, the

MHR shall prepare Form HUD-718, which shall be processed

in the same manner described in paragraph 4-51b.

b\. Amendment of Section 8 Reservation.

\(1\) Decreases. No decreases to the Section 8 reservation

shall be made prior to completion of firm commitment

processing.

\(2\) Increases. Where an amendment increasing the Section 8

reservation is required, the PC&R staff shall prepare a

revised Form HUD-52540 (Project Accounting Data) and Form

HUD-718 as described in subparagraph 4-51.

3/83 Page 5-42