U.S. Department of Housing and Urban Development

H O U S I N G

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Special Attention of: Notice H 93-21 (HUD)

All Regional Administrators and Issued: 4/6/93

Directors, Office of Regional Housing Expires: 4/30/94

All Field Office Managers and
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Housing Development Division Directors Cross References: 4480.1,

4465.1

Housing Management Division Directors H 91-29, H

92-11

Multifamily Housing Development 4185.1

Branch Chiefs

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Subject: Housing Development Instructions for Processing Plans

of Action Under Title II of the Housing and

Community Development Act of 1987 and Associated

Section 241(f) Loan Applications

SECTION 1. INTRODUCTION

1-1. General. \"Subtitle A of VI of the National Affordable

Housing Act, the Low Income Housing Preservation and

Resident Homeownership Act of 1990\" (LIHPRHA) was

implemented and operational May 8, 1992, concurrent with

the publication of the final Guidelines for Determining

Appraisals for Preservation Value under LIHPRHA. Although

LIHPRHA repeals and replaces Title II of the Housing and

Community Development Act of 1987, the Emergency Low

Income Housing Preservation Act of 1987 (ELIHPA), due to

transition requirements and options available to project

owners, there will be a significant number of applicants

under ELIHPA. Accordingly, this Notice is issued to

provide formal instructions to Housing Development for

processing Plans of Action under Title II of the Housing

and Community Development Act of 1987 and associated

Section 241(f) loan applications.

The goal of ELIHPA, as amended by the \"Stewart B. McKinney

Homeless Assistance Act of 1988\" is to preserve, low and

moderate income rental housing. To this effect, ELIHPA

provides that owners of \"eligible low income housing\" may

not prepay, and mortgagees may not accept prepayment of a

mortgage on such housing unless the payment is made in

accordance with a Plan of Action (POA) approved by the

Secretary.

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

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

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

GPO 871 902

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1-2. Purpose of Notice. The HUD Field Office Housing

Development Division (HD) provides technical assistance to

the Field Office Housing Management Division (HM) to

process Plans of Action (POAs). Conversely, HM provides

assistance to HD to process Section 241(f) equity loan

applications submitted in association with approved POAs.

The purpose of this Notice is to provide guidance and

processing instructions to Field Office staff on Housing

Development\'s (HD\'s) responsibilities in the

implementation of ELIHPA. This Notice has been designed

and organized to provide instructions for processing POAs

and Section 241(f) equity loan applications.

1-3. Overview of ELIHPA Process. A general overview of the

ELIHPA process would begin with the property owner\'s

submission of a Notice of Intent (NOI) to; (1) Terminate

Low Income Affordability Restrictions (prepay the

mortgage) or; (2) Extend Low Income Affordability

Restrictions and retain ownership of the property or; (3)

Extend Low Income Affordability Restrictions and transfer

ownership of the property (in accordance with Transfer of

Physical Assets (TPA) requirements). HM will review the

NOI for completeness and eligibility and provide materials

to the owner to develop a POA for either intent. HD

assistance is not required under the NOI stage.

When the owner submits a POA to terminate affordability

restrictions the owner is proposing to prepay the mortgage

or terminate the mortgage insurance contract. Under such

a submission, HD Multifamily Valuation Branch (MV)

provides market data to HM and the Economic Market

Analysis Staff (EMAS) to assist in their assessment of the

impact of prepayment on current tenants.

Under a POA to extend affordability restrictions, the

project owner is eligible to receive one or more

incentives in exchange for continuing the low income use

of the property. To qualify for incentives the owner must

submit an appraisal of the property which demonstrates it

has a higher and better use than subsidized rental. MV

must review the appraisal for accuracy and completeness

and determine if a higher and better use than subsidized

rental has been reached in accordance with the processing

instructions contained in this Notice. The appraisal

review process incorporates a Preservation Capital Needs

Assessment (PCNA) which is completed by the HD

Architectural, Engineering and Cost Branch (AE/C). The

PCNA is an estimation of the repairs/costs needed to bring

the property to a decent, safe, sanitary and good living

condition standard as competitive projects in the market

area of a comparable higher and better use. The PCNA also

identifies HUD regulatory repairs.

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The ELIHPA statute requires the Department to notify the

project owner in writing not later than 60 days after

receipt of the POA of any deficiencies that would prevent

the POA from being approved. The PCNA process includes

contracting of special services such as, lead base paint

analysis, which cannot take more than 45 days. HD will

immediately upon notification by HM of the POA submission,

simultaneously expedite the PCNA and appraisal review

processes in order to meet the statutory Notification of

Deficiencies time frame. In a memorandum to HM, the

Director of HD will communicate the PCNA and appraisal

review conclusions, as well as, any deficiencies. HM will

prepare the Notification of Deficiencies. After the

deficiencies are resolved HM will issue a preliminary

approval of the POA. The preliminarily approved POA will

indicate what incentives, if any, have been approved by

HM.

Section 231 of ELIHPA authorizes the Secretary to provide

insurance for an equity loan as a vehicle for the owner of

an eligible multifamily project to capture a portion of

the project\'s equity in connection with a POA approved by

the Commissioner. Insurance for this second mortgage is

provided under Section 241(f) of the National Housing Act.

Additionally, an owner may be eligible to receive a

rehabilitation loan covering the total costs of repairs

required by the POA (via PCNA process) and related

charges. The rehabilitation loan is added to the Section

241(f) equity loan culminating in a maximum Section 241(f)

mortgage amount (for purposes of clarity this text will

refer to the rehabilitation and equity loans, as component

amounts of the maximum Section 241(f) equity loan). Since

Section 241(f) is a HD program, HD will coordinate the

processing and HM will provide assistance.

The preliminarily approved POA will state if insurance for

an equity loan is approved as an incentive. If it is not,

HD processing concludes with preliminary approval of the

POA. If insurance for an equity loan has been approved as

an incentive, the initial application may be submitted to

HD for processing after preliminary approval or after

final approval of the POA. However, HD shall not issue a

Conditional/firm commitment on an equity loan prior to

final approval of the POA.

The equity loan processing is the final task to be

performed by HD under ELIHPA. Essentially, HD must

determine if rent subsidies can support a maximum equity

loan based on a higher and better use value or lesser

amount. Because PCNA costs are funded by the equity loan

and ELIHPA does not require the equity loan application to

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be submitted within a specified time, AE/C will update the

PCNA at the time of the Section 241(f) application

processing and commitment, if necessary. HD Section 241

\(f\) loan processing concludes with the Mortgage Credit

Branch analyses and final determination of the Section 241

\(f\) loan amount. This concludes an overview of the ELIHPA

process.

1-4. Applicability of this Notice. The instructions in this

Notice are effective immediately and apply to the review

of appraisals, PCNA analyses, and processing of Section

241(f) equity loans submitted pursuant to ELIHPA. The

instructions contained herein are also applicable to

pipeline cases that have obtained preliminary approval of

the POA, and/or final approval, but have not obtained a

Section 241(f) conditional or firm commitment by the date

of this Notice.

1-5. Pipeline Cases. ELIHPA cases submitted to HD for

processing prior to the issuance of this Notice may not

have been processed in accordance with the instructions

contained herein. The Department is not committed to an

appraisal that violates the statutes, regulations, or

administrative guidance. Accordingly, pipeline cases that

have obtained preliminary approval of the POA, or final

approval, but have not received a Section 241(f)

conditional or firm commitment, must be reviewed by HD to

determine compliance with current PCNA and appraisal

review instructions required by this Notice.

In particular, the derivation of \"as is\" value based on a

higher and better use, must be reviewed to determine that

PCNA required repairs, upgrade improvements, and net

discounted conversion costs were all considered. Also,

the estimate of repairs/costs that are necessary to bring

the property to a good condition must be derived in

accordance with the PCNA instructions detailed in Section

2 of this Notice. Repair estimates derived otherwise,

i.e., HM annual inspection, are not acceptable.

As expeditiously as possible, HM will provide HD a list of

ELIHPA pipeline cases that were processed by HD prior to

the issuance of this Notice. HM will also provide HD the

case-by-case documentation necessary to enable HD to

determine compliance with current instructions.

Additionally, consider the following when current PCNA and

appraisal review instructions were not applied:

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A. Prior to Preliminary Approval of POA

If a POA has not yet received preliminary approval,

the PCNA and appraisal review should be conducted

immediately and its effect, if any, transmitted to the

HM along with MV\'s assessment of owner\'s equity.

Preliminary approval of a POA cannot be issued until

the PCNA is completed and appraisal reviewed. In

those instances where the 180-day time limit for

approving or disapproving a POA is imminent, HD will

conduct these tasks in the fastest possible time.

Accordingly, HM will not issue the preliminary

approval until the PCNA and appraisal review has been

completed and the owner\'s equity confirmed.

B. After Preliminary Approval but Prior to Final Approval

Similarly, the PCNA and appraisal review must be

conducted immediately and their effect, if any, on the

prior assessment of owner\'s equity transmitted to HM.

HM will immediately inform the owner that a PCNA and

appraisal review is being conducted and that it may

change the owner\'s equity. After completion, any

changes to HUD\'s determination of owner\'s equity as a

result of the PCNA and appraisal review will be

communicated to the owner prior to issuing final

approval of the POA. HD will be available to assist

HM staff in explaining the PCNA and appraisal review

conclusions to owners.

C. After Final Approval of POA

The PCNA will be conducted as part of the Section

241(f) underwriting procedure. If the PCNA and

appraisal review derive an \"as is\" value, which is

different from that derived by the appraiser, the

Department will presume that the appraiser\'s \"as is\"

value did not take into account all the relevant

factors, (i.e., repair needs) and the revised owner\'s

equity, as reflected in underwriting processing, will

be used to determine the maximum amount of the Section

241(f) equity loan which can be insured by HUD. The

Department may or may not provide additional rent

support to the owner in this instance, depending on

the relationship of the POA approved rents to the

owner\'s equity.

Notwithstanding any of the above, any owner who

applies for Section 241(f) mortgage insurance more

than 60 days subsequent to final approval of the POA

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will be subject to a revised PCNA which may or may not

lead to a revised equity figure. owners will be

informed of this requirement in the POA approval.

1-6. Renegotiation of Section 241(f) Equity Loan Terms. The

Housing and Community Development Act of 1992, amended

ELIHPA, to require HUD to renegotiate terms of an equity

loan if the loan was made in a 30-day period prior to or

90 days after enactment of the 1992 amendments and the

loan was made under a POA accepted by HUD in December

1991\. Projects that were closed within this period with

20-year loan terms may renegotiate for an equity loan term

not exceeding 40 years. The recalculated debt service

mortgage amount shall not exceed the combined total of the

maximum equity loan based on value and rehabilitation

loan, if applicable.

1-7. Eligible Projects.

A. ELIHPA and HUD\'s implementing regulation at 24 CFR

part 248, Subpart C, define \"eligible low income

housing\" as projects that are insured, held or

assisted under the following sections of the National

Housing Act:

1\. Section 221(d)(3) Market Rate Program receiving

assistance under a Rent Supplement contract or

Section 8 Housing Assistance Payments contract.

2\. Section 221(d)(3) BMIR, receiving a below market

interest rate pursuant to Section 221(d)(5).

3\. Section 236, including State Agency noninsured

projects.

4\. \"Formerly insured\" under one of the above Sections

of the National Housing Act acquired by the

Secretary through a foreclosure action and later

sold with a purchase money mortgage (PMM) held by

HUD regardless of the assistance given or terms of

sale.

B. Projects by regulations or contract that were in

effect before November 1, 1987, are eligible, or

within 1 year would become eligible for prepayment

without the Secretary\'s approval.

C. Projects covered by ELIHPA at any time on or after

November 1, 1987, (and meets above A and B conditions)

remains restricted by ELIHPA even if they are no

longer receiving Section 8 or Rent Supplement

assistance.

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D. Projects elected to maintain only a portion of the low

income housing, the incentives provided must be

adjusted accordingly.

1-8. Eligible Owners. An eligible owner is a limited dividend

mortgagor whose mortgage note provides for prepayment

without the Secretary\'s consent after the 20th anniversary

of the final endorsement and are subject to the provisions

of ELIHPA.

A. Owners of projects originally developed by nonprofit

sponsors and transferred to limited dividend ownership

before September 15, 1980, (the effective date of the

regulations at 24 CFR 265) are eligible. Projects

transferred after that date are not eligible; and

B. A PMM project whose note does not include a prepayment

restriction extending at least through December 31,

1991, is also eligible to prepay under ELIHPA.

1-9. Prepayment of Existing Mortgage. Section 225(a) of ELIHPA

provides the exact wording, however, in general, an

eligible owner may prepay and terminate the low income

affordability restrictions only if HUD can make a written

finding that such prepayment will not materially increase

economic hardship for current tenants or the supply of

vacant comparable housing is sufficient to ensure that

such prepayment will not materially effect the

availability of decent, safe, and sanitary housing

affordable to lower and very low income families or

persons in the area.

If HUD cannot make the finding necessary to allow

prepayment, and there is a higher and better use for the

property, HUD is authorized to offer incentives to

continue low income use.

1-10. Permissible Incentives to Extend Low Income Use. The

Secretary may approve one or more of the following

incentives, which are listed under Section 224 of ELIHPA, to

project owners who intend to extend low income use.

A. An increase in the allowable distribution or other

measures to increase the rate of return on investment;

B. Revisions to the method of calculating equity;

C. Increased access to residual receipts accounts or

excess replacement reserves;

D. An insured second mortgage under Section 241(f) of the

National Housing Act which is the sum total of an

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equity component amount based on value and rehabilitation

component amount (if applicable) based on the

replacement costs of all PCNA repairs and related

charges;

E. An increase in the rents permitted under an existing

contract under Section 8 of the United States Housing

Act of 1937, or (subject to the availability of

amounts provided in appropriation acts) additional

assistance under such Section 8 or an extension of any

project based assistance attached to the housing;

F. Financing of capital improvements under Section 201 of

the Housing and Community Development Amendments of

1978;

G. Other actions, authorized in other provisions of law

to facilitate a transfer or sale of the project to a

qualified nonprofit organization, limited equity

tenant cooperative, public agency, or other entity

acceptable to the Secretary; and

H. Other incentives authorized in law.

1-11. Loans Eligible and Not Eligible Under ELIHPA.

A. Eligible Loans

1\. Section 241(f) Equity Loan - Processed by HD.

Covers equity take-out and rehabilitation costs

required by the POA and related charges. This

rehabilitation component amount is not a

Section 241(a) loan and is only available in

association with an approved POA.

NOTE: Original nonprofit sponsors/mortgagors are not

eligible to prepay their loans and, therefore, are not

eligible for incentives such as a Section 241(f)

equity loan. However, limited dividend owners can, as

part of the POA, have an equity loan with a transfer

of physical assets to a nonprofit sponsor who will

assume both the Federally assisted or insured mortgage

and the equity loan.

2\. Flexible Subsidy Capital Improvement Loan

\- Processed by HM. Covers rehabilitation costs.

1-12. Instructional Materials Needed to Understand ELIHPA and to

Complete HD Processing Requirements.

ELIHPA procedures are somewhat different from HD standard

insured processing. Under ELIHPA the primary objective is

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to derive the owner\'s equity. Accordingly, HD staff

should be familiar with ELIHPA Preservation Law, the

related Code of Federal Regulations, related Housing

Management Notices, in addition to the instructions

contained herein. The following materials are ELIHPA

reference sources:

A. Initial Law

1\. ELIHPA - Title II of the Housing and Community

Development Act of 1987, the Emergency Low Income

Housing Preservation Act of 1987.

2\. Stewart B. McKinney Homeless Assistance Amendments

Act of 1988, Subtitle B - Preservation of Low

Income Housing, amended ELIPHA.

B. Administrative Guidance

1\. Code of Federal Regulations - Part 248, Subparts A

and C, Prepayment of Low Income Housing Mortgages

and Part 241, Supplementary Financing for Insured

Project Mortgages (Subpart E and F Insurance for

Equity Loans).

2\. Notice H91-29 - Processing POA under the Housing

and Community Development Act of 1987, Housing

Management document but note it is addressed to

Chiefs of MV.

3\. Notice H92-11 - Applicability of Notice H91-29 to

Certain POAs; Amendment to Notice H91-29, also

addressed to Chiefs of MV.

4\. Housing and Community Development Act of 1992

\- Title III, Preservation of Low Income Housing and

forthcoming regulations for 1992 amendments.

5\. Instructions Referenced in this HUD Notice - HD

instructions for Processing POA under ELIHPA of

the Housing and Community Development Act of 1987

and Associated Section 241(f) Loan Applications.

1-13. Processing Time Frames Under ELIHPA.

A. POA Requesting Extension of Affordability

Restrictions. HD staff should be aware of two ELIHPA

statutory time frames. Section 227 of ELIHPA states

not later than 60 days after receipt of the POA, the

Secretary (HM) must notify the owner of any

deficiencies that would prevent the POA from being

approved. The overall PCNA process cannot take more

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than 45 to 60 days. Additionally, MV\'s review of the

owner\'s appraisal cannot be completed without the

incorporation of the completed PCNA. Accordingly, in

order for any HD deficiencies to be reported in time,

HM will expeditiously (not later than 1 week after

receipt of the POA) and simultaneously provide MV and

AE/C the appropriate materials to process and/or

review.

If the PCNA and appraisal review processes cannot be

completed within 60 days, i.e., special services

contracted under the PCNA are not completed or, the

owner\'s appraisal is found to be unacceptable, MV and

AE/C are required to inform HM of any deficiencies

noted up to that point. In this instance, the

Notification of Deficiencies should include a caveat

that other deficiencies may be brought to the owner\'s

attention upon completion of HD evaluations.

Section 227 also requires the Secretary (HM) to notify

the owner not later than 180 days after receipt of the

POA whether the POA is approved. Accordingly, as in

the preceding paragraph, if the PCNA and appraisal

review process cannot be completed within the initial

60 days after receipt of the POA, HD will have

additional time prior to 180 days to complete these

tasks.

B. POA Requesting Termination of Affordability

Restrictions. The same statutory time frames,

discussed under paragraph A above, concerning requests

to extend affordability restrictions, also apply to

POAs requesting termination of affordability

restrictions.

SECTION 2. ARCHITECTURAL, ENGINEERING AND COST PROCESSING

2-1. Scope. Instructions contained herein shall pertain to

Notices of Intent (NOI), Plan of Action (POA) and Section

241(f) processing stages under the Emergency Low Income

Preservation Housing Act (ELIHPA).

2-2. Objective. The Architectural, Engineering and Cost (AE/C)

Branch\'s role is to identify required repairs necessary to

assure decent, safe and sanitary housing and to determine

requirements necessary to place the existing structure(s)

in good living condition. The purpose is to assure an

acceptable risk through only necessary repair

requirements.

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2-3. Standards. Applicable standards are as follows:

A. HUD Housing Quality Standards (HQS), 24 CFR 886.307.

Compliance with HQS in its entirety is mandatory.

B. State and local Building Codes. The Department does

not assume responsibility for determining compliance

with State and local building codes. However, local

officials shall be encouraged to participate in the

program by the owner and must be requested to identify

any and all building code violations that will be

enforced by code enforcement officials. In localities

where municipal authorities charge for services such

as inspection, the owner shall be responsible for

requesting municipal participation and for payment of

municipal service charges. Payment for services

required by municipal authorities are not to be paid

for by HUD.

C. Section 504 of the Rehabilitation Act of 1973, as

amended, 24 CFR 8.23 and 24.

1\. Alterations of Existing Housing Facilities.

a\. If substantial alterations are undertaken in a

project with 15 or more units and the cost of

the alterations is 75 percent or more of the

replacement cost of the completed project,

then the provisions of 24 CFR 8.22, New

Construction (Housing Facilities), shall

apply. In order to make this determination,

AE/C must extract from the list of PCNA

required and regulatory repairs, the cost for

repairs that meet the 24 CFR 8.3 definition of

\"Alterations.\" The lists are forwarded to

Valuation where it is determined if alteration

costs are 75 percent of the completed project

replacement cost. If they are, AE/C develops

the handicap accessibility costs in accordance

with 24 CFR 8.22 and amends the appropriate

previous estimate of PCNA required or

regulatory repair costs. Upon completion, the

PCNA is returned to Valuation for completion

of processing.

b\. Alterations to dwelling units in a multifamily

housing project shall, to the maximum extent

feasible, be made readily accessible and

usable by individuals with handicaps.

c\. When alterations of single elements or spaces

of a dwelling unit amount to an alteration of

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a dwelling unit, the owner shall make the

entire dwelling unit accessible. Once 5

percent of the dwelling units in a project are

readily accessible and usable by individuals

with mobility impairments, then no additional

elements of dwelling units, or entire dwelling

units are required to be accessible. At the

request of an affected recipient or any State

or local government or agency, HUD may

prescribe a higher percentage (5 percent) or

number based on a demonstration of need that

is satisfactory to HUD.

d\. Alterations to common areas or parts of

facilities that affect accessibility shall, to

the maximum extent feasible, be made

accessible to and usable by individuals with

handicaps.

2\. Existing Housing Programs.

a\. Existing housing programs or activities

receiving Federal financial assistance shall

be operated by a recipient so that the program

or activity (defined at 24 CFR 8.3), when

viewed in its entirety, is readily accessible

to and usable by individuals with handicaps.

This paragraph does not:

\(1\) Necessarily require a recipient to make

each of its existing facilities

accessible to and usable by individuals

with handicaps;

\(2\) Require a recipient to take any action

that it can demonstrate would result in a

fundamental change in the nature of its

program or activity or in undue financial

and administrative burdens. If an action

would result in such a change or

burden(s), the recipient shall take any

action that would not result in a change

or burden(s) but would nevertheless

ensure that individuals with handicaps

receive the benefits and services of the

program or activity.

b\. Methods.

\(1\) A recipient may comply with the

requirements of 2a above through such

means as:

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\(a\) reassignment of services to

accessible buildings;

\(b\) assignment of aides to

beneficiaries;

\(c\) providing housing or related

services at alternate accessible

sites;

\(d\) alteration of existing facilities;

\(e\) construction of new facilities; or

\(f\) other methods that result in making

its programs or activities

accessible to and usable by

individuals with handicaps.

\(2\) A recipient is not required to make

structural changes in existing housing

facilities where other methods are

effective in achieving compliance with

this section or to provide supportive

services that are not part of the

program.

\(3\) When selecting a method, the recipient

shall give priority to those methods that

offer programs and activities to

qualified individuals with handicaps in

the most integrated setting appropriate.

c\. Time Period for Compliance. The recipient

shall comply with the obligations established

under this section within 60 days of July 11,

1988, except that for all housing programs,

excluding public and indian housing, where

structural changes in facilities are made,

such changes shall be made within 3 years of

July 11, 1988, but in any event as

expeditiously as possible.

d\. Transition Plan and Time Period for Structural

Changes. If structural changes to facilities

are to be made to achieve program

accessibility, a recipient shall develop,

within 6 months of July 11, 1988, a transition

plan setting forth the steps necessary to

complete such changes. The plan shall be

developed with the assistance of interested

persons, including individuals with handicaps

or organizations representing them. A copy of

the plan shall be made available for public

inspection. The plan shall, at a minimum:

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\(1\) Identify physical obstacles in the

recipient\'s facilities that limit the

accessibility of its programs or

activities to individuals with handicaps;

\(2\) Describe in detail the methods that will

be used to make the facilities

accessible;

\(3\) Specify the schedule for taking the steps

necessary to achieve compliance, and if

the time period of the transition frame

is longer than 1 year, identify steps

that will be taken during each year of

the transition period;

\(4\) Indicate the official responsible for

implementation of the plan; and

\(5\) Identify the persons or groups with whose

assistance the plan was prepared.

D. Fair Housing Act of 1968. Accessibility requirements

for the handicapped under the Fair Housing Act are not

applicable to Section 241.

E. Davis Bacon Prevailing Wage Requirements. All work

performed as a condition for a Section 241(f) loan is

subject to Davis Bacon prevailing wage requirements.

2-4. Processing. Processing by AE/C staff begins at the POA

stage. However, subsequent application processing may be

performed pursuant to the owner\'s submission of an equity

loan application under Section 241(f), if approved as an

incentive under the POA. No work is required of AE/C

staff in the Notice of Intent stage of processing.

2-5. Plan of Action Stage. AE/C processing begins immediately

upon receipt of the POA from the Director of Housing

Development/Housing Programs Branch.

A. The instructions contained in Handbooks 4450.1 and

4460.1 for processing a conditional commitment

application shall be followed for POA stage processing

except as modified herein.

B. AE/C is responsible for performing the Preservation

Capital Needs Assessment (PCNA). The AE/C Branch

determines whether the PCNA part of the preservation

review (both AE/C functions) will be performed by

in-house staff or by contractors. The architectural and

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cost analyses should either be done entirely in-house

or both steps contracted. Delays in assignment to

AE/C processors (staff or contractors) must be

avoided, as they could result in insufficient time to

obtain the required repairs portion of the PCNA within

60 days after Field Office receipt of the POA as

required by the Appraisal Guidelines. Contractors

must provide a minimum of 30 calendar days to perform

the total AE/C services. Refer to Attachment 1 for a

complete description of the PCNA.

1\. If Field Office staff processors will be utilized,

the need for any special tests and reports

(mechanical, termite, roofing, etc.) and the

availability of staff to perform such tests must

be determined.

a\. If the processor or other Field office or

Regional Office staff have some of the

expertise and can provide some of the analyses

within the time constraints, that work may be

assigned in-house.

b\. Lead-Based Paint (LBP) testing shall be done

on every project except where records document

that testing was done previously and/or LBP

has been abated. The Field Office must

contract for LBP testing simultaneously with

the request for the AE/C services so that the

results can be incorporated into the PCNA.

The test must provide for a determination

whether LBP hazards exist and, if so,

identification of abatement procedures and

requirements and cost estimates for the work

to be done. It must also include a

determination whether LBP abatement is a State

or local requirement, in addition to a HUD

requirement.

c\. EPA standards do not require testing for

asbestos containing material (ACM) by

certified inspectors unless actual physical

demolition or renovation is involved. HUD has

no specific standards requiring testing for

ACMs. HUD\'s purpose for the PCNA is to

establish the value of the existing building

and the cost of repairs necessary to bring it

back to its original physical condition.

Therefore, if the AE/C processor determines

that any demolition, repair or replacement

work disturbing 160 SF or 260 LF of materials

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(Attachment 1 identifies specific materials to

be looked at) is necessary in any one

building, then the processor shall assume

(pursuant to the precedent established in the

Asbestos-In-Schools rule) that the materials

to be disturbed contain asbestos and shall

provide a separate line item within the

estimated costs of repairs for an amount to

cover encapsulation or abatement of the

disturbed materials (in accordance with

EPA/OSHA standards - 40 CFR Part 61, National

Emissions Standards for Hazardous Air

Pollutants; Asbestos; NESHAP Revision; Final

Rule).

In cases where the State or locality where the

building is located has more stringent

asbestos standards or abatement requirements,

the PCNA shall include these measures as a

part of the costs for abatement.

d\. Cost data of acceptable commercial indices

such as Means may be used to derive abatement

estimates. Since Davis Bacon prevailing wage

requirements are applicable in all circumstances

under Section 241(f), the abatement

cost estimate must be adjusted accordingly.

For cases where asbestos hazard abatement is

required by the local jurisdiction, abatement

shall be considered a required repair and not

a regulatory repair as described in Section

II, paragraph D2 of Attachment 1. For

valuation purposes, it is required that an

additional cost estimate be made which

excludes Davis Bacon prevailing wage

requirements for all required repairs.

e\. The AE/C processor is responsible for

determining and ordering if needed, (as part

of the PCNA) any other special tests and

reports for each project for which qualified

staff are not available.

\(1\) identifying potential providers and

contacting the RCO for issuance of Small

Purchase Contracts for the specialized

services, or;

\(2\) contracting the entire AE/C PCNA process

as described in 2. below.

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2\. If a Contractor is to be utilized for the PCNA,

the Field Office must contact the RCO promptly

(services must be contracted within 15 days of

receipt of the POA) for assignment.

a\. LBP testing shall be done on every project

except where project documentation provides

that testing was done previously and/or LBP

has been abated. If it is not performed as

intended by interagency agreement, the Field

Office must contract for LBP testing

simultaneously with the request for the AE/C

services so that the results can be

incorporated into the PCNA.

b\. The contractor is responsible for determining

(as part of the PCNA) if any other special

tests and reports are needed and obtaining

them.

c\. The Technical Disciplines Contract Request for

Proposals (RFPs) issued in December 1991 and

January 1992 contain Statements of Work (SOWS)

for separate AE/C contracts, and address

PCNAs. However, these SOWs do not clearly

address all services required in the PCNA

(referred to therein as 241(f)). Therefore,

the original Technical Disciplines Contracts

for AE/C processing are not to be used for

ELIHPA PCNAs. A revised SOW for LIHPRHA PCNA

which clarified the services and combined both

AE/C functions was subsequently forwarded to

the Regional Contracting Officers and Regional

Housing Staff. Some offices have issued

Technical Disciplines Contracts using this

SOW; others are using it through Small

Purchase Orders. It can be used for the

ELIHPA PCNA if modified to reflect the

requirements of ELIHPA instead of LIHPRHA

(see Attachment 2).

C. Upgrade Improvements. A number of Exhibits are

submitted with the POA, including the owner\'s appraisal

of the property. The owner\'s appraisal may include

hypothetical upgrade improvements (defined below under

Valuation processing) as a component in the derivation

of owner\'s equity. Valuation is responsible for

determining the reasonableness of the items proposed

as upgrade improvements, however, Valuation may

request the assistance of AE/C staff to determine the

reasonableness of the cost of the improvements. When

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making this determination it should noted that Davis

Bacon prevailing wage requirements are not applicable

and shall not be used in making the determination.

The amount determined to be reasonable shall be

entered in Section O, Remarks of Form HUD-92264 by the

AE/C processor.

For example, the appraisal may identify a dishwasher

as a hypothetical upgrade. AE/C staff may be asked to

assist by reviewing the reasonableness of the

appraiser\'s cost estimate. Upgrade improvement costs

should include the costs of labor and related installation

costs such as plumbing modifications, wiring,

etc.

D. Appraiser\'s Required Repair List and Cost Estimate.

The owner\'s appraisal may include a list of required

market repair items and cost estimate. If included,

Valuation shall be responsible for providing a copy of

the list/costs to the AE/C processor for consideration

when establishing the PCNA work write-up and cost

estimate.

E. PCNA Review. The review shall be based on the

instructions in Attachment 1 to this Notice.

F. Determination of Substantial Rehabilitation. Upon

completing the PCNA review, AE/C processor shall

provide a statement as to whether the project meets or

does not meet the criteria (definition) established in

HUD Handbook 4460.1, paragraph 4-2 for substantial

rehabilitation. The statement shall be included as

part of the final processing record described in

Attachment 1 of this notice and shall include a

description of the factors used to make the

determination.

2-6. Section 241(f) Equity Loan Processing. At the discretion

of the owner, an application for a Section 241(f) loan may

be submitted after preliminary or final approval of the

POA. AE/C processing cannot begin until Preliminary

Approval has been issued and cannot be completed until

after Final Approval. Further, no commitment can be

issued prior to Final Approval. AE/C processing of

applications shall be conducted in accordance with A or B

below.

A. Applications Submitted After POA Preliminary Approval.

AE/C processing will be completed in two phases:

1\. Phase One. The general processing requirements of

C. below shall be performed.

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2\. Phase Two. Processing shall not begin until

notification has been received from the Housing

Development (HD) Director that Final Approval of

the POA has been issued. A copy of the approval

letter should be provided to the AE/C processor

for his/her use. AE/C responsibilities under

phase two is limited to conducting a review of the

conditions of POA approval and comparing the POA

PCNA to phase one PCNA processing. Unless

significant (gross impact on equity) differences,

e.g., PCNA required repairs and estimated costs,

are noted which require reprocessing, processing

will be limited to modifying the work performed

under phase one processing.

Applications Submitted After POA Final Approval. AE/C

processing will be performed and completed in accordance

with the general processing requirements of C

below.

C. General. The extent of processing required by the

AE/C processor for applications submitted shall be

determined by conducting a review of the application

submission exhibits. Unless significant differences,

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

noted and require reprocessing, processing will be

limited to modifying the work performed under the POA

stage described in paragraph 2-5 of this Section.

Processing shall conform to the instructions contained

in Attachment 1.

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

review of the required exhibits (see attachment 3)

which pertain to AE/C to determine the following:

a\. Has there been an extensive time delay between

the POA stage and date of application? When

there has been a delay of 6 months or more,

reinspection of the property shall be made to

determine whether the conditions of the

property have changed significantly to warrant

modification of POA processing. The need to

modify POA processing shall be made at the

discretion of the AE/C processor.

b\. Is the owner\'s work write up and cost estimate

(including the Appraiser\'s required market

repairs and estimate) different from that

included in POA processing? If so, are the

differences supported with documentation? The

need to modify POA processing shall be made at

the discretion of the AE/C processor.

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c\. Have appropriate exhibits been submitted to

support proposed revisions to the PCNA work

write up, plans and specification, cost

estimate, etc. Additional exhibits shall be

required at the discretion of the AE/C

processor.

2\. Asbestos Containing Material (ACM) Testing.

Projects assumed to contain ACM at the POA stage

shall be tested at the Section 241(f) application

stage. Testing shall be performed under Small

Purchase Contracts which will be made available to

Field Offices through their RCO. The extent of

testing shall be limited to those areas or items

identified at the POA stage when making the

assumption. Testing and reporting must provide a

determination as to whether ACM hazards exist and,

if so, provide requirements and procedures to

encapsulate or abate disturbed materials (in

accordance with EPA/OSHA standards - 40 CFR Part

61, National Emissions Standards for Hazardous Air

Pollutants; Asbestos; NESHAP Revision; Final

Rule), and a cost estimate and estimate of time to

complete the work.

3\. Commencement of Repair Work. Work related to the

items included in the list of PCNA repairs shall

begin immediately after initial endorsement for

cases involving substantial rehabilitation, and

final endorsement for cases where substantial

rehabilitation does not apply. Repair work shall

not begin prior to project endorsement.

4\. Inspection of Repair Work. Under Section 241(f),

inspection of repair work is to be performed and

approved by AE/C staff. Employment of a supervisory

architect will not be required under this

program unless the work meets the criteria

established for substantial rehabilitation as

defined in paragraph 4-2 of HUD Handbook 4460.1

REV-1, Architectural Analysis and Inspections for

Project Mortgage Insurance. Inspection of the

work shall be completed as follows:

a\. Progress inspections. Where the scope of the

repairs dictates, inspection of work in

progress shall be conducted as follows:

\(1\) In cases where substantial rehabilitation

does not apply, AE/C staff shall determine

the need for and frequency of progress

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inspections based on the scope of work to

be performed. A minimum of one progress

inspection shall be made each month and a

final inspection as described in b below.

\(2\) In cases of substantial rehabilitation, it

is required that a supervisory architect

be employed by the owner to perform

inspection services in accordance with the

instructions contained in Chapter 3 of HUD

Handbook 4460.1.

b\. Repair Completion and Final Inspection

Report. Upon completion of the repair work,

a final inspection report (Form HUD-5379) must

be made which indicates that the work has been

satisfactorily completed and is in compliance

with the work write-up, and plans and

specifications, if applicable.

\(1\) In cases where substantial rehabilitation

does not apply, the requirements of

paragraph 3-10 of HUD Handbook 4565.1, are

applicable.

\(2\) In cases of substantial rehabilitation,

the requirements of paragraphs 3-15 and 16

of HUD Handbook 4460.1, REV-1 are

applicable.

5\. Inspection Fees. A fee in the amount described in

paragraph 4-4 shall be charged for HUD inspection

services based on the extent of rehabilitation

described in paragraph 2-6 C(4)(a) above.

D. Cost Certification. The cost certification

requirements of HUD Handbook 4450.1 REV-1, apply to

cases of substantial rehabilitation.

E. Section 241(f) Endorsement Review. The AE/C processor

shall review endorsement exhibits to assure that

changes have not been made that will affect previous

AE/C processing.

2-7. Processing Pipeline Cases. For all pipeline projects

being processed at the POA or Section 241(f) stages of

processing and have not been issued a firm commitment, a

PCNA shall be performed by HD staff in accordance with the

instructions of paragraph 2-5. This requirement applies

to projects that have reached the POA and Section 241(f)

stages: 1) without a PCNA review, or 2) using an assessment

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performed by anyone (Housing Management, Owner, etc.)

other than HD staff as required by outstanding

instructions. In those instances where the 180-day time

limit for approving or disapproving a POA is imminent,

AE/C shall consider such cases priority and conduct the

PCNA in the fastest possible time. Further, underwriting

conditions which may have resulted due to subsequent POA

processing that includes a PCNA made by anyone other than

HD staff shall not apply. The above requirements do not

apply to projects that have received a Section 241(f)

commitment.

SECTION 3. VALUATION PROCESSING

3-1. Scope. As described under Section 1. Introduction,

valuation responsibilities commence with the project

owner\'s submission of a POA for preliminary approval to

terminate or extend low income affordability restrictions

and generally conclude with the owner\'s submission of a

Section 241(f) equity loan application prior or subsequent

to final approval of the POA (when an equity loan has been

approved as an incentive). This Section will provide MV

instructions in this sequence.

3-2. Proposed POA requests Preliminary approval to terminate

low income affordability restrictions. Section 225(a) of

ELIHPA lists the findings the Secretary must make in order

to approve a request to terminate low income affordability

restrictions. In general, the project owner must

demonstrate that termination of low income affordability

restrictions will not materially increase economic

hardship for the current tenants and prepayment will not

materially affect the availability of decent, safe and

sanitary housing affordable to lower and very low income

families, etc.

Under a request to terminate low income affordability

restrictions, MV provides data on rents for comparable

unsubsidized housing in the area to both HM and EMAS

within 30 days of their request from HM to provide such

data. MV may provide rent data that has been currently

collected and at hand. Field visit of comparables is not

required. This information will assist HM in their

efforts to determine the Section 8 rents and assist EMAS

in their endeavor to determine whether or not prepayment

will increase economic hardship for current tenants and/or

materially affect the availability of comparable housing

within the property\'s market area. Other valuation data,

may include, but is not limited to, a rental analysis that

will estimate what the subject unit rents might be on an

unsubsidized market rate rental basis. The current

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tenant\'s ability to meet the projected market rate rents

is helpful in assessing any material increase in economic

hardship which may result because of prepayment.

Section 248.213(b) of the Departments regulations provides

a complete list of all the contents any POA submission

shall include. The following partial list of materials

submitted to terminate low income affordability

restrictions are potential data sources for comparable

unsubsidized rents in the applicant project\'s market area.

A. A market study which demonstrates the project is

located in a market area that would enable the

Commissioner to make the findings set forth in Section

248.221(b)(1) (explained in general under 1st

paragraph of 3-2).

B. A statement as to the effect, if any, of the proposed

changes on the supply of housing affordable to low and

very low income families in the community within which

the housing is located and in the area that the

housing could reasonably be expected to serve.

3-3. Proposed POA requests Preliminary approval to extend

affordability restrictions and incentives. Alternatively,

an owner may request incentives in exchange for extending

the low income affordability restrictions. However,

permissible incentives may only be approved when it can be

demonstrated that the property has a higher and better use

other than subsidized rental property. This determination

is the crux of the appraiser\'s function in ELIHPA

processing. The process to reach this determination is

provided in detail under this paragraph. However, in

general, a property will not have a higher and better use,

if the unsubsidized fair market value of the property at

its highest and best use (other than subsidized housing)

is insufficient to cover the cost of converting the

property to that use, plus any outstanding indebtedness.

In this instance, the project owner would not be eligible

to receive incentives under ELIHPA. Conversely, if the

unsubsidized fair market value of the property at its

highest and best use is sufficient to cover these costs,

the owner has demonstrated a higher and better use or

equity position and is, therefore, eligible to receive

incentives.

A. POA submission contents. Attachment 3 of this Notice

lists the exhibits required by HD to process POA

proposals requesting extension of low income

affordability restrictions. Upon receipt of the POA

HM will expeditiously forward these materials to MV.

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B. POA MV terminology/appraisal concepts. Many of the

fundamental valuation processes under ELIHPA, such as

the estimation of rents, expenses, etc., are completed

in accordance with long established procedures that

are detailed in HUD Handbook 4465.1. Additionally,

the approach to estimate fair market value under

ELIHPA, is conceptually the same as HUD\'s Section 207

value program. What sets ELIHPA apart is the requirement

to perform additional analyses (e.g. hypothetical

upgrade cost) and formulate additional conclusions

(estimate of owner\'s equity). The following is a

listing of key appraisal requirements/analyses and

terminology that distinguish ELIHPA from typical MV

processing.

1\. Under ELIHPA MV performs a review appraiser

function. MV is responsible for the following:

a\. Determination of the accuracy and

appropriateness of the project owner\'s

appraisal contents and conclusions;

b\. Determination of whether or not the project

has a higher and better use than subsidized

housing;

c\. Determine the Section 241(f) equity loan,

which combines the maximum equity amount based

on value (90 percent of owner\'s equity), plus

rehabilitation costs to complete repairs

identified in the PCNA and related charges

amount (Criterion 3 of the Form HUD-92264A);

d\. Derivation of an independent determination of

value at the highest and best use, if the

owner\'s appraisal is found unacceptable; and

e\. Providing rent comparables for unsubsidized

units in the area, adjusted to the subject

units including appropriate combination of

PBE, to assist HM staff in determining Section

8 rent limits.

2\. Appraisal Assumptions - The fair market value of

the subject property under its highest and best

use will assume:

a\. existing low income restrictions imposed by

HUD have been removed;

b\. existing assisted or insured mortgages have

been prepaid;

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c\. simultaneous termination of any Federal rental

assistance;

d\. the \"As Is\" value will reflect an amount that

will permit a return in the market expected by

an entrepreneur typically participating in

such undertakings;

e\. consideration for improvements necessary to

bring the property up to a quality standard

needed to attract the assumed unsubsidized

market rate tenants. Such items may include

required repairs, hypothetical upgrade

improvements, and any net conversion costs

anticipated in the conversion process; and

f\. the value will be as of the date of the

appraisal.

3\. Highest and Best Use - A higher and better use

other than the property\'s current subsidized

status must be determined in order for the owner

to receive incentives under the POA. A higher and

better use is a hypothetical condition because the

property will remain a subsidized rental since the

owner is not eligible to prepay or has requested

an extension of affordability restrictions. The

determination or selection of the highest and best

use is a two step process. In the first step the

appraiser evaluates the physical and legal

potential of the hypothetical highest and best

use. The appraiser must determine if the

projected use is physically possible (is there

adequate space, size, design, utilities, etc.), as

well as, legal (i.e., is it allowable by building

codes, zoning codes, deed restrictions, etc.).

In the second step the appraiser must determine

whether or not the hypothetical use is

economically feasible. A higher and better use is

economically feasible when the appraisal report

provides reasonable justification that the owner

or converter will have equity remaining after

converting the property to that use. In this

instance, the unsubsidized value of the property,

based on a higher and better use other than

subsidized rental must be sufficient to cover the

costs an owner in the conventional marketplace

would encounter to convert the property to the

higher and better use. Anticipated conversion

costs would include PCNA \"required repairs,\"

hypothetical upgrade improvements, net discounted

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conversion costs, and total HUD approved

indebtedness.

Economic feasibility is then derived by formula.

The reasonableness of the conclusion will depend

upon good analyses conducted for each of the

anticipated conversion costs.

Notwithstanding the above considerations, in

fairness to the owner, the highest and best use

should be a use that brings the owner the greatest

value. We anticipate the highest and best use for

most properties will typically be an unsubsidized

market rate rental use and possibly on a rare

occasion a cooperative, condominium or a

non-residential use.

NOTE: Appraisals that propose a non-residential

higher and better use must be submitted to

Headquarters for review after Field Office

processing.

4\. POA Processing Forms - The estimate of unsubsidized

fair market value and owner\'s equity are

based on market rate rents, expenses, etc.

Accordingly, the Form HUD-92264, Form HUD-92264A,

Form HUD-92273 and Form HUD-92274 or facsimiles,

should be titled \"unsubsidized.\" Supplemental

information attached to the appraisal report will

include but is not limited to, data on rent and

expense comparables, direct sales comparison

comparables; data supporting capitalization rate

components; market study; etc.

5\. Estimated Rents - The review appraiser must visit

the property being appraised and comparables

employed by the owner\'s appraiser. Since the

appraisal must support a higher and better use

other than subsidized housing, the estimated rents

must be derived from market rate comparables. The

estimated rents will reflect the property\'s

proposed higher and better use, assuming all PCNA

required repairs, hypothetical upgrade improvements

and net discounted conversion costs have

been completed. Rents are estimated as of the

appraisal date. Trending estimates beyond this

point is not acceptable. Any subsequent

modification of the appraiser\'s estimated rents

and/or effective gross income by the review

appraiser, must also be reflective of market

conditions that existed at the time of the initial

appraisal date.

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The selection of rent comparables is critical in

the highest and best use analysis. Comparables

should be extracted from the subject\'s market area

or from similar market areas and comparables

should reflect the appraised property\'s highest

and best use condition. Rent comparables that

require large and/or numerous amenity and/or

location adjustments should be avoided.

If properties comparable to the subject\'s

hypothetical highest and best use do not exist

within the subject\'s market area economic

feasibility is a real concern. In this instance,

a higher and better use other than subsidized

rental may not exist. Under all circumstances a

higher and better use must be justified on some

defensible basis.

6\. Rent Control and Restrictive Convenants - It is

the owner\'s appraiser\'s responsibility to explore

fully and reflect the effect rent control would

have on the unsubsidized fair market value. The

objective of the appraisal is to estimate the

unregulated market value of the property in the

absence of any Federal participation, but not

excluding State or local requirements such as rent

control. However, rent control requirements must

be closely evaluated to determine what impact, if

any, it will have on the project. Rent control

may only apply to specific unit types or limit

annual rent increases after the first year of

conversion, in which case rent control may not

have any effect on the processing rents

immediately after conversion.

The original mortgage must also be evaluated to

ascertain the conveyance of other restrictive

covenants, ie., control of lot size, set back,

placement of buildings, architecture, etc., and

their effect on the ability to convert to a higher

and better use other than subsidized rental.

NOTE: ELIPHA AND LIHPRHA do not have the same

standards with regard to State and local laws.

Section 232 of the LIHPRHA statute is a provision

for the preemption of State and local laws, such

as, rent control. Under LIHPRHA, the effect of

rent control on the unsubsidized value is

nullified when such law or regulation is not of

general applicability, to both housing receiving

Federal assistance and nonassisted housing. The

ELIHPA statute does not provide conditions in

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which State and local laws, such as, rent control

are preempted. Accordingly, the rule of general

applicability does not apply to ELIHPA processing.

7\. Residential and Ancillary Income Project Occupancy

Rate - The estimated occupancy rate used to derive

the unsubsidized value is based on current longterm

occupancy rates and trends extracted from

comparable properties within the subject project\'s

market area. Adequate data supporting the project

occupancy rate must be provided within the

appraisal.

HUD anticipates that a long-term residential and

ancillary income occupancy rate will seldom exceed

93 percent which provides a 5 percent vacancy loss

and 2 percent bad debt and collection loss.

Project occupancy rates exceeding 93 percent may

not adequately address bad debt and collection

losses. Bad debt and collection loss percentages

must be supported by market data. If such losses

are reflected in the estimate of operating

expenses, the amounts must be specified.

8\. Commercial leases - Where commercial facilities

are present and/or proposed in the property to be

appraised, a separate analysis must be made of the

effect that the commercial operation will have on

the project expense estimate. A complete analysis

of commercial income and expenses will be

conducted.

9\. Operating Expenses and Replacement Reserve - The

unsubsidized value of the appraised property is

based on expense comparable data that is also

extracted from market rate properties that are

comparable to the proposed highest and best use

condition. Additionally, the appraised property\'s

prior 3 years operating experience should be taken

into consideration to estimate the unsubsidized

operating expenses. HM will provide MV the

property\'s three previous Form HUD-92410s,

Statement of Profit and Loss.

The appraiser must take into account the effect of

any PCNA required repairs and hypothetical upgrade

improvements when estimating operating expenses.

Expense estimates shall be made as of the owner\'s

appraisal date. Trending estimates beyond this

point is not acceptable.

The annual deposit to replacement reserve will be

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based upon the rate of deposit extracted from

market rate comparables in lieu of HUD\'s underwriting

requirement of .006 of total structures.

Whether or not to include an annual deposit to

replacement reserve as an expense item, is left to

the judgment of the processing appraiser when

market data does not support its use.

See paragraph 3-3, 11 and 19 below, for a

discussion on initial deposit to replacement

reserve account.

10\. Approaches to Value

a\. Capitalization - The following should be

considered when deriving a capitalized value:

\(1\) The capitalization rate should reflect

conventional market loan/equity ratios,

debt service rates, and equity dividend

rates.

\(2\) Equity dividend rate data extracted from

comparable unsubsidized properties that do

not need conversion reflects the return on

investment or anticipated risk associated

with the transfer of unsubsidized

multifamily property not requiring the

additional effort and risk a conversion

does. However, in order to convert to an

unsubsidized market rate use converters

will experience greater risk.

Accordingly, the additional entrepreneurial

return (perhaps 10 to 20 percent,

based on market analysis) associated with

conversion should be reflected in the

equity dividend rate extracted from market

comparables. For example, a 5 percent

equity dividend rate adjusted to reflect a

10 percent converter\'s profit would be

.05/(1.00 - .10) = .05555 or 5.56 percent.

A 6 percent equity dividend rate adjusted

to reflect a 20 percent converters profit

would be .06/(1.00 -.20) = .075 or 7.5

percent. An 8 percent equity dividend

rate reflecting a 15 percent converter\'s

profit would be 9.41 percent. The equity

dividend rate would be combined with the

mortgage constant conventionally available

by the typical loan ratio to arrive at an

overall rate. Similarly, when using the

direct capitalization approach, the

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overall capitalization rate must be

adjusted. Of course, if the comparables

were properties that would require the

same conversion effort as the subject,

such an adjustment would not be

applicable. This must be fully documented

in the report.

b\. Market Value by Direct Sales Comparison - (to

be used if the appraiser deems it necessary).

Unsubsidized properties in the projected

highest and best use condition should be used

as comparables. This approach will reflect

the fair market value after completion of

repairs or conversion.

However, if the Market Comparison Approach is

deemed necessary by the appraiser, a Gross

Income Multiplier (GIM) or an Effective Gross

Income Multiplier (EGIM) must also be used in

addition to whatever market comparison technique

is used by the appraiser. Accordingly,

both a Market Comparison and a Multiplier

Approach must be used as part of each report

when the appraiser determines to use the

comparison approach.

c\. Summation Approach - (to be used if the

appraiser deems it necessary). - the summation

approach will reflect the replacement cost of

the project new in its projected highest and

best use converted condition. (HUD does not

require the replacement cost to be

depreciated). (See HUD correlation requirement

below.) This instruction is predicated on the

fact that various kinds of depreciation are

difficult to measure and that the total amount

of depreciation of an income property is

reflected in the amount of income the property

can produce. Accordingly, if the income is

properly calculated, it will be reflective of

any applicable depreciation.

d\. Correlation of Value - In the correlation of

value, the undepreciated summation approach

shall serve only as a final upper limit to the

correlated value which shall be the lesser of

the value indicated by comparison and the

value indicated by capitalization. Since this

is income property, it is reasonable to expect

that its value will be no higher than its

income can support. However, if the

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property\'s replacement cost, before

depreciation should be less than the value

indicated by capitalization or comparison, in

no event may the final correlation of value

exceed the property\'s replacement cost before

depreciation.

11\. Preservation Capital Needs Assessment (PCNA) - The

PCNA analysis (explained in detail under Section 2

of this Notice) identifies two types of repair

requirements; PCNA required repairs, are

improvements any developer would reasonably make

in the private sector to convert the property to a

standard comparable to competitive projects in the

market area; and any improvements beyond this

level are considered PCNA HUD regulatory repairs.

Collectively, PCNA repairs may be referred to as

rehabilitation costs required by the POA.

The PCNA analysis will also include an assessment

of the initial deposit to the replacement reserve

account which is based on the current condition of

the property, as well as, any PCNA repairs to be

accomplished under the POA. MV will compare the

PCNA estimated reserve amount to the current

reserve balance and indicate any shortfall to HM

(under the POA stage) and the Mortgage Credit

Examiner (under the Section 241(f) stage). The

maximum Section 241(f) equity loan, exclusive of

the rehabilitation component, may be used to fund

any shortfall in the initial deposit to replacement

reserve account.

As explained above under Paragraph 3-3, Highest

and Better Use, the appraiser must deduct any

required repair costs that he/she believes would

be encountered in the marketplace from the

unsubsidized value in order to derive the

property\'s \"as is\" value. Upon receipt of the

appraisal, MV will forward AE/C the appraisal

report estimate of required repairs/costs so they

may be considered in AE/C\'s final determination.

The review appraiser will use the required repairs

list/costs (based on market rate wages not based

on Davis Bacon prevailing wages) developed by AE/C

to determine the \"as is\" value.

Inherent in the estimate of unsubsidized fair

market value, is the value attributable to the

kind of required repairs estimated by the owner\'s

appraiser. If the PCNA required repair

items/costs estimated by AE/C are not in accord

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with the appraiser\'s estimate, it could have an

effect on the unsubsidized value. Accordingly,

upon receipt of the appraisal, MV will forward

AE/C the appraiser\'s estimate of required

repair/costs so they may be considered in AE/C\'s

final determination. The review appraiser will

use the required repairs list/costs (based on

market rate wages) determined by AE/C to derive

the \"as is\" value. If in the final analysis the

required repair estimates are not in accord, the

Notification of Deficiencies (discussed under

paragraph 1-13) should also request the owner\'s

appraiser to review the unsubsidized value in view

of the required repair determinations by AE/C.

Required repairs identified by the owner\'s

appraiser that are also PCNA regulatory repair

requirements will not be included in the list of

required repairs, unless it is a requirement of

the local jurisdiction, or unless there is

reasonable expectation that local practice (ie.,

appraisal practice) would demand them.

Section 504 of the Rehabilitation Act of 1973 (24

CFR Part 8) provides the exact wording, however,

in general, if the costs of alterations (as

defined by Part 8.3) is 75 percent or more of the

replacement costs of the completed facility

(substantial alteration) or if alterations of

single elements or spaces of a dwelling unit, when

considered together, amount to an alteration of a

dwelling unit (other alterations), AE/C will

estimate the costs to make the specified number of

units prescribed in Part 8 (see paragraph 2-3, C,

1\) accessible to handicap.

To determine applicability of the 75 percent rule,

AE/C will provide MV, separate from the PCNA

repairs list/costs, the total costs to complete

those PCNA repairs (required and regulatory) that

are in accord with the definition of alteration as

stated in Part 8.3. MV will determine if

alteration costs equal or exceed 75 percent of the

replacement costs of the completed facility. The

estimated replacement costs of the completed

facility should comprise the \"as is\" value of the

project, alteration costs and related charges and

fees on the alteration costs. The multifamily

form, Replacement Costs by Formula Rehabilitation

Projects, provided with instructions in HUD

Handbook 4480.1, may be used to compute the

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replacement costs with the exception of

modifications stated under paragraph 14 below.

If the alteration costs equal or exceed 75 percent

of replacement costs, AE/C must amend the previous

estimate of PCNA regulatory repairs to reflect

costs that will be incurred in order to comply

with handicap accessibility. \"Other alterations\"

should have been included in the initial estimate

of PCNA regulatory repairs and should not have to

be amended.

Under the PCNA procedures, AE/C will also assist

MV in determining the reasonableness of the

appraiser\'s estimate of upgrade improvement costs.

See the discussion below under Hypothetical

Upgrade Improvements for instructions.

12\. Hypothetical Upgrade Improvement Costs - Upgrade

improvement costs are also deducted from the

unsubsidized value of the property to derive the

\"as is\" value. Upgrades are those improvements

that would be incurred by any owner or purchaser

attempting to elevate the property to a condition

that will attract market rate tenants and enable

it to compete with comparable unsubsidized rental

properties within the subject\'s market area.

Upgrade improvements are typically hypothetical.

However, upgrades can be implemented if they are

also identified as PCNA repair requirements.

Upgrade improvements may range from amenities,

such as, unit washers and dryers, dishwashers,

etc., to major improvements, like a swimming pool

and bath house. Data must justify such improvements

are market preferences needed to achieve the

property\'s highest and best use. More

importantly, all upgrade improvements must be

economically feasible or demonstrate that they

will have the effect of increasing net project

income by increasing the obtainable unit rent

levels and/or by reducing operating expenses.

Operational/energy upgrades or energy saver

improvements, such as, individual metering,

thermopane windows, increased insulation that have

not been identified as PCNA required repairs, may

also be considered upgrade improvements.

The review appraiser may not have the expertise to

determine the reasonableness of the appraiser\'s

estimate of upgrade improvement costs which

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reflects the purchase price, labor and

installation charges. MV may request AE/C\'s

assistance by providing AE/C the appraiser\'s

estimate of upgrade improvements/costs for review.

The labor component of any upgrade improvement

costs should be based on market wage rates as

opposed to Davis Bacon prevailing wages. To

facilitate this assessment, a list of typical

local market upgrade amenities and their costs

could be developed and updated annually by AE/C

and MV staffs. MV would use the list as an

upgrade cost bench mark. Major proposed upgrades,

such as, a swimming pool, individual metering,

etc., will require greater technical assistance

from AE/C to determine the feasibility of the

proposal and associated development costs.

When determining the hypothetical upgrades the

appraiser should keep in mind that:

a\. all upgrades may not necessarily contribute

value (i.e., a 30-year vs. a 25-year roof);

b\. one or two upgrades may result in a positive

increase in net income, whereas the total

number of proposed upgrades could create a

rent beyond the means of the local market or

beyond the intended use. Diminishing returns

could also be created by unneeded amenities,

ie., hypothetical on site recreational

facilities when the subject property is

located adjacent to a park;

c\. the owner\'s appraisal must base the increment

in rent attributable to hypothetical upgrades

on market data. Under most circumstances,

upgrades will be new amenities as opposed to

the replacement of existing amenities. If

AE/C should require an existing amenity to be

replaced, say with a standard builders model,

the appraiser may hypothetically select an

enhanced model. The amount of increase in the

rent or operating expense savings the enhanced

model generates should be included in the net

income supporting the unsubsidized value. The

difference in costs between the standard

builders model and the enhanced model must be

included as an upgrade cost. The owner\'s

appraiser must provide market data that will

support the increase in net income derived by

the enhanced model and specification data on

the model to enable the review appraiser to

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determine the reasonableness of the upgrade

costs;

d\. the owner\'s appraiser may reduce the cost of

an upgrade improvement by the amount of any

salvage value in the existing amenities that

will be hypothetically replaced. In most

instances, existing amenities will have a

nominal or nil salvage value. The owner\'s

appraiser must provide full documentation when

using salvage value to offset upgrade costs;

e\. upgrade improvements must also be physically

and legally possible;

f\. upgrade improvement costs must also be

considered when the fair market value

is based upon a nonresidential higher

and better use;

g\. upgrade improvements also identified as PCNA

repairs must be deleted to avoid duplicating

the deduction from the \"as is\" value.

13\. Conversion Period Net Discounted Costs

\- Conversion costs are also deducted from the fair

market value of the property to derive the \"as is\"

value. These hypothetical costs are in addition

to upgrade improvements and reflect costs that

would be incurred by any individual intending to

convert the subsidized property to a specific

higher and better use. Conversion costs are

typically losses in effective gross income, from

the stabilized occupancy percentage, due to move

in and move outs during the repair and conversion

period, as well as unusual legal expenses,

relocation costs, etc. Conversion period revenues

and costs must be documented by the appraiser.

The following are some examples:

a\. Conversion Period Revenues

\(1\) Estimated prevailing unsubsidized

market rents;

\(2\) The turnover and absorption rates at

which current tenants are unable to pay

the market rents will move out and be

replaced by market rate households;

\(3\) Estimated revenue projections for units

that will continue to have occupancy

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during the conversion period.

b\. Conversion Period Costs (other than upgrading

or required repairs).

\(1\) Estimated income loss due to vacancy from

start of repairs to point of reaching

sustaining occupancy;

\(2\) Estimated legal costs (e.g., evictions,

etc.);

\(3\) Estimated relocation costs required by

local law;

\(4\) Estimated costs associated with any

mortgage the appraiser might assume in

the capitalization rate;

\- Application fee;

\- Appraisal fee;

\- Credit checks; and

\- Placement fee.

\(5\) Estimate Marketing Program;

\- Leasing personnel;

\- Model units; and

\- Advertising.

c\. These revenue/cost assumptions for the

conversion period will vary by property in

accordance with project characteristics such

as:

\(1\) Differential between current project

rents and prevailing market rents;

\(2\) Income distribution of current tenants

(e.g., greater ease of conversion in

properties with large percentage of

moderate vs low income tenants);

\(3\) Degree of disruption due to substantial

rehabilitation of occupied units with

additional costs of phasing and

on-site/offsite relocation; and

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\(4\) Degree of potential market resistance

associated with converting a project that has been

occupied by subsidized tenants for many years to

an unsubsidized occupancy.

It is expected that the net effect of the revenues

and costs during the conversion period could

represent a significant adjustment in the

determination of the estimate of \"as is\" value.

No implication is to be inferred that any or all

of these costs are mandatory, but rather that each

one must be reviewed by the appraiser and included

only to the extent that the appraiser believes the

costs would be required in the marketplace. Aside

from the appraisers\' own sources, the appraisers

may place reliance upon the assessment of

conversion costs determined by the appropriate

State agency, if such agency has data.

d\. The owner\'s appraiser must discount these total net

conversion costs at a discount rate equal to the

interest rate of an assumed return on deposit of funds.

For example, if it is assumed that the total net

conversion cost of a project is \$60,000, and that this

cost would be disbursed evenly over five periods of 6

months each, and that money deposited in the savings

bank to be used to defray these net conversion costs

would earn interest at 6 percent per year (or 3 percent

per period), the total net conversion cost needed for

the 30-month conversion period, after discounting for

interest received from the bank, is as follows:

Period of Money Disbursed Present Money Required

Six Months During Period Worth After Interest

Factor\* Discount

1 \$ 12,000 .97087 \$ 11,650

2 12,000 .94260 11,311

3 12,000 .91514 10,982

4 12,000 .88849 10,662

5 12,000 .86261 10,351

Total Net Discounted Conversion Cost \$ 54,956

\* 1/(1+i)n= V, when V is present value, n is number

of periods and i is the interest rate or rate of

return on deposited funds per period.

1/(1+.03) = V

1/1.0609 = V

.94260 = V

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14\. Calculation of Rehabilitation Component Amount of

the Maximum Section 241(f) Equity Loan To Fund the

Costs of PCNA Repairs and Related Charges - As of

this writing, the rehabilitation component amount

is equivalent to 90 percent of the costs to

complete both the required and HUD regulatory

repairs identified in the PCNA, plus related

charges and fees. However, a rule amending this

will be published soon to reflect changes set

forth in the Housing and Community Development Act

of 1992. Once the new rule becomes effective, the

rehabilitation component amount is equivalent to

100 percent of the costs to complete PCNA repairs

and related charges and fees.

The multifamily form, Replacement Cost by Formula

Rehabilitation Projects, provided with

instructions in HUD Handbook 4480.1, may be used

to compute the total rehabilitation costs.

Section G of Form HUD-92264 (9-80), should be used

to confirm the formula results and record the

final product. Charges and fees funded by the

rehabilitation component of the equity loan are

solely based on PCNA repair costs that reflect

Davis Bacon prevailing wage requirements. Charges

and fees applicable to the Section 241(f) equity

component amount based on value (see example

paragraph 17 below) are not funded by the

rehabilitation component, but may be paid from

proceeds of the equity loan.

To derive the charges and fees based on the

replacement costs of required repairs and HUD

regulatory repairs identified in the PCNA, the

following modifications to outstanding instructions

to complete Section G of Form HUD-92264 (and

the Replacement Cost by Formula Rehabilitation

Projects) must be followed.

a\. Line 50, Total for All Improvements, will

reflect the total cost of required repairs and

HUD regulatory repairs identified by the PCNA.

The estimated time to complete all repairs may

be shown on line 52 (add 2 months for cost

certification process for projects whose

repairs are defined as substantial

rehabilitation).

b\. Line 53, interest paid during the repair

period, is not included in the rehabilitation

loan since the new rents approved under the

POA (that reflect debt service on the

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rehabilitation loan) will be in effect during

the repair period and rent-up will not be a

factor.

c\. Line 54, Taxes and line 55, Insurance, are not

applicable for similar reasons as b above.

d\. Line 56, FHA Mtg., Insurance Premium is 0.5

percent for nonsubstantial rehabilitation

cases and 0.5 percent for each fraction of a

year when substantial rehabilitation applies

(defined under inspection fee below).

e\. Line 57, FHA Exam Fee is 0.3 percent.

f\. Line 58, FHA Inspection Fee.

\(1\) Nonsubstantial rehabilitation cases - Fee

is \$30/unit if total PCNA repairs

(required and regulatory) equal \$3,000 or

less/unit; or Fee is 1 percent of total

PCNA repairs, if total PCNA repair costs

are greater than \$3,000/unit and do not

meet definition of substantial

rehabilitation.

\(2\) Substantial rehabilitation cases (defined

Section 2, paragraph 2-6, C.4.) - Fee is

0.5 percent or greater of total PCNA

repair costs.

g\. Line 59, Financing Fee and line 61, Permanent

Placement Fee must equal 3.5 percent in total.

h\. Title Recording, legal, organizational and

audit (audit is applicable to rehab., cases)

costs are all based on market data.

i\. Line 68, BSPRA is not applicable.

j\. Line 71, Contingency Reserve is applicable to

substantial rehabilitation projects only.

AE/C will provide MV the amount. An escrow of

150 percent of the total PCNA repair costs is

required for all other projects).

k\. Relocation Costs - if applicable, are limited

to \$500 per unit.

Charges and fees on the equity component amount

based on value that must be paid by the owner,

include but are not limited to, title and

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recording, legal, mortgage insurance premium,

examination fee, financing fee, and permanent

placement fee. Fee percentages are the same as

applied to the rehabilitation component indicated

above, with the exception of mortgage insurance

premium, which is limited to 0.5 percent in all

cases. MV should also estimate the amount of

charges and fees on the equity component and

report these costs to HM along with other

appraisal review conclusions.

15\. \"As Is\" Value - \"As is\" Value, is defined as the

unsubsidized fair market value of the property,

less the costs of any required repairs, upgrade

improvements, and net discounted conversion costs

that would have been incurred by an owner/converter

in the marketplace to achieve the hypothetical

highest and best use.

16\. Existing Indebtedness - Total HUD-approved

indebtedness relating to the property is deducted

from the \"as is\" value to derive the owner\'s

equity.

17\. Owner\'s Equity, Section 241(f) Equity Component

Amount Based on Value and Maximum Section 241(f)

Equity Loan (Criterion 3 Form HUD-92264A)

\- Owner\'s equity is the net value of the property

obtained by deducting all HUD approved indebtedness

from the \"as is\" value (as defined above).

This definition of owner\'s equity coincides in

general, with the conventional meaning and, for

our purposes, indicates the appraised property has

a higher and better use other than subsidized

rental and the owner is eligible to receive

incentives. A loan ratio of 90 percent is applied to

the owner\'s equity to derive the equity component

amount based on value.

When a property has a higher and better use, the

owner is also eligible to receive a rehabilitation

component amount as explained under paragraph 14

above. The procedure to calculate the maximum

Section 241(f) equity (Criterion 3 Form HUD-92264A)

loan is explained below.

NOTE: Rehabilitation costs and related charges

and fees should not be added to the equity

component amount based on value to derive the

maximum equity loan, when some other source of

financing will be used for this purpose. This

would in effect overstate the funding required.

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The following example illustrates these points. Pencil in

the following procedure under Criterion 3 of Form

HUD-92264A.

\$ 2,000,000 Unsubsidized Value @ Higher/Better Use

\- 100,000 PCNA Req. Repairs (w/o chgs/fees/Davis Bacon

\- 50,000 Upgrade Imprv Cost (w/o chgs/fees/Davis Bacon

\- 10,000 Less Net Discounted Conversion Costs

1,840,000 \"As Is\" Value

\- 440,000 Less Total HUD-Approved Debt

\$ 1,400,000 Owner\'s Equity (indicates property has a

higher/better use and owner is

eligible to receive incentives)

x .90 Section 241(f) Loan Ratio

\$ 1,260,000 Section 241(f) Equity Component amount

based on value.

When PCNA repair costs are funded by the

Maximum Section 241(f) equity loan, add the

total estimated costs of required repairs and

regulatory repairs, including related carrying

charges and financing fees.

\+ 120,000 PCNA Required Repairs (w/ Davis Bacon)

\+ 75,000 PCNA HUD Regulatory Repairs (w/ Davis Bacon)

\+ 70,000 Chgs/Fees on 100 percent of PCNA Repairs Costs

\$ 265,000 Rehabilitation Component amount based on

replacement costs.

\$ 1,525,000 Max. Section 241(f) Equity Loan (combine

equity and rehabilitation component

amounts above). The indicated maximum

equity loan is only available if it can be

supported by the debt service mortgage amount

that is estimated under the Section 241(f)

application processing.

18\. Environmental Assessment Under ELIHPA - The Code of

Federal Regulations 24 CFR Part 50.20(n) excludes

approval of mortgage prepayments or POAs (including

incentives) under ELIHPA, from the National

Environmental Policy Act (NEPA) requirements, when the

proposal does not involve demolition of any building,

or parts of any building, containing the primary use

served by the project. However, where the responsible

official determines that the POA proposal has an

41

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environmental effect because of extraordinary

circumstances, the requirements of NEPA shall

apply.

Additionally, approval of mortgage prepayments or

POAs (including incentives) are not excluded from

individual compliance requirements of other

environmental statutes, Executive orders and HUD

standards listed in 24 CFR Part 50.4. The format

to be used by HUD in documenting compliance for

projects, prior to preliminary approval of the

POA, is contained in Appendix B of 24 CFR Part 50.

19\. Report to HM - MV will advise HM of the results of

the appraisal review. This memorandum should

communicate the following and show major

components of each derivation, as well as, provide

discussion if needed to supplement any analyses.

a\. unsubsidized fair market value at the

highest and best use;

b\. \"as is\" value;

c\. owner\'s equity;

d\. equity loan component amount based on value;

e\. rehabilitation component amount based on

replacement cost;.

f\. maximum Section 241(f) equity loan;

g\. charges/fees on equity loan based on value;

h\. environmental assessment issues; and

i\. any shortfall in initial deposit to

replacement reserve.

HM should also be advised that any subsequent

negotiated conditions that effect a change in the

calculation of the maximum equity loan or

component amounts, should be communicated to MV to

determine if the appraisal review conclusions

require revision.

3-4. Final Approval of POA Stage.

Issues raised in the aforementioned Notification of

Deficiencies (paragraph 1-13) are resolved with the owner

prior to preliminary approval of the POA. Upon receipt of

42

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the preliminarily approved POA the tenants have the

opportunity to comment. The Department\'s receipt of any

comments initiates the final approval stage.

A Section 241(f) equity loan application may be submitted

for processing (ATTACHMENT 4 submission requirements), if

approved as an incentive, between the date on which

preliminary approval of the POA is granted and final

approval is granted or after final approval. A commitment

on a equity loan shall not be made prior to final

approval. Whichever option the owner selects, MV

processing is the same as explained under paragraphs 3-5

and 3-6 below.

3-5. Submission of Section 241(f) Equity Loan Application.

Section 241(f) MV processing is a continuation of where

the review appraisal process concluded prior to

preliminary approval of the POA. The last function

performed by MV was a review of the appraiser\'s estimate

of the owner\'s equity or determination of a higher and

better use other than subsidized rental. A loan ratio of

90 percent was applied to the owner\'s equity to calculate

the statutory equity component amount based on fair market

value. The rehabilitation component amount based on the

replacement costs of total PCNA repairs, plus related

charges and fees, was estimated and added to the equity

component based on value to derive the maximum Section

241(f) equity loan (Criterion 3 of Form HUD-92264A). The

appraiser\'s primary task now is to determine whether or

not a mortgage based on actual subsidized debt service

(Criterion 5 of Form HUD-92264A) can support the already

computed maximum equity loan (Criterion 3 of Form

HUD-92264A), that is based on the appraisal assumption that

the property has a higher and better use other than

subsidized rental. The controlling mortgage amount will

be the lesser of Criterion 3, 5, or the amount requested.

Since an approved POA will typically provide Section 8

Contract authority and/or the Section of the Act the

property is currently insured under may provide interest

subsidy assistance, the actual income available for debt

service will always be to some extent subsidized.

Accordingly, MV will label the Section 241(f) application

processing forms (Forms HUD-92264, HUD-92264A, HUD-92274)

\"Subsidized.\"

The following should be considered to derive the

controlling mortgage amount.

A. Criterion 3 \"Trial\" Form HUD-92264A Maximum Section

241(f) Equity Loan. Under most circumstances the

maximum equity loan, derived prior to preliminary

approval of the POA, will not have to be recomputed

43

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when processing the Section 241(f) application

submission. However, MV must review the final

approved POA to assure that agreements have not been

made that would impact final appraisal estimates

and/or the maximum equity loan determination

previously reported to HM. MV must also consider the

effect of any changes in PCNA required repairs and/or

HUD regulatory repairs requirements/costs by AE/C

under the Section 241(f) application submission, on

the maximum Section 241(f) equity loan.

An application for a capital improvement loan, to

finance the completion of PCNA repairs, may be

submitted after preliminary approval processing of the

POA. As a result, MV may inadvertently overlook this

source of financing or may partially or completely

duplicate the financing required to complete PCNA

repairs by also funding such costs from the equity

loan. Since HM is the recipient and processor of

capital improvement loan applications, HM will alert

HD of cases that require review.

B. Criterion 5 \"Trial\" Form HUD-92264A Loan Amount Based

on Debt Service.

The debt service mortgage may be supported by project

unit rents that are 100 percent assisted, ie., Section

8 subsidies in tandem with or without interest subsidy

assistance, or project unit rents may be partially

assisted. Depending upon the scenario, the net

project income attributable to the assisted units is

derived differently.

1\. Projects 100 Percent Assisted - HM will provide MV

the subsidized unit rent structure indicated in

the final approved POA. Section 8 rents will be

based on the lesser of the Existing Fair Market

Rents (FMRs) applicable to the project\'s market

area or rents for comparable unassisted units in

the project\'s market area. Further, ELIPHA states

for purposes of establishing the amount of the

Section 241(f) equity loan, the appraiser may

assume that Section 8 subsidies will be renewed

for the term of insurable mortgages. An occupancy

factor of 97 percent may be applied when processing

100 percent assisted projects.

2\. Partially Assisted Projects - Title II eligibility

also extends to certain projects wherein only a

portion of the units may benefit from a form of

HUD assistance at the time of the POA submission.

For example, a Section 236 contract will

44

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explicitly state, for Section 236 State Agency

(noninsured) projects, the number of units in the

development that benefit from Section 236 interest

subsidy assistance. While the entire partially

assisted project is eligible for a Section 241(f)

equity loan, incentives approved in exchange for

extension of affordability restrictions, such as a

Section 241(f) equity loan, are awarded

proportionately to the assisted units only. To

assure that HUD subsidies do not support a

disproportionate share of the operating costs and

Section 241(f) loan debt service, the following

instructions apply.

a\. Calculate the assisted unit fair share

percentage factor. The date of the POA

submission shall be the effective date of the

processing. The effective date must be stated

in remarks. LM will determine the number of

units eligible to receive Section 8 assistance,

as of January 1, 1987, or as of the

date of the POA submission. Whichever profile

results in a greater number of units eligible

to receive HUD assistance (ie., units with

very low income households) will be used for

this analysis. The appraiser will then

determine the percentage of gross monthly

residential income subsidized by HUD as of the

applicable date. This percentage will be used

to determine the fair share of vacancy/

collection losses, operating costs and Section

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

subsidized rent structure under the POA and

establishes the basis for proportionality.

For example; (not all Section 236 tenants are

eligible for Section 8). This example case is

currently 50 percent assisted under Section

236\. An assumption is being made, for this

exercise only, that 20 of the 236 tenants

residing in assisted units (ten 1BR & ten

2BR) do not qualify for Section 8.

45

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\* 10 Assisted (236) 1 BRs @ \$390/mon. = \$ 3,900

15 Assisted (Sec 8) 1 BRs @ \$500/mon. = 7,500

\* 10 Assisted (236) 2 BRs @ \$480/mon. = 4,800

15 Assisted (Sec 8) 2 BRs @ \$600/mon. = 9,000

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

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

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

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

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

Factor

53% Unassisted Unit Percent

of Operating Expenses

\* These rents are the Section 236 market rents by

formula. (The same formula that was used in the

original development processing).

b\. Calculate the debt service mortgage supported

by the fair share percentage of assisted unit

net income and unassisted unit net income.

Step 1. Calculate the assisted unit net income

without adjustment for fair share

percentage.

No. of Assisted Gross Monthly

Assisted Units Unit Rent Assisted Rent

10 1BRs (236) @ \$390/mon. = \$ 3,900

15 1BRs (Sec 8) @ \$500/mon. = 7,500

10 2BRs (236) @ \$480/mon. = 4,800

15 2BRs (Sec 8) @ \$600/mon. = 9,000

1\. Gross Monthly

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

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

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

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

(Line 1 multiplied by Line 2)

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

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

5\. Effective Gross Income

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

(Line 3 multiplied by Line 4)

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

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

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

46

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

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

(Line 6 multiplied by Line 7)

9\. Assisted Unit Net Income Without

Adjustment for Fair Share Percentage

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

Step 2. Calculate the unassisted unit net income.

The hypothetical rents, which were used as a basis

to derive the unsubsidized value of the property

based on its highest and best use, may be used as

a basis to estimate the unassisted unit rents of

partially assisted projects. However, since the

hypothetical rents may reflect amenity improvements,

utility conversions, etc., that are typical

of unsubsidized local market properties, it may be

necessary to adjust the hypothetical rents, prior

to use, to reflect the current condition of the

property plus consideration for any improvements

required under the approved POA.

No. of Unassisted Gross Monthly

Unassisted Units Unit Rent Unassisted Rent

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

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

1\. Gross Monthly

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

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

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

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

(Line 1 multiplied by Line 2)

4\. Unassisted occupancy Factor\...\..... x .93

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

5\. Effective Gross Income

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

(Line 3 multiplied by Line 4)

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

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

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

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

(Line 6 multiplied by Line 7)

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

(Line 5 minus Line 8)

Step 3. Calculate the fair share percentage of

assisted unit net income.

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

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

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

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

(Line 1 plus Line 2)

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

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

\*5. Fair Share Percentage of Assisted

Net Income (Line 3 multiplied by

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

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

Step 4. Allocate the fair share percentage of

assisted net income in the pattern of

Existing Fair Market Rent Limits less

Personal Benefits Expense.

The assisted unit rents, used as a basis to derive

the assisted unit net income without adjustment

for fair share percentage (under step 1 above),

must be reduced since the fair share percentage of

assisted net income is a lower amount in our

example. To reduce the assisted unit rents by the

appropriate proportion and still maintain a

semblance of the current spread between the one

bedroom and two-bedroom assisted unit charges, the

following allocation formula in the pattern of

Existing Fair Market Rent limits (FMRLs) less

personal benefit expenses should be used.

No. Products and

BRs FMRLs Less PBE Units Total

1 \$ 500 x 15 = \$ 7,500

2 600 x 15 = 9,000

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

Total Monthly FMRLs less PBE = \$ 16,500

1\. Assisted Unit Net Income Without

Fair Share Adjustment\...\...\..... \$ 166,428

2\. Fair Share percent of Subsidized Net

Income\...\...\...\...\...\...\...\..... - 157,830

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3\. Subsidized Net Income Not to be

Applied to Debt Service Mortgage 8,598

4\. Divide by 12\...\...\...\...\...\...\... /12

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

5\. Amount to Reduce Monthly FMRLs \$ - 717

6\. Gross Monthly Fair Share Section 8

Unit Rent\...\...\...\...\...\...\....\$ 15,783

Allocation

Ratio

Fair Share Section 8 Rent 15,783 = .95654546

Total FMRLs less PBE 16,500

Section 8

Allocation Ratio FMRL less PBE Unit Rents

.95654546 x \$ 500 = \$ 478

.95654546 x 600 = 573

No. Section 8 Gross Monthly

BRs of Units Unit Rents Section 8 Income

1 15 x \$ 478 = \$ 7,170

2 15 x 573 + 8,595

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

Gross Monthly Section 8

Income in Pattern of FMRLs \$ 15,765

Gross Monthly 236 Income + 8,700

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

Total Assisted Monthly Income \$ 24,465

Step 5. Calculate the debt service mortgage

reflecting the fair share percentage of

subsidized net income in the pattern of FMRLs

and unassisted unit rents.

1\. Gross Monthly

Assisted Rent\...\...\..... \$ 24,465

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

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

3\. Gross Annual Unassisted Income\..... 293,580

(Line 1 multiplied by Line 2)

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

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

5\. Effective Gross Income

Assisted Units\...\...\...\...\.... 284,773

(Line 3 multiplied by Line 4)

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

7\. Assisted Percentage\... x .47

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

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

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

(Line 6 multiplied by Line 7)

9\. Assisted Unit Net Income\...\...\...\..... 157,873

(Line 5 minus Line 8)

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

11\. Total Project Net Income\...\...\...\...\..... 327,253

(Line 9 plus Line 10)

12\. Section 241(f) Loan Ratio\...\...\...\...\... x .90

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

13\. Total Project Net Income

Available for Debt Service\...\...\...\....\$ 294,528

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

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

15\. Debt Service Available for

Section 241(f) Loan\...\...\...\...\...\.....\$ 234,527

(Line 13 minus Line 14)

16\. Section 241(f) Loan Debt Service Rate../.109138788

17\. Criterion 5 Debt Service Mtge Based on

Fair Share % of Subsidized Net Income

and Unassisted Unit Rents\...\...\..... \$ 2,148,800

18\. Criterion 3 Mtge Based on Equity Value

and Total Costs of PCNA Repairs (not

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

c\. Determine the amount of the Section 241(f)

equity loan based on the lesser of the

requested application amount, Criterion 3 or

Criterion 5. For the above example an

application amount was intentionally not

provided. However, between criteria 3 and 5,

the equity loan based on debt service,

\$2,148,800, controls. If Criterion 3 mortgage

amount, \$2,300,000 had controlled the

following procedure would derive the fair

share percentage of subsidized income to apply

to vacancy and collection losses, operating

expenses, and debt service.

50

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Step 1.

Criterion 3

Max. Equity Loan Debt Service Rate Debt Service

\$ 2,300,000 x 10.9138788 = \$ 251,019

Debt Service on Max. Equity Loan\..... = \$ 251,019

Debt Service on Existing Insured Mtge. = + 60,000

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

Sub Total\..... 311,019

Equity Loan Ratio\...\...\...\...\...\...\... /.90

Total Project Net Income Needed to

Support Criterion 3 Mtge Loan Amount\... \$ 345,577

Assisted Fair Share Factor\...\...\... x .47

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

Assisted Fair Share Net Income Needed

To Support Criterion 3 Mortgage\...\.... \$ 162,421

3\. Commercial Leases - Conclusions reached under the POA

stage with regard to estimates of commercial income,

occupancy and the effect of commercial leases on

project expenses are incorporated in the \"subsidized\"

processing.

4\. Operating Expenses and Replacement Reserve - The total

project expense estimate and replacement reserve must

reflect the operating expenses of a subsidized project.

The previous 3 years of operating history provided by

HM will be useful in this analysis.

Any PCNA repairs approved under the POA that will have

an effect on operating expenses must also be considered

in the estimate of project expenses. For example,

energy conservation improvements, utility

modifications, etc.

The annual deposit to replacement reserve is the sum

total of the current regulatory deposit amount plus

.006 of any PCNA repairs (required and HUD regulatory)

approved under the POA. Since the replacement reserve

is generally used to help defray the costs of replacing

a project\'s capital items that have estimable useful

lives, non-recurring items identified as a PCNA repair,

ie., costs to abate lead base paint, should not

generally be reflected in the annual deposit to

replacement reserve.

MV will inform the Mortgage Credit Examiner of any

shortfall between the PCNA assessment of the initial

51

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deposit to replacement reserve account and the

current balance.

5\. Net Income - Notwithstanding Form HUD-92264A

Criteria 3 calculation of the maximum equity loan,

the maximum equity loan amount based on debt

service, criteria 5, cannot exceed what 90 percent

of the subsidized net income less debt service on

the existing HUD loan can support.

6\. Section 241(f) Loan Term - As of this writing, the

regulations require a 20-year term, however, a

rule amending this will be published soon to

reflect changes set forth in the Housing and

Community Development Act of 1992. Once the new

rule becomes effective, the equity loan term is

defined as follows:

The term should enable the owner to obtain an

equity loan equivalent to 90 percent of owner\'s

equity and 100 percent of the costs of required

repairs and HUD regulatory repairs identified in

the PCNA plus related charges and fees.

Accordingly, the term may range from 20 to 40

years, but may not exceed 40 years.

C. The following are additional analyses performed by MV

when processing a Section 241(f) equity loan.

1\. Phased in Rent Operating Deficit Escrow - By law

the rent increases to current project tenants,

including tenant paid utilities, shall be set at a

level that does not exceed 30 percent of the

adjusted income of the tenant or the Existing FMR,

whichever is lower. Rent increases of more than

10 percent must be phased in.

If the total rent increase, caused by incentives,

is greater than 30 percent of the existing rent,

the rent for that unit (exclusive of increases due

to operating expenses) must be phased in equally

over a period of not less than 3 years; if the

total increase is greater than 10 percent but less

than 30 percent, it must be phased in at no more

than 10 percent per year. The phased rents to be

used in the processing will be provided by HM to

HD.

The Section 241(f) loan processing will reflect or

assume all tenants are immediately paying the full

increased rent. However, since in actuality this

52

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will not be the case, the amount of annual gross

income shortfall must be escrowed from the Section

241(f) loan proceeds until the increased rent

amounts can be legally applied. The objective is

to estimate the shortfall as of the appraisal date

conclusions. Only the gross income shortfall is

escrowed. Vacancy and collection losses,

operating expenses and net income are not factored

into this analysis.

For example, the existing tenant rent is \$400 per

month and the POA approved processing rent is

\$450. This is an increase of 12.5 percent (or the

total increase is greater than 10 percent but less

than 30 percent). In accordance with ELIHPA

legislation increases of more than 10 percent but

less than 30 percent must be phased in at no more

than 10 percent per year.

a\. The Section 241(f) loan is based upon the

approved contract rent of \$450.

b\. However, in actuality, the owner will only

receive a contract rent of \$440 the first year

(\$400 x 1.10 maximum phase in per year); or

only \$40 of the \$50 unit rent increase is

allowed to be phased in the first year.

c\. Since the entire POA approved processing rent

of \$450 is needed to support the Section

241(f) debt service, the \$10 shortfall per

month or \$120 annual shortfall for this

particular unit rent is obtained by holding

back or escrowing Section 241(f) equity loan

proceeds.

d\. Since the first year phase in rent of \$440 can

be increased to the processing rent of \$450

the second year of operation without exceeding

the statutory increase limitation of 10

percent, no second year phase in hold back for

this particular unit is required.

The amount of phase in rent could differ for

each project unit that is affected. The

project owner will calculate and provide the

amount of tenant rents that must be phased in

for each segment of the phase in period. HM

will assist MV in confirming its accuracy.

Notice H 92-100 (HUD), Phase-in of Tenant

Rents after Plan of Action Implementation,

53

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provides complete phase in processing

instructions.

If the PCNA repairs are of such a nature, ie.,

meet the definition of substantial rehabilitation,

that occupancy of one or more units is

delayed or interrupted, any loss of income

should also be factored into the phased in

rent escrow.

2\. PCNA Repairs Escrow - The estimation of this

escrow is a mortgage credit function and applies

only to owners that have PCNA repair costs that do

not meet the definition of substantial

rehabilitation.

SECTION 4. MORTGAGE CREDIT PROCESSING

SECTION 241(F) TITLE II EQUITY LOANS

4-1. Basic Source Book. Except as modified here, basic

mortgage credit processing instructions are in HUD

Handbook 4470.1 REV-2, Mortgage Credit Analysis for

Project Mortgage Insurance, Section 207.

4-2. Scope. Under ELIHPA, Mortgage Credit processing commences

with the submission of a Section 241(f) application.

Mortgage Credit has no responsibility under the NOI stage.

4-3. Application Requirements. The application must be

submitted by an approved lender and an owner or purchaser

of the project.

4-4. FEES AND CHARGES. Fees and charges are as follows:

A. Conditional commitment application fee - \$1.50 per

thousand dollars of loan amount requested.

B. Firm commitment application fee - an amount when added

to the original fee, totals no more than \$3.00 per

thousand of dollars of the loan amount requested.

C. HUD Inspection Fee for:

1\. Title II Equity Loan with no PCNA Repairs is \$0.

2\. Title II Equity Loan with PCNA Repairs.

a\. \$30 per dwelling unit where the project

involves repairs of \$3,000 or less per unit.

54

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b\. 1 percent of the total repairs where the

project involves repairs of more than \$3,000

per unit.

3\. Title II Equity Loan with Substantial

Rehabilitation Required Before Final Endorsement

\$5.00 per thousand of dollars of the loan amount

paid at initial endorsement for insurance of

advances or before the start of construction for

insurance-upon-completion projects.

D. Mortgagee\'s Initial Service Charge (Financing Fee)

\- maximum of 2 percent of loan amount.

E. Permanent Placement Fee - may not exceed 1.5 percent

of the loan amount.

4-5. Processing Stages for Title II Equity Loans.

A. SAMA/Feasibility

These stages of processing do not apply to Section

241(f) processing.

B. Conditional Stage

1\. Upon receipt of an application for Conditional

Commitment, the mortgage credit examiner (MCE)

reviews:

a\. Form HUD-92013, Application for Multifamily

Housing Project.

b\. Form HUD-92013 Supplement on each principles

of the mortgagor entity.

c\. Individual/company credit reports of the

mortgagor entity and principal sponsors

supplied by originating mortgagee.

d\. Project financial statements and supporting

schedules.

2\. The MCE reviews credit reports and Form

HUD-92013 Supp to ensure that any delinquent

Federal debt has been satisfactorily addressed.

3\. In the case of a Title II Equity Loan with

Substantial Rehabilitation Required Before Final

Endorsement, the MCE will perform a complete

financial and credit analysis on the general

contractor in accordance with HUD Handbook 4470.1.

55

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C. Firm Stage

Upon receipt of an application for Firm Commitment,

the MCE updates processing and reviews all

documentation for its correctness, completeness and

applicability.

If an application is not submitted for Conditional

Commitment processing, the MCE complete the processing

described in 2 above during Firm Commitment

processing.

4-6. Determining Loan Amount and Amortization Period. Analysis

of the credit risk is based on a loan for a definite

amount and amortization period.

A. The loan will be a principal obligation stated in

multiples of \$100.

B. The amortization period of the loan will not exceed 40

years (see 3-5, B., 6, when 40-year term becomes

effective). Valuation will record the term of

amortization in Section O, \"Remarks,\" on Form

HUD-92264.

4-7. Determination of Maximum Insurable Mortgage, Sect on I of

Form HUD-92264-A, Supplement to Project Analysis.

A. Title II Equity Loan with no Required PCNA Repairs.

The MCE determines the amount of the equity loan based

on the lesser of:

1\. Application Amount

2\. Ninety percent of the HUD estimated owner\'s

equity.

3\. Debt service that does not exceed 90 percent of

project\'s estimated net income. Reduce this

result by the current annual debt service

requirements on all outstanding indebtedness

relating to the property. The equity loan based

upon the equity may exceed this limit by

capitalizing the savings from any tax abatement.

NOTE: \"Outstanding indebtedness as approved by

HUD relating to the property\" means the total

outstanding amount of unsecured obligations of the

owner incurred in connection with improving,

repairing, or maintaining the property and

outstanding mortgage or obligations constituting

liens on the title to the property.

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B. Title II Equity Loan with PCNA Repairs. The maximum

loan amount is based on the lesser of:

1\. Loan criteria A1 and A3 above or;

2\. Ninety percent of the HUD estimated owner\'s equity

and 100 percent of the hard and soft costs

associated with PCNA repairs less the amount of

any grant/loan funds attributable to the repair

cost.

NOTE: AE/C estimates the hard cost of PCNA

repairs. This information will be recorded in the

\"Remarks\" Section of Form HUD-92264.

C. Title II Equity Loan with Substantial Rehabilitation

Required Before Final Endorsement. The maximum loan

amount is based on the lesser of:

1\. Loan criteria A1 and A3 above or;

2\. Ninety percent of the HUD estimated owner\'s equity

and 100 percent of the hard and soft costs

associated with the substantial rehabilitation of

the project less the amount of any grant/loan

funds attributable to the substantial

rehabilitation cost.

4-8. Total Requirements for Settlement, Section II of Form

HUD-92264-A, Supplement to Project Analysis.

A. Title II Equity Loan with no Required PCNA Repairs.

1\. Part B of Section II.

a\. Line 1, Fees not to be Paid is Cash, is not

applicable.

b\. Commitment, Marketing Fees and Discounts

\(1\) Fees: GNMA Indemnification Escrow, if

applicable.

\(2\) Discounts.

c\. Working Capital Deposit. Not applicable.

2\. Part A of Section II.

a\. Line 1, Development Cost. Deleted

\"Development Cost\" and enter \"Cost of Title II

Equity Loan with no Required PCNA Repairs\"

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Enter the total loan closing charges based on

the maximum loan.

Compute the loan closing charges in the

Remarks Section of Form HUD-92264-A.

\(1\) Financing Fee (Initial Service Charge not

to exceed 2 percent).

\(2\) Permanent Placement Fee (not to exceed the

difference between 3.5 percent and the

percentage applicable to the financing

fee).

\(3\) Mortgage Insurance Premium of .5 percent

of the loan paid at initial/final

endorsement.

\(4\) Initial Deposit to Replacement Reserve

\- the Valuation Branch will indicate in

Section 0, Remarks, of Form HUD-92264 the

amount of the deposit, if any, that the

mortgagor is required to make.

\(5\) Title and Recording Expenses, if known.

\(6\) Legal Expenses, if known.

b\. Line 2. Land Debt. Not applicable.

c\. Line 3. Self explanatory.

d\. Line 4. Modify to read \"Amount of Loan and

Grant.\"

e\. Line 5. Not applicable.

f\. Lines 6 and 7. Self explanatory.

g\. Line 8, Operating Deficit. Valuation

computes an operating deficit due to phase-in

of unit rents. At initial/final endorsement

the operating deficit escrow must be

established.

The computation of the operating deficit

considers occupancy disruption to any units

due to required repairs.

h\. Lines 9, 10, 11, and 12.

NOTE: Front Money Escrow. Not Applicable.

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B. Title II Equity Loan with PCNA Repairs.

1\. Part B of Section II.

a\. Line 1, Fees not to be Paid in Cash, is not

applicable.

b\. Commitment, Marketing Fees and Discounts

\(1\) Fees: GNMA Indemnification Escrow, if

applicable.

\(2\) Discounts.

c\. Working Capital Deposit. Not applicable.

2\. Part A of Section II.

a\. Line 1, Development Cost. Deleted

\"Development Cost\" and enter \"Cost of Title II

Equity Loan with PCNA Repairs\".

Enter the total loan closing charges based on

the maximum loan.

Compute the loan closing charges in the

Remarks Section of Form HUD-92264-A.

\(1\) Financing Fee (Initial Service Charge not

to exceed 2 percent).

\(2\) Permanent Placement Fee (not to exceed the

difference between 3.5 percent and the

percentage applicable to the financing

fee).

\(3\) Mortgage Insurance Premium of .5 percent

of the loan paid at initial/final

endorsement.

\(4\) Initial Deposit to Replacement Reserve

\- the Valuation Branch will indicate in

Section 0, Remarks, of Form HUD-92264 the

amount of the deposit, if any, that the

mortgagor is required to make.

\(5\) Title and Recording Expenses, if known.

\(6\) Legal Expenses, if known.

b\. Line 2, Land Debt. Delete \"Land Indebtedness\"

and enter the required PCNA repairs in Section

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O \"Remarks\" on Form HUD-92264. Adjust to

reflect escrow requirements equal to 150

percent of the cost of non-critical PCNA

repairs to be completed after Initial/Final

Endorsement.

NOTE: With HUD\'s permission any repair items

included in the list of PCNA repairs may be

completed before endorsement of the loan.

Therefore, the MCE may have to adjust the PCNA

repair escrow at the Initial/Final

Endorsement.

c\. Line 3. Self explanatory.

d\. Line 4. Modify to read \"Amount of Loan and

Grant.\"

e\. Line 5. Not applicable.

f\. Lines 6 and 7. Self explanatory.

g\. Line 8, Operating Deficit. Valuation

computes an operating deficit due to phase-in

of unit rents. At initial/final endorsement

the operating deficit escrow must be

established.

The computation of the operating deficit

considers occupancy disruption to any units

due to required repairs.

h\. Lines 9, 10, 11, and 12.

NOTE: Front Money Escrow. Not Applicable.

C. Title II Equity Loan with Substantial Rehabilitation

Required Before Final Endorsement.

Complete in accordance with Section 207 instruction

found in HUD Handbook 4480.1.

4-9. Commitment Requirements.

A. Commencement of Amortization. Amortization shall

begin for a:

1\. Title II Equity Loan with no Required PCNA Repair

amortization commences on the first day of the

second month following the date of initial/final

endorsement of the loan.

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2\. Title II Equity Loan with PCNA Repairs

amortization commences on the first day of the

second month following the date of initial/final

endorsement of the loan.

3\. Title II Equity Loan with Substantial

Rehabilitation Required Before Final Endorsement

amortization commences four months after final

completion of the substantial rehabilitation work.

B. Preparation of Commitment.

1\. Form FHA-2432 will be used for insurance of

advances.

2\. Form FHA-2453 will be used with loans under:

a\. Title II Equity Loan with PCNA Repairs.

b\. Title II Equity Loan with Substantial

Rehabilitation Required Before Final

Endorsement.

4-10. Initial/Final Endorsement of Title II Equity Loan with

PCNA Repairs. At the closing:

A. The mortgagor sets up a two-tier escrow equalling at

least 150 percent of the cost of PCNA repairs not yet

completed.

1\. 100 percent of the cost must be in cash.

2\. 50 percent or such greater amount as determined by

the mortgagee must be funded in cash or at the

mortgagee\'s option by a letter of credit.

B. The mortgagor enters into a formal escrow agreement

using Form HUD-92476-1, Escrow Agreement for Unpaid

Construction Costs, with mortgagee and HUD which

provides:

1\. All repairs must be completed by the mortgagor

within 12 months.

a\. The mortgagee may specify a shorter escrow

period.

b\. The Field Office grant extensions of the

escrow beyond 12 months. Each extension will

be for a period of time determined necessary

by the Field Office.

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2\. If the mortgagor does not complete all the repairs

within the allotted time frame, the mortgagee will

use the balance of the escrow to complete the

repairs unless an extension is granted by the

Office of Insured Multifamily Housing Development.

3\. At the mortgagee\'s option, escrowed funds may be

disbursed as work progresses using Form HUD-92464,

Request for Approval of Advance of Escrow Funds.

a\. HUD must inspect and approve all work

before authorizing release of the

escrowed funds.

b\. Funds released from the 100 percent escrow are

not subject to any holdback. No money is

released from the second 50 percent escrow

until all PCNA repair work is complete and

found acceptable.

4\. Funds remaining in the escrow account, including

the holdback portion, may be released when:

a\. Latent Defects guarantee is satisfied;

b\. All PCNA repairs have been satisfactorily

completed;

c\. Evidence of clear title has been

provided to the Field Office;

d\. An updated title search indicates no

liens have been placed on the subject

as a result of the PCNA repairs, and;

e\. Cost certification is submitted to and

reviewed by the local Field Office.

4-11. Insurance of Advances for Title II Equity Loan with

Substantial Rehabilitation Required Before Final

Endorsement.

A. Insurance of advances will be available only where the

substantial rehabilitation costs equal \$200,000 or

more.

B. Release the equity component of the loan at initial

endorsement.

C. Assurance of Completion. The Borrower must provide an

assurance of completion in accordance with 24 CFR

207.19(c)(6).

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D. Pre-construction conference is required.

E. All closing documents presently required in connection

with Section 207 insured mortgages are to be used in

equity loans, including property insurance

requirements as well as the mortgagee\'s and

mortgagor\'s certificate.

1\. The new Note and Mortgage for the Section 241(f)

will be on the same form as used for the original

loan. The mortgage form will be adjusted to

delete reference to \"first mortgage\" and state

that the second mortgagee\'s rights are subject to

the rights of the mortgagee of the HUD-insured

first mortgage, including rights relating to the

assignment of rents.

2\. The new mortgage form will be adjusted to delete

all references to the collection of escrows for

\"taxes\" and \"hazard insurance.\"

3\. Title evidence must be presented covering the new

loan that reflects no lien other than the lien of

the first mortgage and liens accepted on the first

title policy insuring the first mortgage.

4-12. Cost certification.

A. Title II Equity Loan with no Required PCNA Repairs.

No cost certification is required.

B. Title II Equity Loan with PCNA Repairs or with

Substantial Rehabilitation Required Before Final

Endorsement. Cost certification is required.

1\. Simplified cost certification requirements apply

when the PCNA repair or substantial rehabilitation

component of the loan equals \$200,000 or less.

2\. Long form cost certification requirements apply

when the PCNA repair or substantial rehabilitation

component of the loan exceeds \$200,000.

NOTE: No operating statement is required since the

mortgagor entity is controlled by an existing

Regulatory Agreement and is required to execute a Use

Agreement as a condition of awarding incentives.

4-13. Latent Defects Guarantee. Upon completion of PCNA repair

or substantial rehabilitation work:

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A. The mortgagor must give satisfactory evidence that the

repair work is covered by a guarantee, running for a

period of 15 months from the date all repair work is

satisfactorily completed, against defects due to

faulty materials or workmanship.

B. Performance must be assured by either:

1\. Surety Bond. Form FHA-3259, Surety Bond Against

Defects Due to Defective Materials and/or Faulty

Workmanship, by a surety on the accredited list of

the U. S. Treasury and drawn in an amount not less

than 10 percent of the cost of repairs as

estimated by HUD.

2\. Cash Escrow equal to 2-1/2 percent of the total

cost of repairs, to be retained for a period of 15

months from the date all repair work is

satisfactorily completed.

3\. If Form FHA-2452, Performance Bond-Dual Obligee,

or the American Institute of Architect\'s Form AIA

A311, Performance Bond were used for substantial

rehabilitation no action is required as the bonds

remain in effect for two years from the date of

final payment under the construction contract.

4-14. Prepayment Privileges and Charges. Same as those set

forth in 24 CFR Section 241.1100.

4-15. Bond Financed Loans must comply with all the requirements

for bond financed loans found in HUD Handbooks 4430.1 and

4470.1 REV-2.

4-16. Low Income Housing Tax Credits. The mortgagor and Field

Office must comply with all Headquarters review

requirements concerning processing a project receiving

benefit of Low Income and Historic Tax Credits including

those found in HUD Handbook 4430.1.

4-17. Additional Considerations.

A. Section 241(f)(9) of the National Housing Act, as

amended, 12 U.S.C. Section 1715z-6(f)(5), provides

that a mortgagee approved by the Secretary may not

withhold consent to an equity loan on a property on

which that mortgagee holds a mortgage. Given this

fact, it is HUD\'s intention to protect a mortgagee\'s

first lien position as follows:

1\. The local HUD Field Office will notify the

mortgagee of record of HUD\'s intent to insure a

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Section 241(f) supplementary loan before issuing a

loan commitment.

2\. At this time, there is no obligation on the part

of the first mortgagee to provide notice or

opportunity to cure to the second mortgagee in the

event of a default under the first loan documents.

Further, the Department has no intention of

imposing such a requirement on the first

mortgagee.

3\. Because the mortgage form contains a covenant

precluding the placing of a lien inferior or

superior to the HUD-insured mortgage, mortgagee

consent to the junior lien created by the equity

loan is required. However, as noted above,

Section 241(f)(9) precludes a HUD approved

mortgagee from withholding its consent to the

equity loan on a property on which that mortgagee

holds the mortgage. If the first mortgagee needs

to review the Section 241(f) loan documents to

satisfy company policy, it must be done at no cost

to the mortgagor, second mortgagee or HUD.

B. Housing Assistance Payments Contracts must be executed

or amended before or at initial closing to reflect the

Section 8 rents included in the Section 241(f)

processing and appropriate contract and budget

authority.

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

James E. Schoenberger

Associate General Deputy Assistant

Secretary for Housing

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ATTACHMENT 1

DESCRIPTION OF CAPITAL NEEDS ASSESSMENT

TITLE II PRESERVATION LOAN PROGRAM

Preservation applications will not follow the basic HUD

underwriting processing stages. Instead, an analysis which is

similar to the conditional stage for rehabilitation projects

shall be done.

1\. HANDBOOKS AND REFERENCES

All processing of the Preservation Capital Needs

Assessment (PCNA) shall be done in accordance with the

HUD Handbooks and regulations referenced below. It is

essential that the processor assigned to perform the

PCNA for Title II Preservation processing read the

regulations implementing Title II to familiarize

themselves with the intent and procedures for

implementing the program.

Handbook 4460.1 Rev 1, Architectural Analysis and

Inspections for Project Mortgage Insurance provides

technical instruction and guidance for HUD staff,

sponsors, architects and building contractors on

acceptable design and construction of multifamily

housing pursuant to HUD\'s basic underwriting program

Section 207. Handbook 4450.1 Rev. 1, Cost Estimation

for Project Mortgage Insurance, provides basic cost

processing instructions. The following handbooks and

references apply to the PCNA:

A. Prepayment of a HUD-Insured Mortgage by an Owner of

Low Income Housing, published as an interim rule

April 8, 1992.

B. Guidelines for Determining Appraisals of

Preservation Value Under the Low Income Housing

Preservation and Resident Homeownership Act of 1990,

published May 8, 1992, in the Federal Register.

C. 4350.6\--Processing Plans of Action Under the Low

Income Housing Preservation and Resident

Homeownership Act of 1990.

D. 4450.1 Rev. 1\--Cost Estimation for Project Mortgage

Insurance.

E. 4460.1\--Architectural Analysis and Inspections for

Project Mortgage Insurance.

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F. 4470.1 Rev. 2\--Mortgage Credit Analysis for Project

Mortgage Insurance, Section 207.

G. 4480.1\--Multifamily Underwriting: Reports and Form

Catalog.

H. 4565.1\--Mortgage Insurance for the Purchase or

Refinancing of Existing Multifamily Housing

Projects: Section 223(f).

I. 4585.1\--Supplemental Loans for Project Mortgage

Insurance: 241.

J. 4910.1 (MPS)\--Minimum Property Standards.

K. 24 CFR Part 8, the regulation implementing Section

504 of the Rehabilitation Act of 1973.

L. 24 CFR Parts 35 and 200, Subpart 0, Lead-Based Paint

Poisoning and Prevention.

M. 24 CFR Part 886.307, Housing Quality Standards

N. 40 CFR Part 61, National Emissions Standards for

Hazardous Air Pollutants; Asbestos; NESHAP Revision;

Final Rule.

All of the Handbook and regulatory citations

described in this Attachment are subject to

revision. It is the Field Office\'s responsibility

to ensure all analysis is conducted according to

current HUD standards.

II\. DETAILED WORK REQUIREMENTS

There is only one AE/C processing stage for Title II

Preservation applications. This is the Plan of Action

stage. Subsequent application processing may be done;

however, it would be pursuant to a separate a Section 241(f)

loan application for the repairs identified under the

preliminary preservation application.

AE/C performs an inspection of the project, obtains

necessary engineering and other special reports, prepares a

PCNA (work write up with cost estimates for repairs), and

prepares an estimate of the remaining useful life of short

lived equipment and building components (including

replacement cost estimates).

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A. REVIEW OF THE APPLICATION EXHIBITS. AE/C staff shall

review the application exhibits and notify the Housing

Programs Branch immediately of any deficiencies or

additional information required. The following exhibits

shall be evaluated:

1\. Owner\'s Notice of Intent (NOI), Form HUD-9608.

2\. Owner\'s Application, Form HUD-92013 (completed by

HUD Loan Management staff).

3\. Latest inspection report by local building

officials, fire marshall, etc., identifying any code

violations (if available).

4\. City/County Health officer\'s report/clear report

where private water supply or sewage treatment

systems are involved. Obtain from the owner at the

time of the inspection.

5\. Last three physical inspection reports by HUD Loan

Management staff, the owners\' responses and

resolution of any findings (from Loan Management).

6\. Location map.

7\. Name and phone number of owner\'s representative.

8\. As-built plans or surveys available from the owner

or HUD, if available.

9\. Plans or descriptions from the owner of any

planned/proposed repairs or renovations (if

available).

10\. Repair records (major equipment/systems as well as

units) available at the project site or from the

owner.

11\. Comments from tenants, tenant representatives, state

and/or local government regarding the condition of

the project. Comments will be forwarded from Loan

Management.

12\. Appraiser\'s list of required market repairs and cost

estimate, if applicable.

B. Tests and Reports.

1\. The AE/C processor is responsible for reviewing the

condition of the entire project. Based on one or

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more of the following factors, the AE/C processor

may determine that engineering and/or other

specialized reports are necessary in order to

complete work write-up/capital needs assessment:

a\. The age of the building (all projects will be at

least 18 years old).

b\. The existing condition of the property.

c\. The availability of detailed maintenance and

repair records from the owner at the time of the

inspection.

2\. If needed, special tests and reports are typically

provided by the owner(s) in HUD\'s mortgage insurance

programs. However, under the Title II Preservation

Loan Program, HUD must obtain necessary tests. The

AE/C processor must determine the need for these

tests and arrange for the services of specialists

qualified in each area. This responsibility

includes requesting assistance through the Housing

Development Director from other Field or Regional

Office staff, or contacting the Regional Contracting

Officer to contract for the special services.

3\. The PCNA must include analyses of roofing and

mechanical systems. HUD staff or consultants may

provide these reports. The AE/C processor will be

responsible for reviewing the test results and

incorporating the conclusions in the PCNA after

giving consideration to the impact on other areas of

the PCNA. If additional tests are needed, based on

the conditions of the project or conditions within

the Region, (e.g., seismic requirements, wind,

termite infestation, etc.), these additional

requirements should be added to the PCNA description

and AE/C Statement of Work (SOW) when applicable.

4\. Engineering Services or other specialty consultants,

beyond those provided by the AE/C staff, may be

required due to specific findings, the general

condition or age of project elements or other good

cause. Testing and analysis of other components or

systems may include, but are not limited to, the

following: electrical, civil, structural,

geotechnical, toxic and hazardous materials (i.e.,

PCBs, underground storage tanks, radon gas), special

equipment, fire protection, etc.

5\. The AE/C processor is responsible for reviewing all

special reports and analyses in addition to

performing the physical inspection of the project.

The AE/C processor retains the ultimate authority

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and responsibility for the comprehensive review of

the project and all relevant reports and documents

in preparing the work write-up, cost estimate and

estimate of remaining useful life. The AE/C

processor shall consolidate the reviews, considering

any comments or recommendations in the overall

analysis or report, and assure that the overall

analysis has been checked for discrepancies,

inconsistencies and duplications between the various

specialty areas.

6\. When reviewing the test results and reports for lead

based paint testing and abatement and estimated

costs when applicable, the AE/C processor shall rely

on the expertise of these specialists and include

the results of their analysis in the PCNA.

7\. The AE/C processor shall identify any applicable

state or local requirements for LBP and asbestos

testing and/or abatement, or a lack of such

requirements, in the PCNA.

8\. LEAD-BASED PAINT (LBP). In all instances, HUD will

contract separately with a professional testing

service for lead-based paint testing (24 CFR PARTS

35 and 200) for all projects. The test results and

cost estimate for abatement, if LBP is found, must

be provided and included in the PCNA.

9\. ASBESTOS. EPA standards do not require testing for

asbestos containing materials (ACM) by accredited

inspectors unless actual physical demolition or

renovation is involved. HUD\'s purpose for the PCNA

is to establish the value of the existing building

and the cost of repairs necessary to bring it back

to its original physical condition. Therefore, if

the Contractor determines that any demolition,

repair or replacement work disturbing 160 SF or 260

LF of the listed materials (see below) is necessary

in any one building, then the Contractor shall

assume (pursuant to the precedent established in the

Asbestos-In-Schools rule) that the materials to be

disturbed contain asbestos and shall provide a

separate line item within the estimated costs of

repairs for an amount to cover encapsulation or

abatement of the disturbed materials (in accordance

with EPA/OSHA standards - 40 CFR Part 61, National

Emissions Standards for Hazardous Air Pollutants;

Asbestos; NESHAP Revision; Final Rule).

a\. In cases where the State or locality where the

building is located has more stringent asbestos

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standards or abatement requirements, the

Contractor shall include these measures and the

costs of abatement.

b\. Acceptable cost data such as Means Construction

Cost Data may be used to derive abatement cost

estimates.

LISTED MATERIALS (EPA Booklet 2OT-2003)

Cement Pipes

Cement Wallboard

Cement Siding

Asphalt Floor Tile

Vinyl Floor Tile

Vinyl Sheet Flooring

Flooring Backing

Construction Mastic

Acoustical Plaster

Decorative Plaster

Textured Paints/Coatings

Ceiling Tiles and Lay-in Panels

Spray-Applied Insulation

Blown-in Insulation

Fireproofing Materials

Taping Compounds (thermal)

Packing Materials (for wall/floor penetrations)

High Temperature Gaskets

Elevator Equipment Panels

Elevator Brake Shoes

HVAC Duct Insulation

Boiler Insulation

Breeching Insulation

Ductwork Flexible Fabric Connections

Cooling Towers

Pipe Insulation

Heating And Electric Ducts

Electrical Panel Partitions

Electrical Cloth

Electric Wiring Insulation

Roofing Shingles and Felt

Base Flashing

Thermal Paper Products

Fire Doors

Caulking/Putties

Adhesives

Wallboard

Joint Compounds

Vinyl Wall Coverings

Spackling Compounds

6

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C. Project Inspection and Property Analysis.

1\. The AE/C processor must determine the necessary

repairs and their cost, to restore the project back

to its original physical standards for occupancy.

This means identifying only necessary repairs to

bring it to the same \"good\" condition standard as

competitive projects in the market area and meet HQS

and local codes. Items to be included as necessary

repairs are described in paragraph D, PCNA Work

Write-Up.

2\. The inspection shall be conducted as soon as

possible after receipt of the POA from Loan

Management. The AE/C processor should not wait for

the owner\'s or HUD\'s review appraiser to conduct a

joint inspection, as they will not be simultaneously

assigned to the project. In addition to the AE/C

processor, the inspection may be attended by the

owner or owner\'s representative and/or appraiser,

HUD review appraiser, code enforcement

representative, HUD Loan Management and tenant

representative(s). Prompt assignment of any

necessary subcontractors and inspection will be

essential to obtain the necessary test reports and

analyses discussed above, review and consider them

and address their recommendations in the PCNA work

write-up.

a\. The AE/C processor shall request that the owner

or owner\'s representative be present during the

entire inspection. Advise the representative of

the anticipated inspection pattern so that

residents may be given legally required

notification and to assure that access (e.g.,

keys, ladders, etc.) is available to all living

units, common and community spaces, roof

elements, etc.

b\. The AE/C processor shall invite/request

participation by the controlling code inspection

and fire marshal, unless previously arranged by

the owner. Request copies of any recent reports

from these officials. The owner must

specifically arrange for municipal

participation, where the municipal authority

requires payment for its services. Payment for

such services are not to be paid for by HUD.

Municipal service charges shall be the

responsibility of the owner.

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c\. Any comments received from tenants, tenant

representatives, state or local officials should

be considered by the AE/C processor when

preparing for the inspection. Comments may

highlight problems in individual units which

should be included in the physical inspection.

Comments or complaints which are repetitive may

indicate patterns of problems in the project

such as excessive noise, leaking windows or

roofs, inadequate heat, etc. It is not

expected, however, that the inspector look at

every unit for which comments are received or

where routine maintenance type issues are

reported.

d\. The inspection shall address defects,

deterioration, remaining useful life of short

lived elements, and required repairs,

replacements or corrections.

\(1\) Survey primary and accessory buildings,

including mechanical and structural systems;

utility systems and lines, including private

water and sewage disposal facilities.

\(2\) Identify any potential offsite, or on-site

environmental issues or hazards indicating

the need for special attention or

engineering analysis.

\(3\) Determine the need for any additional

engineering tests and reports which must be

performed by subcontractors not already

scheduled and present at the inspection.

Make arrangements immediately for these

tests. (See Section II B above.)

\(4\) Identify clearly in the work write up which

repairs are necessary to achieve compliance

with HUD\'s Housing Quality Standards (24 CFR

886.307). Identify Section 504 Handicapped

Accessibility requirements that would not

otherwise be required repairs. Refer to the

Section 504 regulations (24 CFR PART 8) to

determine their applicability (generally,

are applicable only if the scope of the

repairs is extensive).

\(5\) Required repairs, replacements and

corrections are the type and extent of work

required to place the property in

conformance with the applicable local

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standards, sound operating condition, and

program and project objectives. A

description of Required Repairs is included

in Section II, D of this Attachment 1.

\(6\) Minor nonroutine maintenance items are not

to be included, unless they constitute

extensive deferred maintenance, or if left

untended, would result in further

deterioration.

\(7\) New amenities, facilities, and building

equipment are not to be included in this

work write-up, where they did not previously

exist. (The appraiser will identify

required improvements/upgrades such as

installation of AC where not already

present.)

\(8\) Dated building components and equipment, if

operative and functionally sound, may not be

used as the basis for replacement work

requirements. Their age and condition shall

be considered in the evaluation of the

reserve for replacement account.

\(9\) Maintenance and operating expense reduction

should not be the basis for making work

requirements in the list of required

repairs. Therefore, installation or

addition of ceiling insulation, storm

windows or high efficiency equipment should

not be made required repairs, even though

such work would be cost effective and have a

short pay back. (These upgrade repairs will

be identified by the appraiser.)

\(10\) PCNA work write up repairs must be clearly

identified. Examples include repairs to

achieve compliance with HUD HQS, MPS or 504

regulations.

e\. Exit conference - After completion of the

inspection, an exit conference shall be held

with the owner\'s representative at which time

preliminary findings/conclusions shall be

relayed to the owner. Tenant Representatives

and tenants may be present at the exit

conference and may present additional comments

on the required repairs. Comments relating to

required repairs shall be reviewed by the AE/C

processor, in addition to those provided in

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writing prior to the inspection. Comments which

address routine maintenance type issues or do

not relate to the scope of the PCNA are not to

be included in the report.

f\. Unit Inspection. - The units to be surveyed to

determine the level of repairs in each project

shall be randomly sampled, except that at least

three of each typical unit type must be

examined. The following schedule reflects the

minimum number of units to be surveyed in each

project:

Units in Project Units to be Inspected

1 to 99\...\...\...\...\...\...\...\...\....20 percent

100 to 200\...(greater) 20 units or 15 percent

over 200\.....(greater) 30 units or 10 percent

If, during the site visit, the AE/C processor

finds major problems, inspection of more units

may be warranted.

\(1\) Work proposed by the owner, specific

findings during inspection, comments from

tenant representatives or tenants, or

knowledge of problems common to the building

type, age, location, mechanical systems,

etc., may require more extensive

investigation than identified above.

\(2\) Use a random inspection pattern dispersed

throughout the building(s), when a

representative sampling of the units are

examined. Include units which are:

\(a\) Under various roof elements.

\(b\) At all exterior building exposures

weighted to the side(s) resisting

prevalent wind driven rain and snow.

\(c\) At different building conditions.

\(d\) Throughout the building height.

\(e\) At least three of each typical unit

type.

\(3\) Where there is evidence of hard use,

accelerated deterioration, or extensive

deficiencies - all units must be examined.

g\. General Project Examination.

\(1\) Examine all project grounds, site

facilities, accessory structures,

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recreational facilities, building exteriors;

and common building areas, facilities,

equipment, etc.

\(2\) Examine at random repetitive elements in a

high-rise structure, e.g., corridors, trash

chute vestibules and hoppers, and exit

stairs. The number of repetitive elements

examined must be the greater of 25 percent

of the repetitive elements or at least 3 of

each typical element.

\(3\) Specifically examine all other building

elements even though more than one may

exist, e.g., roofs, laundry rooms, machine

and meter rooms, storage rooms and repair

shops, trash compactor and storage rooms,

community rooms and similar spaces,

congregate facilities, offices, day care

facilities, commercial spaces, etc.

\(4\) Immediate Project Surrounds must be assessed

for potential offsite hazards to the

property and other physical risks. Identify

any potential offsite, or on-site

environmental issues or hazards indicating

the need for special attention.

D. PCNA Work Write-Up. Prepare a work write-up detailing

two separate lists of repairs (required and regulatory),

replacements and corrections that will restore the

project to its original physical standards for

occupancy. Original physical standards for occupancy do

not mean that the project will be returned to an \"as

new\" or mint condition, but that the property will be in

the same \"good\" condition as other competitive projects.

Work write-up items will be categorized appropriately in

accordance with the descriptions of the following lists.

1\. Required Repairs. Repairs that will reflect only

those repairs that an owner would encounter to bring

the property up to a \"good\" condition that meet

local codes and HQS. Required repairs are not to

include new amenities, facilities, and equipment

(i.e., dishwashers, garbage disposals, etc.) that do

not already exist in the property, unless, it is

proposed as an operational/energy upgrade. Examples

of operational/energy upgrades might be: 1)

replacing an aged, non-efficient oil fired boiler

that has a long increasing history of operational

maintenance repairs with a new energy efficient gas

fired boiler, 2) single pane double-hung wood

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windows with double insulated casements. Further,

required repairs are not to include items of

deferred maintenance which are minor nonrepetitive

items such as repairing a bifold door. Items of

deferred maintenance should not be confused with

routine maintenance items which are eligible to be

included with other required repairs. Routine

maintenance items may be minor, however, are

repetitive and require repair, correction, or

replacement. The items included in this list are to

be further categorized under General Requirements or

Special Requirements.

a\. General Requirements. List of repair,

replacement or correction items which are

applicable to the property in general. For

Example:

\(1\) Site or related work,

\(2\) Work common to all buildings, e.g., replace

flooring in all lobbies and public

corridors, or install new roofing

throughout, or;

\(3\) Work common to all units, e.g., replace

vinyl flooring in all kitchens and

bathrooms, regrout tile wainscot in all

showers.

b\. Special Requirements. List of repair,

replacement or correction items applicable to a

specific space, unit, building, condition, site,

etc. which are not required for the project as a

whole. For Example:

\(1\) Replace the entrance door to Unit 2B.

\(2\) Repair ceramic tile floor in mens 1st floor

lavatory.

Clearly identify required work and exact

location of Special Requirements.

Requirements must be specific. Phrases such as

\"repair or replace\" or \"as required\" are

unacceptable. The requirement must state what

is to be done and where. Requirements must be

clear enough for tradesmen to complete the work

and for inspectors to monitor the completed work

with out further explanation.

2\. Regulatory repairs. Repairs resulting from

regulatory requirements such as lead-based paint,

asbestos hazard abatement, and Section 504

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compliance will be included in this list, unless, it

is a requirement of the local jurisdiction, local

appraisal practice, or necessary for the subject

project to be marketed conventionally. Regulatory

requirements which are required by the local

jurisdiction shall be included in the Required

Repairs list described in Section II D1 above.

Further, items included in this list shall be

categorized under General and Specific requirements

as also described in D1 above.

3\. When establishing the required and regulatory repair

lists described in 1 and 2 above, consideration

shall be given to items included in the appraisers

market repair list.

4\. Review and consider all required work from

engineering surveys and special reports (see Section

II B above) before issuing the work write-up. Any

special reports should include the following

information:

a\. Specialty area (mechanical, roofing, termite,

structural, geotechnical, noise attenuation,

toxic and hazardous materials, equipment, etc.).

b\. Systems or components studied, e.g., space

heating system, chiller, DWV, etc.

c\. Specific tests performed, e.g., pressure or flow

tests, cutting and examining line segments, etc.

d\. Required repairs and replacements.

e\. Estimated repair costs.

5\. Estimate the remaining useful life of short-lived

systems or components, after any required repairs or

replacement.

6\. Identify if local government requires any

corrections to the applicable system when repairs or

rehab are made to existing construction.

E. Estimate of Remaining Useful Life.

The AE/C processor must prepare an analysis of the

estimated remaining useful life of short lived building

components and systems, e.g., mechanical systems and

equipment, appliances, resilient flooring, carpeting,

window coverings, roofing, and other project features

which will be used by the appraisers to evaluate the

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adequacy of the replacement reserve account and any

necessary initial deposit to that account. A schedule

for the estimated economic (useful) life for short lived

building components and equipment, which may be

considered in the analysis is provided herein for

guideline purposes only.

1\. Prepare a schedule which identifies each

component/system and itemizes the Effective Age

(actual) of Item, Estimated Economic Life, Percent

Depleted, Replacement Cost (less salvage), Number of

Items, and Initial Deposit for each item.

a\. Where certain types of items, e.g., individual

dwelling unit A/C units or water heaters have

been partially replaced in groups, more than one

entry may be appropriate for the given item.

Generalizing expended ages of a given type of

item into a single average based on observations

should be acceptable for the intended purpose in

many cases.

b\. The schedule shall not include items:

\(1\) Proposed to be replaced as part of the PCNA

work write-up.

\(2\) Whose effective age exceeds the estimated

economic life of that item. In such cases,

the AE/C processor may make a determination

to increase the estimated economic life of

the item to reflect his/her estimate of

remaining useful life. The determination

shall be based on experience of

material/equipment performance, appearance,

use, physical and operating condition, and

maintenance record.

c\. The schedule may include items proposed for

deferred maintenance.

d\. The schedule should identify the location of

items, if required for clarification.

e\. Davis Bacon prevailing wage requirements are

applicable and shall be used when estimating the

replacement costs (less salvage) of short lived

building components and equipment.

2\. A schedule of items and estimated economic (useful)

life for new installations of short lived building

components and equipment is provided below as a

guideline only. These estimates are generalized and

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require further adjustment based on performance

under local conditions.

ROOFING YEARS

Membrane (Elastomeric) 20

Built-up (Slag/Grav UV Screen) 20

Built-up (No UV Screen) 15

Composition Shingles

235# Plus & Tabbed 20

Light Wgt 15

Mineral Cap Sheet (90# plus) 12

Roofing of materials such as slate, tile, standing

seam roofs generally last the life of the building

and would not typically be considered short-term

when considering the replacement reserve account.

FLOORING YEARS

Vinyl/VA/VC (Tile/sheet) 17

Carpet 7

Flooring of materials such as quarry tile, terrazzo,

ceramic tile or wood generally last the life of the

building and would not typically be considered

short-term when considering the replacement reserve

account

APPLIANCES/PLUMB EQUIP YEARS

Range 15

Refrigerator 15

Dishwasher 10

Washer/Dryer (Laundry) 10

Hot Water Heater (Tank Type) 10

Garbage Disposal 7

FURNACES/HEATERS YEARS

Central Forced Warm Air 20

Wall (Recessed Gas) 15

Base Board-Electric

Heating Element 10

Heat Pumps

Split System (Inner/Outer) 10

Thru-The-Wall 10

A/C EQUIPMENT YEARS

Split System (Inner/Outer) 15

Thru-The-Wall Unit 10

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VENTILATION EQUIPMENT YEARS

Exhaust Fans

Kitchen/Bath Ceiling/Wall 20

Central Kitchen/Bath 20

Corridor 20

Supply Fans 20

MISCELLANEOUS YEARS

Storm/Screen Doors 7

Window Screens 15

Gutter & Downspouts 15

Trash Compactor

Heavy Duty 20

Light Duty 10

CENTRAL BOILERS & A/C EQUIP

Use ASHRAE 1991 Applications Handbook for the useful

life of system components. Engineering analysis for

the remaining useful life of existing central plant

space heating, domestic hot water and A/C systems is

recommended.

PROJECT OWNED UTILITY LINES

Use HUD Handbook 7418.1 for useful life of project

owned electric and fuel gas site distribution systems.

Engineering analysis recommended for existing

project owned water/sewer systems.

F. Significant Observations. List any salient facts or

findings in addition to the above, which should be

considered by HUD.

G. PCNA Cost Estimates. Two cost estimates of the items

included in the PCNA work write-up shall be made using

the quantity take-off method. Estimate 1 shall be made

to exclude Davis Bacon prevailing wage requirements and

estimate 2 shall include Davis Bacon requirements. Cost

estimates made using the comparable method are

unacceptable.

1\. Estimate 1: Excludes Davis Bacon Wage Requirements.

a\. Make separate estimates of Required and

Regulatory repair costs. Each estimate shall

include a cost breakdown of General and Special

Requirement items and subtotals for each.

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\(1\) Consider all required work from engineering

surveys and special reports.

\(2\) Use applicable commercial building cost data

(Means, Dodge, etc.) and quotations from

field sources to estimate costs. Adjust the

data as necessary to include union wage

requirements.

b\. Estimate the cost of all Required and Regulatory

work write-up items, categorize each by trade

using the numerical coding system and identify

the tradesman responsible for performing the

labor/installation.

c\. For each separate estimate (Required and

Regulatory) include allowances and fees that

reflect the risk and responsibility inherent in

repair work or rehabilitation and consider the

location of the project.

\(1\) Builder and Sponsor Profit & Risk (BSPRA)

fee is not applicable. Application

processing shall include a Builders Profit,

if appropriate.

\(2\) Architects design and supervision fees are

not applicable and shall not be included,

except:

a\. for substantial rehabilitation projects

as determined in the POA stage.

b\. for services (e.g., plans and

specification) required by AE/C staff.

\(3\) Bond Premium is not applicable and shall not

be included, except for substantial

rehabilitation projects.

d\. Provide subtotals (general and specific

requirements) and a total estimated cost for

each Required and Regulatory repair estimate.

e\. Prepare Form FHA-2326, Project Cost estimate,

for all trade costs in accordance with

outstanding.

f\. Form HUD-92264, Section O, Remarks. Enter

separately the estimated cost (including fees)

of both Required and Regulatory repairs and any

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applicable remarks. Identify that costs

excludes Davis Bacon prevailing wages.

2\. Estimate 2: Includes Davis Bacon Wage Requirements.

Field Offices that do not have adequate bench mark

data suitable for making a cost estimate which is

defensible and complies with the requirements of

Davis Bacon may use the following methodology:

a\. Make a listing of labor wage/cost data to be

used to develop factors for converting a cost

estimate that includes union wage rates to an

estimate that includes Davis Bacon prevailing

wage rates. The listing shall include the

following data.

\(1\) Union Total Wage Rates required to be paid

to tradesmen of each trade. A Total Wage

Rate shall include the Basic Wage Rate and

the cost of the fringe benefit package.

This data may be obtained from the most

current edition of Means Labor Rates For The

Construction Industry. Note that this data

is compatible with structures classified as

Residential and Building under the

provisions of Davis Bacon.

\(2\) Davis Bacon Total Wage Rates required to be

paid to tradesmen of each trade. A Total

Wage Rate shall include the Basic Wage Rate

and the cost of the fringe benefit package.

This data shall be taken from the

appropriate wage determination (Residential

or Building) provided by the Department of

Labor.

\(3\) An average labor percentage for each trade

which represents the portion of the trades

total cost attributable to labor and

installation. Each labor percentage can be

derived from data taken from the

Construction Economics Division, Single

Family Home Costs section of the most

current edition of the National Construction

Estimator. For each trade divide the square

foot (SF) cost of labor by the total cost

per SF to derive the average labor

percentage.

\(4\) A percentage differential factor for each

tradesman which represents the difference

between Davis Bacon and Union total wage

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rates. This is derived by dividing a Davis

Bacon total wage rate (2 above) for a

tradesman by the corresponding union total

wage rate (1 above).

b\. Compare classifications of tradesmen included in

the applicable Davis Bacon wage determination

list to the classifications of tradesmen in the

union list and match as many as possible.

Categorize each match and applicable labor wage

data (see 2a above) under the appropriate trade

division as listed on Form FHA-2326.

Additionally, compare and match the trades

listed in the Single Family Home Costs list used

to derive the average labor percentages

described in 2a(3) above to the appropriate

trade division and list the data.

c\. Derive conversion factors for converting union

wages included in a project cost estimate to

Davis Bacon prevailing wages. To accomplish

this apply the knowns listed below to the

following formula.

C = 1 - L + (L \* D)

\(1\) C is a factor that will be developed for

each tradesman for converting applicable

union labor cost to Davis Bacon labor cost.

\(2\) L is the average labor percent described in

2a(3) above.

\(3\) D is the percentage differential described

in 2a(4) above.

Example:

Derive the conversion factor to convert the

total estimated project cost for the painting

trade division (includes costs related to spray

painting only) which includes union wage rates

to a total estimated cost which includes Davis

Bacon prevailing wages.

A spray painter\'s union hourly wage rate is

\$22.34 as compared the Davis Bacon hourly rate

of \$21.04. According to the statistics

contained in the National Construction Estimator

the total per SF cost for the painting trade

division is \$2.18 and the SF cost which

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represent the portion attributable to labor and

installation is \$ 1.42.

L = 1.42 divided by 2.18 = 65%

D = 21.04 divided by 22.34 = 94%

C = 1 - L + (L \* D)

= 1 - .65 + (.65 x .94)

= .35 + .61

= 96%

\(4\) A conversion factor shall be derived for

each tradesmen performing under each trade

division.

d\. Convert the separate estimates of Required and

Regulatory repairs made under 1a above from

union wage rates to include Davis Bacon wage

rates.

\(1\) For each work write-up item included in the

Required and Regulatory repair estimates

prepared under 1b above, multiply the total

cost of the work performed by each tradesman

by the applicable conversion factor derived

in accordance with 2c above.

\(2\) For each separate estimate include

allowances and fees as described in 1c

above.

\(3\) Provide subtotals (general and specific

requirements) and a total estimated cost for

each Required and Regulatory repair

estimate.

e\. Form HUD-92264, Section O, Remarks. Enter

separately the total estimated cost (including

fees) of both Required and Regulatory repairs

and any applicable remarks. Identify that costs

include Davis Bacon prevailing wages.

f\. Prepare Form FHA-2326 in accordance with

outstanding instructions to include the total

land and structures costs of the Required and

Regulatory estimates.

g\. Estimate the contingency reserve percentage and

amount for substantial rehabilitation projects

only. Enter the recommended amount and

percentage in Section O, Remarks.

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h\. Estimate the length of rehabilitation period in

months, but not to exceed 12 months, except for

substantial rehabilitation projects. Enter the

number of months in Section O.

3\. Estimate the costs of remaining useful life of

short-lived systems or components after any required

repairs or replacement. Enter the total amount in

Section O, Remarks.

4\. Upgrade improvements are not part of the PCNA.

Therefore, items listed in the upgrade improvement

list, if provided by valuation staff, shall not be

included in the PCNA cost estimate.

H. Escrow Requirements. For all cases not involving

substantial rehabilitation, an escrow account equal to

150 percent of the cost of PCNA repairs shall be

established at closing in accordance with the

requirements of paragraph 4-6 of this notice. This

escrow is for the purpose of assuring that PCNA repairs

are completed (including change orders) after

endorsement.

I. Interrupted/Delayed Occupancy. Identify any unit(s) for

which completion of repairs will result in delayed or

interrupted occupancy or income and the anticipated

period of the delay.

III\. RESULTS AND DELIVERABLES

The final product shall be the processing record including

the work write-up and calculations identifying the remaining

useful life of equipment and systems (and cost estimates),

completed and signed by the AE/C processor. The processing

record shall account for all interaction and related work

with the owner and appraisers. The Branch Chief shall

review for acceptability.

A. The processing record shall be a cumulative record which

shall provide all supporting documentation. It shall be

complete enough to show how the analysis was performed

and a recommendation made. It shall include a narrative

overview of the analysis, statement of determination as

to whether the project meets the criteria established

for substantial rehabilitation, and recommendations

describing assumptions, concerns, and conditional

requirements. The final processing record shall

include:

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1\. Application Exhibits - Form HUD 92013; the Notice of

Intent, any plans or other exhibits provided with

the application or subsequently by the owner.

2\. Site inspection report, including project and

individual unit inspections sheets.

3\. PCNA Work write-up.

4\. PCNA cost estimate.

5\. Estimate of remaining useful life of short lived

building components.

6\. Any Engineering and Specialty reports provided by

the HUD staff or subcontractors. The AE/C

processor\'s analysis of both the reports and any

requirements incorporating their recommendations.

7\. Correspondence and documentation from HUD, the owner

or subcontractors relevant to the architectural and

engineering functions.

8\. Copy of the AE/C processor\'s log of contacts and

journal of architectural actions summarizing

communications with the owner and architect and the

decision making process.

9\. Copy of report from code enforcement officials

identifying code violations that must be corrected.

10\. Determination of reasonableness of Upgrade

Improvement costs as requested by Valuation staff.

IV\. SCHEDULES

This section sets forth the time frames for completion and

submission of the final work product.

If at any time the AE/C processor is unable to complete the

required processing due to the incomplete information from

Loan Management or the owner, the AE/C processor shall

promptly notify the Director of Housing Development of the

circumstances resulting in the delay, so that any necessary

action can be taken to meet the time frames.

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The completed PCNA must be provided to the Appraisers no

later than 60 days from Field Office receipt of the POA.

The remainder of the PCNA should be submitted to Valuation

by 90 days from FO receipt of the POA. The POA and required

exhibits will be forwarded from the Director of

Housing/Housing Programs Branch ASAP after receipt to

Housing Development.

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ATTACHMENT 2

TITLE II MODIFICATION - Insert the following on page C-4 just

before paragraph II to modify the AE/C SOW to address Title II

Preservation Projects.

This Contract may also be used to obtain a PCNA for Title II at

HUD\'s discretion. The services to be provided are the same,

however, the following information applies:

\* The services involve Title II - Subtitles A and B of the

Housing and Community Development Act of 1987 (Title II),

entitled the \"Emergency Low Income Housing Preservation

Act.\"

\* For delivery orders for Title II PCNA, all references to

timeframes which refer to the date of the owner\'s

submission of the NOI mean the same time period commencing

with the date of the delivery order.

\* Reference to consideration of tenants, comments and

attendance by tenants and/or tenant representatives at the

inspection are not applicable to the PCNA for Title II.

(Paragraph IV.C.4. and IV.C.7)

\* The timing and purpose of the PCNA as identified in the

contract varies somewhat for Title II. The owner\'s

appraisal will have been fully completed by the time the

PCNA is performed for Title II. The PCNA results will be

utilized by HUD Valuation staff in reviewing the POA. The

PCNA repairs will be primarily utilized in determining

eligible incentives.

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ATTACHMENT 3

PLAN OF ACTION APPLICATION EXHIBIT LIST

EMERGENCY LOW INCOME HOUSING PRESERVATION ACT OF 1987

MATERIALS NEEDED BY HOUSING DEVELOPMENT STAFF

TO PROCESS A PLAN OF ACTION REQUESTING

EXTENSION OF LOW INCOME AFFORDABILITY RESTRICTIONS

1\. A copy of the Proposed POA - Valuation must review and

be familiar with the proposed POA so that valuation

processing will reflect the conditions and terms in

the POA. The review appraiser must note and assure

adequate consideration of any elements of the POA that

impact valuation processing.

2\. Form HUD-92013 - When the owner requests an extension

of affordability restrictions, the HUD review

appraiser will need the current status of the physical

condition and physical characteristics of the

property, as additional data, to evaluate the

reasonableness of the owner\'s proposed upgrade

improvements or lack thereof, to convert the property

to its highest and best use. The front page of the

Form HUD-92013, drafted by the owner and concurred on

by HM, may be used to reflect the property\'s current

physical characteristic data. The following Sections

of Form HUD-92013 must be completed.

a\. Section A, Project Identification,

items 1 through 3

b\. Section C, Items 1 through 19

c\. Section D, Items 7 through 12

d\. Section E, Items 1 through 10

e\. Section F, All

f\. Section K, as appropriate

3\. A description of any proposed changes in the low

income affordability restrictions (ie., rents,

occupancy). A detailed statement of the proposed

rental structure with incentives, including phase-in

rents.

4\. Two complete tenant income profiles, (1) a current

one, and (2) one as of January 1, 1987.

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5\. Last 3 years operating statements and supporting

schedules including Form HUD-92410.

6\. Existing mortgage information (plus any proposed

changes):

\(a\) Mortgage balance;

\(b\) Interest rate;

\(c\) Monthly mortgage payments to principal, interest

and MIP; and

\(d\) Maturity date of mortgage.

7\. Most recently completed Annual Physical Inspection

Report.

8\. A list of any incentives the owner proposes in

exchange for extending the low income use of the

project for the remaining mortgage term.

9\. A complete description of assistance provided by State

and local government agencies.

10\. An independent, current, professional appraisal of the

property adhering to these instructions and all other

regulatory and/or legislative requirements, which

determines (1) the highest and best use, and (2)

provides an estimate of the owner\'s equity based on

consideration of one or more of the following

approaches, depending which is deemed necessary by the

processing appraiser:

\(a\) capitalization of net income;

\(b\) direct sales comparison; and

\(c\) replacement cost.

Among other supporting documentation the owner\'s

appraisal must show how hypothetical costs, if any,

for the purchase and installation of any upgrade

improvements were derived.

Reasonable specification data for major upgrades must

also be provided. Similar documentation must also be

provided to support the derivation of hypothetical

conversion costs.

The appraisal should be effective not later than 30

days prior to the date of submission of the POA.

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11\. A certification of the owner\'s intent to use Low

Income Housing Tax Credits.

12\. Availability of tax abatement and details, if known.

13\. Current balance of project owner\'s replacement reserve

account.

Architecture, Cost and Engineering exhibits required

under the Plan of Action Stage are listed under

Attachment 1, Description of Capital Needs Assessment,

II., Detailed Work Requirements.

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ATTACHMENT 4

SECTION 241(F) APPLICATION EXHIBIT LIST

UNDER

EMERGENCY LOW INCOME HOUSING PRESERVATION ACT OF 1987

1\. APPLICATION FORM HUD-92013 (OMIT SECTION J) SUBMITTED

BY HUD APPROVED MORTGAGEE FOR CONDITIONAL OR FIRM

COMMITMENT (RECOMMEND ALL BYPASS CONDITIONAL). THE

FORM HUD-92013 MUST BE SIGNED BY THE MORTGAGEE.

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

MORTGAGE AMOUNT FOR CONDITIONAL, OR \$3 PER THOUSAND

FOR FIRM.

3\. ANALYSIS OF BALANCE IN ALL PROJECT ESCROW ACCOUNTS.

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

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

PRINCIPALS.

6\. FORM HUD-92013-E SUPPLEMENT TO HUD-92013 (IF

APPLICABLE).

7\. ORIGINAL CREDIT REPORTS ORDERED BY MORTGAGEE ON

MORTGAGOR ENTITY (COMMERCIAL) AND ALL PRINCIPALS

(INDIVIDUAL).

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

REHAB. IF DIFFERENT FROM PCNA PERFORMED BY HUD,

IDENTIFY ITEMS ADDED AND DELETED WITH JUSTIFICATION

AND SUPPORTING DOCUMENTATION (e.g., plans and

specifications).

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

STAFF.

10\. THE FOLLOWING EXHIBITS ARE REQUIRED AS PART OF THE

OWNER\'S POA SUBMISSION. IF THE POA WAS SUBMITTED

WITHIN 6 MONTHS OF THE SECTION 241 APPLICATION, THE

POA EXHIBITS MAY BE USED. IF THE POA EXHIBITS ARE

OVER 6 MONTHS OLD, UPDATED EXHIBITS MUST BE SUBMITTED

WITH THE SECTION 241 LOAN APPLICATION.

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

B. OUTSTANDING BALANCE OF EXISTING MORTGAGE.

C. ANNUAL PHYSICAL INSPECTION REPORT IF SUBSEQUENT TO

THE NOTICE OF INTENT SUBMISSION.

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D. COMPLETE DESCRIPTION OF ASSISTANCE PROVIDED BY

STATE AND LOCAL GOVERNMENTAL AGENCIES.

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

INCOME HOUSING TAX CREDITS.

F. AVAILABILITY OF TAX ABATEMENT AND DETAILS, IF

KNOWN.

11\. HOUSING DEVELOPMENT MUST OBTAIN A COPY OF THE APPROVED

PLAN OF ACTION IDENTIFYING ALL TERMS AND CONDITIONS

PRIOR TO COMPLETION OF PROCESSING OF THE SECTION

241(F) LOAN.

12\. PHASE IN RENT SCHEDULE.

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