4350.2 REV-1

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CHAPTER 1. OVERVIEW

1-1. BACKGROUND

A. Purpose

1\. The Section 8 Loan Management Set Aside

(LMSA) Program for projects with HUD-insured

and HUD-Held mortgages is designed to reduce

claims on HUD\'s insurance fund by stabilizing

the financial condition of troubled

HUD-insured or HUD-held multifamily projects.

The program is intended to assist projects

with immediately or potentially serious

financial problems.

2\. The LMSA program provides Section 8 rental

assistance to the project. The Section 8

assistance is a mechanism that allows tenants

to afford rent levels necessary to maintain

the project and allows increases in income.

The rental subsidy for the residents makes it

possible for the owner to receive higher unit

rents. To qualify for the program, owners

must show how LMSA assistance will enable

them to overcome the project\'s problems.

3\. Assistance is also provided under the LMSA

program for other purposes as authorized in

applicable legislation, such as incentives to

owners to prevent prepayment of HUD

mortgages, incentives in exchange for

extending low income affordability

restrictions, or conversions to the Section 8

program from Rent Supplement, Rental

Assistance Payment (RAP) or other defunct HUD

subsidy programs. When funds are made

available for conversion of Rent Supplement

and RAP, a Notice of Fund Availability (NOFA)

will appear in the Federal Register.

B. Authority

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1-1 6/92

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4350.2 REV-1

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The program is authorized by Section 8 of the U.S.

Housing Act of 1937, as amended, and is covered in

Federal regulations at 24 CFR Part 886 Subpart A.

C. Additional References

This Handbook should be used in conjunction with

the following additional Handbooks and

Departmental issuances, including the current

Notice of Fund Availability (NOFA) for the Section

8 LMSA Program:

o Occupancy Requirements of Subsidized

Multifamily Housing Programs (HUD Handbook

4350.3);

o Insured Project Servicing Handbook (HUD

Handbook 4350.1);

o Housing Fund Control Handbook (HUD Handbook

7400.10);

o Management Documents, Agents, and Fees (HUD

Handbook 4381.5).

1-2. ELIGIBLE PROJECTS

Four types of HUD multifamily projects are eligible for

LMSA assistance:

1\. HUD-Insured projects and HUD-Held mortgages with

or without subsidy are eligible for new units,

except such projects which already have a contract

for project-based Section 8 assistance for all

units;

2\. any project described in (1) above that has been

assigned to the Secretary;

3\. any multifamily project acquired by the Secretary

and thereafter sold under a Secretary-held

purchase money mortgage; or

4\. a property financed under Section 202 of the

Housing Act of 1959.

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4350.2 REV-1

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References to HUD-Held or Secretary-Held projects

throughout the handbook include any projects that meet

one of the descriptions (Paragraph 1-2.) above.

1-3. FORM AND TERM OF SUBSIDY

A. Form of Subsidy

1\. Section 8 assistance is a rental subsidy that

provides the difference between the approved

rent for a covered unit and the amount

determined by formula to be payable by the

Section 8 eligible tenant.

2\. The program also provides the following

additional benefits to the owner;

o HUD payment of limited claims for unpaid

rent and tenant damages; and

o HUD payment of limited claims for

vacancy losses.

B. Term of Assistance

1\. Section 8 Housing Assistance Payments (HAP)

Contracts are executed between HUD and the

owner.

o Because of the appropriations language,

the initial term of contracts executed

since 1983 may not exceed 5 years. Upon

expiration of the contract term, HUD

will offer to extend the contract for

additional five-year increment periods

to the extent appropriations are made

available. Total contract shall not

exceed 15 years. Owners not in

compliance with housing quality

standards and not maintaining the

project in a decent, safe, and sanitary

manner will not be offered an

opportunity to extend the Section 8

contract.

The total number of years in the

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1-3 6/92

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4350.2 REV-1

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contract term for HAP contracts executed

between 1976 and 1983, including

renewals, must not exceed 15 years. At

the option of the owner, these contracts

can be extended in five-year increments

up to a maximum term of 15 years.

o Upon expiration of the contract term,

HUD will offer to extend the contract

for additional five-year incremental

periods to the extent appropriations are

made available.

2\. The Housing and Community Development Act of

1987 changed the procedures regarding

contract expirations. Prior to the Act,

renewals and extensions were initiated with

the mutual agreement of HUD and the owner.

Since the Act, all owners must provide

advance notice of their intent to terminate

the HAP Contract upon expiration. (See

Paragraph 3-4 for more detailed information

about expiring contracts and extensions.)

1-4. PROGRAM FUNDING

A. Competitive Process

LMSA assistance is not an entitlement. HUD

selects projects to receive assistance through a

competitive awards process announced in an annual

Notice of Fund Availability (NOFA) published in

the Federal Register. In making awards, HUD

considers the type of project (insured or HUD-held),

the immediacy of the project\'s financial

problems, the quality of the owner\'s plan for

correcting these problems, and the likelihood that

the assistance will avoid an insurance claim.

Funds designated for assistance to troubled

projects are awarded under competitive procedures.

The competitive awards process described herein

does not apply to LMSA assistance provided for

special purposes such as incentives to prevent

mortgage prepayment, Rent Supplement/RAP

conversions, etc.

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4350.2 REV-1

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B. Types of Funding

Owners of eligible projects can apply for

assistance under either general funding or

emergency funding procedures.

1\. General Funding: Most LMSA funds that are

available each year will be awarded through

general funding procedures. To receive LMSA

general funding assistance owners submit an

application in response to a NOFA (see

Appendix 1 for LMSA Application, Form

HUD-52530).

2\. Emergency Funding

o In most cases, Headquarters retains a

limited portion of each annual LMSA

funding allocation for emergency funding

requests. The portion of annual funds

potentially available for emergency

requests will be announced in the NOFA

published each year.

o Applications for LMSA assistance

received after the general funding

deadline will be considered under

emergency funding procedures.

Applications for emergency assistance

may be submitted according to

instructions described in the NOFA.

However, before preparing an

application, owners should check with

the HUD Field Office to determine if

emergency funding is likely to be

available and whether or not the project

would be a good candidate for emergency

assistance.

o In evaluating emergency funding

requests, the Field Office will assess

the likelihood that the assistance

requested will prevent a mortgage

default or assignment in the near future

and the reasons the funds are needed on

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1-5 6/92

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4350.2 REV-1

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an emergency basis. The Field Office

will assess the immediacy of a project\'s

financial problems using the indicators

described in Paragraph 2-11.

o Headquarters will consider emergency

requests only to the extent that

adequate funds are available to fulfill

the request.

1-5. CONDITIONS OF ASSISTANCE

A. Disclosure of Tax Credits and Other Federal

Assistance to the Project

HUD is required to certify that the amount of

assistance it will provide through the LMSA

program will not exceed the amount needed to

provide affordable housing. This certification

must be made before HUD can execute LMSA contracts

for new or additional units of assistance, or

reserving funds for those units. This requirement

does not apply to contract renewals or cost

amendments.

To enable HUD to make this certification, owners

must disclose information about low-income housing

tax credits and other government assistance

received by the project.

1\. Tax Credits

If a project does not have tax credits, the

owner must sign a certification that no tax

credits have been received and agree to

notify the Field Office of any changes in the

project\'s tax credit status.

If a project has received tax credits, the

owner must provide the following information

with the application:

o A brief summary of the terms under which

the owner will participate in the

program, including:

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4350.2 REV-1

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\- annual credit amount

\- type of credit (acquisition or

rehab)

\- date the 10-year credit period will

begin

\- credit percentage awarded for each

type of credit

\- maximum qualified basis for each

type of credit

\- the applicable income eligibility

limit

\- number of units, if any, for deep

rent skewing

o a copy of:

\- IRS Form 8609, Low Income Housing

Credit Allocation Certification; or

\- a report on the status of any tax

credit allocation still in process

and a copy of any credit agency

reservation form or other document

indicating the agency\'s intent to

award credits to the project

o In the case of a Transfer of Physical

Assets (TPA), documentation of whether

the credits will be claimed by the

current owners or new owners

o a list of all federal, state and local

government insurance, loan, grant or

subsidy programs in which the applicant

plans to participate, and any grants or

below market loans expected to be

received from non-government sources.

For each loan, give interest rate,

monthly debt service loan amount and

loan term

o a sources and uses of funds statement as

contained in Chapter 13, Appendix F of

HUD Handbook 4350.1, itemizing:

\- all funds available (gross amounts

available before syndication,

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1-7 6/92

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4350.2 REV-1

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legal, or other intermediary

costs);

\- all purposes for which funds will

be disbursed; and dates any

investor contributions are due.

o a statement in which the applicant

agrees to promptly notify the HUD Field

Office of any change in the information

provided pursuant to the project\'s tax

credits

2\. Other Government Assistance

If the amount of government assistance the

applicant will receive or can reasonably

expect to receive during the Federal Fiscal

year in which the LMSA application is

submitted exceeds \$200,000, the applicant

must disclose the types and amount of other

government assistance received. Examples of

other government assistance include: mortgage

insurance, loans, grants, payments, subsidies

or indirect assistance from a federal, state

or local government agency.

In determining whether assistance to a

project exceeds the \$200,000 threshold,

owners should count the total amount of a

multi-year assistance award as assistance

received during the Federal fiscal year of

the application. The total amount of LMSA

assistance requested in the current

application and the total amount of existing

LMSA contracts should be included when making

this determination.

B. Lobbying Restrictions Agreement

Under the federal lobbying regulations, federal

funds, including LMSA assistance, may not be used

to influence or attempt to influence any Executive

or Legislative branch personnel in connection with

the award of any Federal contract, loan or grant,

or the entering into of any cooperative agreement.

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4350.2 REV-1

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This prohibition also applies to payments made to

influence a Federal official in connection with

the extension, continuation, renewal, amendment or

modification of any contract, grant, loan or

cooperative agreement. As part of the LMSA

application, owners must certify that they have

not used, are not using and will not use federally

appropriated funds for lobbying. Owners must also

agree to require comparable certification language

in contracts and agreements with subrecipients of

LMSA funds, such as property managers.

Owners who apply for LMSA funds in excess of

\$100,000 are required to disclose payments made

with non-federally appropriated funds for lobbying

activities, and must certify that they will

disclose such activity should it occur in the

future. Certification regarding lobbying

activities must be submitted as part of the

application. Disclosure statements, if warranted,

regarding lobbying activities must also be

submitted as part of the application. Applicants

are responsible for determining whether their

disclosure statements need to be updated at the

end of any calendar quarter, using the criteria

set forth in 24 CFR 87.110(c).

Certification and disclosure statements, if

warranted, regarding lobbying activities must be

submitted as part of the application. Upon

receipt of a disclosure form (SF-LLL), the Field

Office Loan Management staff must make a duplicate

of the disclosure form and forward the original to

the Office of Ethics in Headquarters. Applicants

are responsible for determining whether their

disclosure statements need to be updated each

quarter. Sample certification language and a

lobbying disclosure form (SF-LLL) are included in

Appendices 5 and 6.

In addition, if applicants spend non-federally

appropriated funds for the purpose of influencing

a HUD funding decision or management action

regarding their LMSA application, they must keep

records of all such expenditures and, if the total

amount of money on such expenditures exceeds

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1-9 6/92

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4350.2 REV-1

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\$10,000 in a calendar year, report to HUD on such

expenditures between January 1 and January 10 of

the following year. Each person receiving payment

or consideration to influence HUD\'s decision must

register with HUD\'s Office of Ethics in

Headquarters. These requirements do not apply to

expenditures incurred in complying with

conditions, requirements, or procedures imposed by

HUD as part of the application.

C. HUD Fair Housing Requirements

Owners must certify on their applications that

they will comply with the Fair Housing

requirements that apply to multifamily rental

properties. These requirements are set forth in

the Fair Housing Act, Title VI of the Civil Rights

Act of 1964, Executive Orders 11063 and 11246,

Section 504 of the Rehabilitation Act of 1973,

Americans with Disabilities Act of 1990, the Age

Discrimination Act of 1975, Section 3 of the

Housing and Urban Development Act of 1968, as well

as with all regulations issued pursuant to these

authorities. The specific requirements can be

found in Exhibit A to the HAP Contract, Form

HUD-52537 (see Appendix 2).

In addition, owners must submit and comply with

their Affirmative Fair Housing Marketing Plan.

D. Housing Quality Standards (HQS)

The units for which assistance is requested must

meet the standards for decent, safe, and sanitary

housing as specified in 24 CFR 886.113. Since

eligible LMSA projects have already met minimum

property standards and housing quality standards

(HQS) at the time of construction, the Field

Office must inspect the units to ensure continued

compliance with HQS and also that unit maintenance

is satisfactory. If the Field Office finds that

units do not meet HQS requirements, HUD can

provide assistance for those units only if the

owner presents an acceptable plan for bringing the

deficient units into compliance. Further details

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6/92 1-10

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4350.2 REV-1

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and discussion of housing quality standards are

found in Paragraph 2-5 of this Handbook.

E. Lead-Based Paint

1\. The owner is required to inspect all units

proposed for assistance under the LMSA

program which were constructed prior to 1978

for defective paint surfaces. These are

surfaces on units which have cracking,

scaling, chipping, peeling or loose paint.

2\. If the lead-based paint or defective paint

surfaces are discovered in any unit proposed

for assistance, follow the guidelines

outlined in Paragraph 1-5.E.3.c.i. below, as

a condition for approval of the new HAP

contract.

3\. For HAP contracts executed on or after May 1,

1987, the following requirements apply:

a\. A random sample of all dwelling units

shall be tested for lead-based paint in

chewable surfaces. Chewable surfaces

are defined as protruding painted

surfaces up to five feet from the floor

or ground which are readily accessible

to children under seven years of age.

These surfaces include, but are not

limited to, protruding corners, window

sills and frames, doors and other

protruding woodwork.

i\. For projects with twenty or more

units, ten units shall be tested.

ii\. For projects with fewer than twenty

units, six units shall be tested.

iii\. A sampling of common areas and

exterior surfaces frequently used

by children under 7 years of age,

such as play grounds and day care

centers, shall also be tested.

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1-11 6/92

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4350.2 REV-1

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If all of the units tested in the sample

are found to be lead free, then the

project may also be considered lead free

and no further testing or abatement will

be necessary. If lead is fond in any of

the tested units, then all assisted

units and units proposed for assistance

in the project must be tested. If lead

is found to be present in any of the

common areas, then all common areas must

be tested.

b\. Elevated Blood Level (EBL) Child. If an

owner is presented with test results

that indicate a child seven years or

younger living in a unit has an elevated

blood level (25 micrograms per deciliter

of blood or greater unless otherwise

specified by HUD) then the owner is

required to test the unit and if the

test is positive for lead-based paint

abate the unit following the guidelines

outlined in Paragraph 2-6, or the owner

may forego testing and abate all unit

surfaces.

c\. Requirement to test and abate. If

lead-based paint is discovered in any

assisted units or units proposed for

assistance, abatement will be required

under the following conditions:

i\. For all new applications :

defective paint surfaces. For the

approval of new units under LMSA,

the owner is required to inspect

for defective surfaces. All

defective paint surfaces and

chewable paint surfaces must either

be abated, or tested for lead-based

paint and abated if found to be

positive (see Paragraph 2-6.B. for

required abatement procedures).

ii\. For all new applications - chewable

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6/92 1-12

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4350.2 REV-1

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surfaces. For the approval of new

units under LMSA, the owner is

required to conduct the random

sampling test for chewable surfaces

as described above, in accordance

with the testing requirements

described in Paragraph 2-6, and

abate the entire interior and/or

exterior chewable surfaces (if test

results indicate the presence of

lead-based paint). The owner and

testing entity must certify that a

unit is free of lead-based paint,

as a condition prior to the

execution of a HAP contract.

iii\. In the case of an EBL child. If an

owner is presented with test

results that a child living in an

assisted unit has an EBL as defined

above, and the unit tested positive

for lead-based paint then the owner

must abate the unit according to

procedures set forth in Paragraph

2-6 or relocate the family to a

unit free of lead-based paint.

F. Resident Input

1\. Purpose: Project owners subject to 24 CFR

Part 245 are required to solicit input from

residents when they request a rent increase

as part of their LMSA application. This

requirement seeks to ensure that owners

consider the impact of requested rent

increases on residents of projects that do

not receive a project-based rental subsidy.

2\. Notice: HUD will take resident comments

prior to executing the HAP contract with

owner, not during the application stage.

Project owners subject to 24 CFR Part 245

must notify the project\'s residents of their

intent to request a rent increase as part of

an application for LMSA assistance. The

notice must be distributed directly to each

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4350.2 REV-1

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resident and posted in common areas within

the project, including, but not limited to,

the project office, laundry rooms, and common

entry ways. For further information, refer

to Chapter 7 of HUD Handbook 4350.1.

3\. Comment Period: Owners must give tenants a

period of at least 30 days following the date

of the notice to submit written comments on

proposed rent increases. Owners should

specify in the notice to tenants the final

date comments can be accepted.

4\. Summary of Comments: At the end of the

comment period, the owner must summarize the

residents\' comments, and prepare a

recommendation on whether the proposed rent

increase should be revised to accommodate the

comments. Owners must assemble copies of the

summary, the recommendation, the residents,

comments and a copy of the notice distributed

to tenants, and submit them to HUD along with

their rent increase request.

G. Other HUD Requirements

1\. Applicants must comply with Section 102 of

the HUD Reform Act of 1989. See 24 CFR Part

12, Subpart C for detailed information.

Subpart C provides for (1) initial reports

from applicants for HUD assistance and (2)

update reports from recipients of HUD

assistance. All applicants for assistance

from HUD for a specific project or activity

must make a number of disclosures, if the

applicant meets a dollar threshold for the

receipt of covered assistance during the

fiscal year in which the application is

submitted. The applicant must also make the

disclosures if it requests assistance from

HUD for a specific housing project that

involves assistance from other governmental

sources. HUD Form 2880, which provides for

these disclosures, is provided to the public

through the application package. A copy of

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6/92 1-14

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4350.2 REV-1

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HUD-2880 is included at Appendix 18.

2\. The owner must be in compliance with the

Regulatory Agreement and all other HUD

regulations and guidelines. For example, the

Field Office should confirm that the security

deposit account for the project is adequately

funded. If an owner is not in compliance,

LMSA assistance,cannot be awarded until the

owner presents an acceptable plan to correct

all deficiencies.

1-6. KEY STEPS IN THE PROCESS

Exhibit 1-1 summarizes key steps in the approval of

LMSA funds.

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1-15 6/92

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4350.2 REV-1

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EXHIBIT 1-1

KEY STEPS IN LMSA APPROVAL PROCESS

Publication of Notification of Fund

Availability (NOFA) \-- General Funding and

Emergency Funding

Owner submits application to HUD Field

Office

Field Office Review

o Local Government Review and Comment

o Field Office Review

o Annual Needs Survey

Acceptable applications submitted to

Headquarters by Field Offices

Headquarters Review and Selection Based

upon Selection Criteria and Priorities

established in the NOFA

Allocation and Reservation of Funds

o Headquarters allocation to Regional

Office

o Regional Office notification Field Office

o Field Office reservation of funds

Execution of HAP Contract

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6/92 1-16

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4350.2 REV-1

CHG-1

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1-7. PROGRAM ADMINISTRATION

A. Headquarters Role

1\. The Office of Multifamily Housing Management

reviews acceptable applications forwarded by

the Field Offices in the Annual Needs Survey

and selects projects to receive LMSA awards.

The Field Offices are then notified of the

results of the selection process.

2\. The Funding Control Division, Office of

Budget and Field Resources, issues Section 8

funds for approved projects to the Regions

for distribution to the Field Offices.

3\. The Operations Division, Office of

Multifamily Housing Management, conducts

overall program administration.

B. Regional Offices

1\. Regional Offices of Housing must review and

approve all funding requests when the number

of units recommended for assistance by the

Field Office exceeds the sum of the vacant

units and the number of tenants paying more

than 30 percent of their adjusted income for

rent. Any recommendation by the Regional

Office of Housing must be submitted in

writing to Headquarters and must contain

certification by the Regional Director of

Housing that the applications have been

processed in accordance with all guidelines

and instructions. Any additional details and

project priority will be described in the

NOFA. Regional Offices must also review and

provide written concurrence with all

applications for emergency funding submitted

to Headquarters.

2\. The Regional Accounting Division (RAD)

Director, is responsible for recording and

controlling Section 8 funding authorizations

for Field Offices and the disbursement of

funds against such authorizations.

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1-17 8/93

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4350.2 REV-1

CHG-1

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C. Field Offices

1\. Loan Management staff

o is responsible for the day-to-day

activities involved in reviewing owner

applications, including lobbying

certifications, completing the Annual

Needs Survey, and administering the

program.

o will notify applicants of HUD\'s decision

regarding their application.

2\. The Housing Management Division Director

o approves all applications recommended to

Headquarters and executes contracts with

owners whose applications have been

approved by HUD.

o must assure that reservations and

obligations of contract authority for

this program do not exceed the amount of

contract authority allocations actually

received on Form HUD 185.1.

1-8. FUNDING DISCLOSURE

HUD\'s regulation implementing Section 103 of the

Department of Housing and Urban Development Reform Act

of 1989 was published May 13, 1991 (56 FR 22088) and

became effective on June 12, 1991. This regulation,

codified as 24 CFR Part 4 applies to the funding

competition. The requirements of the rule continue to

apply until the announcement of the selection of

successful applicants.

HUD employees involved in the review of applications

and in the making of funding decisions are restrained

by Part 4 from providing advance information to any

person (other than an authorized employee of HUD)

concerning funding decisions, or from otherwise giving

an applicant an unfair competitive advantage. Persons

who apply for assistance in this competition should

confine their inquiries to the subject areas permitted

under 24 CFR Part 4.

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8/93 1-18

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4350.2 REV-1

CHG-1

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Applicants who have questions regarding funding

disclosure and lobbying restrictions should contact the

HUD Office of Ethics at (202) 708-3815 TDD/Voice (This

is not a toll-free number. In addition to the public,

the Office of Ethics can provide information of a

general nature to HUD employees as well. However, a

HUD employee who has a specific program question, such

as whether particular subject matter can be discussed

with persons outside the Department, should contact his

or her Regional or Field Office Counsel, or

Headquarters counsel for the program to which the

question pertains.

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1-19 8/93