U.S. Department of Housing and Urban Development

Originating Organization: H O U S I N G

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Special Attention of: Interim Notice H 92-11 I

All Regional Administrators,

Directors, Office of Regional Issued: 8/12/92

Housing; Managers, Category A Expires: 12/31/92

and Category B Offices; and
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Field Office Housing Cross References;

Development Division Directors,

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Subject: Supplemental Instructions on Conversion of Section 202/8

Section 162 Fund Reservations to Capital Advances

I. PURPOSES. This Notice provides corrections and additional

instructions in converting the Section 202/8 direct loan and

Section 162 pipeline to the capital advance programs.

II\. CORRECTIONS TO NOTICE H 92-1. (PRAC Calculation

Instructions)

Paragraph III. (2) B. Cases where operating expenses have

been established. The PRAC reservation shall be established

based on the HUD-estimated operating expenses plus Ground

Rent, if any, increased by five percent to cover vacancy and

collection losses plus appropriate PBE (personal benefit

expense).

The following demonstrates how the Multifamily

Representative will calculate the PRAC.

1\. Add the Per Unit Per Month PBE from the Remarks Section

of the HUD 92264, for each unit type to the rounded-up

per unit operating expense plus ground rent, if any,

from Section C, Block 27, Form HUD 92264. (NOTE:

these entries have already been adjusted for vacancy

and collection losses. See Part II B.)

2\. Multiply the total of the PUPM operating amount and the

PBE by the number of units in each unit type, add the

monthly amounts for various unit types and then

multiply by 12 to arrive at the annual PRAC amount.

3\. Multiply the result from Step 2 above by 20 years to

arrive at the total budgeted PRAC amount.

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

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

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Form HUD 92264 Processing

Form HUD 92264 will be processed in accordance with

outstanding basic instructions contained in HUD Handbook

4480.1, Multifamily Underwriting Report and Forms

Catalog, with the exception of the following items.

Section C. Estimate of Income. There will be no estimate

of income. This is converted to an estimate of expense.

A. In Block C27, enter the total number of revenue units,

by type, under the column \"No., of Each Family Type

Unit.\"

B. Add line E29 and the Annual Ground Rent, if any.

Multiply the total x 1.05, divide by 12 and then by

the proposed number of income-producing units.

Round these amounts up to the next whole dollar and

enter for each unit type in Block C27. This will

reflect the per unit per month (PUPM) operating amount,

excluding any PBE, required for the project.

C. Multiply the total number of revenue units by the per

unit per month operating amount and enter the results

under the column \"Total monthly Rent For Unit Type.\" In

the column heading, cross out the word \"rent\" and

insert \"expense\".

D. The sum of step C will be entered in Block C28 and Block

C31.

E. Block C31 will be multiplied by 12 to derive the annual

expense estimate, with an allowance for vacancy and

collection loss. The result will be entered in Block

C32. The headings in Blocks C31 and C32 should be

changed to read \"expense\" rather than \"rent\".

F. Enter the PBE in Section O \"Remarks\" for each unit type.

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Paragraph IV (4) HUD 92264-A Processing, Section I

\- Determination of Maximum Capital Advance, Criterion 4,

Line a. states \"Enter the total number of units, including

nonrevenue units, for each bedroom type in the first column

of blanks. The second column of blanks should reflect the

product \... \".

NOTE: For group homes enter the total number of persons,

not including the nonrevenue unit. The cost of a

nonrevenue unit is included in the Development Cost Limits

for group homes.

Paragraph IV. (4) MAXIMUM CAPITAL ADVANCE. Compare the

mortgage criteria on Form HUD-92264-A.

A. If Criterion 1, Fund Reservation Amount, exceeds the

other mortgage criteria, this amount shall be considered

the maximum capital advance. (See Illustration #1 of

Attachment 1.)

B. If Criterion 3 exceeds Criterion 1, but is less than

Criterion 4, the fund reservation may be increased to

equal criterion 3. This amount will be considered the

maximum capital advance. (See Illustration 12 of

attachment 1.)

C. For cases involving substantial rehabilitation,

Criterion 6 should never exceed Criterion 3. If

Criterion 6 is less than Criteria 3 and 4, but more

than Criterion 1, the fund reservation may be increased

to equal criterion 6. This amount will be considered

the maximum capital advance.

D. If Criteria 3 and 6 exceed Criteria 1 and 4, the

fund reservation amount may be increased to equal

Criterion 4. This amount will be considered the maximum

capital advance. Should the cost exceed the local high

cost factor, requests for waivers to exceed local high

cost factors must be submitted to Headquarters on a

case-by-case basis in accordance with outstanding

instructions. In no case where the fund reservation is

increased shall the amount of the capital advance ever

exceed criterion 4. Cost not attributable and site not

attributable are included in the computation.

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E. If replacement cost, (Criterion 3) is less than

Criterion 1 and Criterion 1 is less than Criterion 4,

the maximum capital advance shall be based upon the fund

reservation. See Illustration #4 of Attachment 1.

NOTE: Upon determining the maximum capital advance

amount, round down to the nearest hundred dollar.

III\. LEASEHOLD. If the site is being leased, the fee is included

under Section E Estimate of Annual Expense of the 92264.

(See processing instructions above.)

IV\. INTEREST RATE. There is no construction interest under

the capital advance program. In the event of default,

however, the interest rate to be used in the mortgage note

is the annual rate determined under the formula in Section

885, for example 8-3/8 percent for Fiscal Year 1992. The

optional interest rate is not used in the capital advance

program.

V. MATURITY DATE. The specific maturity date should be 40

years from the estimated date of construction completion.

This date should be extended where there is a substantial

delay in construction.

VI\. COST SAVINGS. Cost savings are calculated by Mortgage

Credit and shown in Section III of the 92264A (Source of

Funds to Meet Cash Requirements). The calculation of the

actual cost savings is done at the time of cost

certification and is based on the difference between the

fund reservation amount (if the fund reservation was

not increased subsequent to conversion) and the total

recognized costs allowed by the Mortgage Credit Examiner.

At the Firm Commitment stage, it is still necessary to

identify any potential cost savings. That is, if the

original fund reservation (only if there have not been any

increases) is determined to be the maximum capital advance

amount, the Mortgage credit Examiner will calculate the

difference between the fund reservation amount and

replacement cost formula (Criterion 3 of the 92264A). That

amount will be restricted and placed in a separate column

on Form HUD-92451. Accordingly, the Firm Commitment must

be conditioned on the shared cost savings being restricted

until final closing.

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NOTE: The regulatory limits (not statutory) will be the

uppermost limits if an increase in the fund reservation is

warranted. In such a case, the existing fund reservation

plus the increase cannot exceed the regulatory limits.

Otherwise, you can and will have conversion projects where

the capital advance reservation will exceed the

regulatory limits.

For those projects funded under the capital advance program,

the reservation will not include an amount for

cost-not-attributable to dwelling use. The cost-not-attributable

to dwelling use is processed at the conditional and firm

commitment stage of processing when actual costs are

estimated. The percentage shall not exceed 10 percent of

total project cost. However, for those projects

converted to the capital advance program, an estimated

amount for cost-not-attributable to dwelling use was

included in the initial reservation.

VII\. CONSULTANT FEES. The consultant\'s fee is to be based on a

percentage of the capital advance not to exceed \$40,000

(i.e., replacement cost items, excess unusual land

improvements, cost of ineligible amenities, value of

leased fee and unpaid special assessments) as determined

at that stage of processing. Consultants of converted

projects are not eligible for incentive payments. Since

the consultant\'s contract will have been approved and

partially performed prior to the conversion, a change

in the formula resulting in a reduced fee would not

be permissible. However, consultants of such projects with

fewer than 25 units may receive up to 5 percent of the

mortgage amount not to exceed \$20,000 as applicable under

the loan program.

VIII\. PROJECT CONTINGENCY. The allowance for project contingency

is to be based on 2 percent of the replacement cost formula,

rather than a percentage of the capital advance amount as

indicated on page 9, Item F under Section G of HUD

Notice 92-1.

IX\. PRAC CONTRACT. On Part I of the Project Rental Assistance

Contract, Form HUD 90173-A-CA, Exhibit 2, delete the

following sentence: \"The Housing Division shall furnish

the Legal Division with the information necessary to

complete this Exhibit, with appropriate supporting

documentation including a PRAC Contract List,\" since

the Housing Division will prepare the PRAC contract.

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X. RELOCATION EXPENSES. If the project involves displacement

of site occupants who are eligible for relocation

assistance, include an amount for relocation expenses

as approved by the CPD relocation specialist. Enter the

approved amount on Line 70 under Section G of Form HUD

92264, by deleting \"Supplemental Management Fund\" and

inserting \"Relocation Expenses\".

XI\. DEVELOPMENT COST FORMAT. The appraiser must use the

attached format for the determination of development cost

by formula. (See Attachment 2).

XII\. LICENSED GROUP HOMES. Field Offices are authorized to

increase cost limits for group homes which are licensed

by state agencies (e.g., Intermediate Care Facilities for

residents with developmental disabilities which are licensed

by the State Medicaid agency) to cover the cost of

installing sprinkler systems if they are required for

licensing.

XIII\. REDUCTION IN CAPITAL ADVANCE AMOUNT. At conditional or firm

stages of processing, Field Offices shall use their best

estimates for prohibited amenities to calculate the total

reduction in the capital advance amount that is to be

reflected in the Rent Formula Supplement to Form HUD 92264.

Questions regarding this Notice may be directed to the

appropriate desk officer in the Housing for the Elderly and

Handicapped People Division at FTS 8-202-708-2866.

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Assistant Secretary for Housing

-Federal Housing Commissioner

Attachments

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Attachment 1

EXAMPLES OF DETERMINING FIRM COMMITMENT/MORTGAGE NOTE AMOUNT FOR

CONVERSION PROJECTS:

ILLUSTRATION #1

Initial Fund Reservation - \$5,000,000

Amount Based upon

Replacement Cost Criterion - 4,750,000

Amount Based upon

Cost Limits (including cost

not attributable) - 4,700,000

In the illustration above, normally the reservation and

commitment amounts would be reduced to \$4,700,000, the maximum

under the cost limits. However, the regulations provide that the

sponsor will share in cost savings if the fund reservation is not

increased above the amount originally reserved. Therefore, the

amount in the firm commitment/mortgage note should be \$5,000,000.

In this situation, however, the sponsor would be limited to

project development costs which do not exceed the amount based on

the cost limits and would have to put up \$50,000. It could share

in cost savings of \$250,000, however.

ILLUSTRATION #2

Initial Fund Reservation - \$4,700,000

Amount Based upon

Replacement Cost Criterion - 4,800,000

Amount Based upon Cost Limits

(including cost not

attributable) - 4,750,000

In this illustration, both the Replacement Cost Criterion and the

Cost Limits Criterion exceed the Fund Reservation. Therefore,

the fund reservation should be increased, but only to \$4,750,000,

the amount based on the cost limits. Thus, \$4,750,000 should be

the firm commitment/mortgage note amount because it exceeds the

fund reservation amount, but is less than the amount based upon

the replacement cost criterion. The sponsor would be required to

put up \$50,000. Since the fund reservation has been increased,

the sponsor is not entitled to share in any cost savings.

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ILLUSTRATION #3

Initial Fund Reservation - \$4,700,000

Amount Based upon

Replacement Cost Criterion - 4,500,000

Amount Based upon Cost Limits

(including cost not

attributable) - 4,650,000

In this illustration since the initial reservation amount exceeds

both the amounts based on the replacement cost criterion and the

cost limits, the reservation amount would be the firm

commitment/mortgage note amount. Assuming that the fund

reservation is not increased, the sponsor would be able to share

in the cost savings of \$200,000 based on the initial fund

reservation amount even though it exceeds the amount based on the

cost limits.

Even though the mortgage note is for the higher amount, project

costs cannot exceed \$4,500,000 which is the replacement cost

criterion.

ILLUSTRATION #4

Initial Fund Reservation - \$4,600,000

Amount Based upon

Replacement Cost Criterion - 4,500,000

Amount Based upon Cost Limits

(including cost not

attributable) - 4,700,000

In this illustration the amount based on the cost limits exceeds

both the fund reservation and the amount based on the replacement

cost criterion. Therefore, the fund reservation amount will be

the one used in the firm commitment/mortgage note.

Again, even though the cost limits exceed both the replacement

cost criterion and the fund reservation amount, the sponsor is

limited to \$4,500,000 in project costs, although it is possible

if the fund reservation does not increase that the sponsor could

share in savings of \$100,000.

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Attachment 2

FORMAT ONLY: TO BE REPRODUCED LOCALLY

DETERMINATION OF DEVELOPMENT COST BY FORMULA

PROPOSED CONSTRUCTION

Item 50 - Total for all Improvements \$\_\_\_\_\_\_\_\_\_\_\_\_

Item 54 - Taxes \_\_\_\_\_\_\_\_\_\_\_\_

Item 55 - Insurance \_\_\_\_\_\_\_\_\_\_\_\_

Item 62 - Title and Recording \_\_\_\_\_\_\_\_\_\_\_\_

Item 64 - Legal \_\_\_\_\_\_\_\_\_\_\_\_

Item 65 - Organization (Substantially

reduced, if consultant fee

allowed in Item 68) \_\_\_\_\_\_\_\_\_\_\_\_

Item 66 - Cost Certification Fee

Item 68 - Consultant Fee \* 0 \_\_\_\_\_\_\_\_\_\_\_\_

Item 73 - Warrented Price of Land \_\_\_\_\_\_\_\_\_\_\_\_

Total Knowns: \$\_\_\_\_\_\_\_\_\_\_=A

Item 60 - Project Contingency \_\_\_\_\_\_.02\_\_\_

Total Unknowns: \_\_\_\_\_\_.02 =B

A

Total Project Cost = \_\_\_\_\_\_\_\_\_

1 - B

Example: Total Knowns \$950,000.00

Total Unknowns .02

950,000

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1 - .02 Cost)

969,388 (x) .02 = \$19,388.00

\* If the consultant fee is a lump sum simply insert the total

amount of the fee. If the consultant fee is a percentage of

the total development cost then refer to HUD Handbook

4571.3, Chapter 3 to develop a preliminary estimate of the

consultant fee. After the preliminary estimate of the

consultant fee is made include the estimate in the known

quantities. After a more precise replacement cost is

determined the consultant fee can be recalculated.

\*U.S.Government Printing Office: 1992-312-218/60247