4381.5 REV-2

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CHAPTER THREE

ALLOWABLE MANAGEMENT FEES FROM PROJECT FUNDS

3.1 GENERAL

Management agents operating HUD-insured and HUD-assisted properties

are paid a management fee for their services. Management fees may be

paid only to the person or entity approved by HUD to manage the

project. Management agents must cover the costs of supervising and

overseeing project operations out of the fee they receive.

Owners determine the actual amount of fee to be paid to the management

agent. As provided for in project Regulatory Agreements and rental

assistance contracts, for certain projects HUD determines the amount

of fee that may reasonably be paid out of project funds.

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NOTE: Unless otherwise specified, the term \"management fee\"

in this chapter references to the management fee payable out of

project funds.

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This chapter addresses reviews of management fees requiring HUD

approval.

Section 1: Management Fees and Review Requirements discusses the

types of fees that are allowed and summarizes review

requirements.

Section 2: Procedures for Performing Management Fee Reviews

covers procedural steps in the review process.

Section 3: Assessing Reasonableness of Management Fees provides

guidance on the technical review of proposed fees.

Section 4: Special Provisions for Fees Approved On or Before

August 1, 1986 highlights special rules for certain \"held

harmless\" projects.

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SECTION 1: MANAGEMENT FEES AND REVIEW REQUIREMENTS

3.2 TYPES OF MANAGEMENT FEES

a.There are five major types of fees that, when added together,

make up the overall management fee for a project. The five types

of fees are:

(1)Residential income fee;

(2)Commercial income fee;

(3)Miscellaneous income fee;

(4)Special fees; and

(5)Add-on fees.

b.Fees derived from project income (residential, commercial, and

miscellaneous) must be quoted and calculated as a percentage of

the amount of income collected by the agent. Multiplying the fee

percentage by the income collected gives the actual amount of fee

paid to the agent. This requirement serves two purposes.

(1)It gives the agent an incentive to maximize collections; and

(2)It automatically increases the agent\'s potential fee yield

as project rents increase. These increases help offset

increases in the agent\'s cost due to inflation.

c.Both special fees and add-on fees are quoted as dollar per unit

amounts because they relate to project conditions that are not a

function of project rents or income.

3.3 RESIDENTIAL INCOME FEE

HUD specifies the kinds of income that may be treated as residential

income when determining the residential income fee. In general,

income received from the rental of housing units may be counted as

residential income. Figure 3-1 indicates the types of income that may

and may not be included in the residential income base amount used

when calculating this fee.

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Figure 3-1

Determining Residential Income

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DO COUNT DO NOT COUNT

1\. Apartment rents. 1. Section 8 Special Claims:

a\) unpaid rents

2\. Cooperative carrying charges. b) vacancy loss

c\) debt service

3\. Rent Supplement payments. d) resident damages.

4\. RAP payments. 2. Excess rents and charges for

Section 236 when the unit rent

5\. Section 8 regular tenant paid is greater than the unit

assistance payments (including Basic Rent. (This condition

utility reimbursement payments applies regardless of whether

made to residents whose Total the excess income is due to

Tenant Payment is less HUD.)

than the utility allowance).

3\. Section 236 Interest Reduction

Payments (IRPs) made to

mortgagees on Section 236

projects.

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3.4 COMMERCIAL INCOME FEE

Most sources of commercial income may be counted when establishing the

income base for this fee. Figure 3-2 shows the types of income that

may be counted as commercial income.

===========================================================================

Figure 3-2

Determining Commercial Income

===========================================================================

DO COUNT DO NOT COUNT

1\. Rent receipts from commercial 1. Charges for services paid

space. directly to an outside vendor

or contractor.

2\. Fees for parking spaces or

garages.

3\. Charges collected by the

agent for additional

services not included in

project rents.

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3-312/94

4381.5 REV-2

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3.5 MISCELLANEOUS INCOME FEE

a.HUD will allow management agents to earn fees only on selected

types of miscellaneous income. Figure 3-3 lists the types of

income that may and may not be counted in the miscellaneous

income base amount.

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Figure 3-3

Determining Miscellaneous Income

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DO COUNT DO NOT COUNT

1\. Laundry and concession income 1. Interest earned on invested

(e.g., coin machines, car security deposits, reserves,

wash, cable TV, etc.). or other project funds.

2\. Charges collected from 2. Section 8 Special Claims for

residents, such as fees for unpaid rent, vacancy loss,

damages, bad checks, and debt service, or resident

late payments. damages.

3\. Proceeds from Loss of Rents 3. Flexible Subsidy Funds,

Insurance policies. except as provided for in the

MIO plan.

4\. Income from furniture, 4. Refunds from property tax or

equipment, and other charges utility rate appeals.

shown on the HUD-approved

Rent Schedule (Form HUD-92458). 5. Proceeds from property damage

or liability insurance

policies.

5\. Pet fees - for clean-up, etc.

(not pet deposits). 6. Recovered legal fees and

court costs.

7\. Replacement reserve and

residual receipts

reimbursements to the

project.

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3.6 SPECIAL FEES

a.Use of Special Fees. In addition to the percentage-based fees

described above, owners may agree to pay special management fees

if a project has special needs or problems. Proposing special

fees (rather than adjusting the fee percentage) is an appropriate

and cost effective way to address specific project conditions

that should be temporary in nature.

b.Circumstances When Special Fees Are Allowed. Agents may earn

special management fees only if all six conditions listed below

are met.

(1)The agent did not cause the problem the fee is designed to

address.

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12/943-4

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(2)The fee is tied to the correction of specific problems or

the accomplishment of specific tasks. Examples of such

tasks include:

(a)Renting-up the project (unless compensation for this is

provided from a supplemental management fund);

(b)Obtaining or renewing a lease for commercial space at

the project;

(c)Completing significant rehabilitation work or utility

conversion;

(d)Reducing vacancies or improving rent collections;

(e)Reducing a specific excessive expense (e.g., utility

costs or property taxes); and

(f)Processing membership transfers at cooperatives.

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NOTE: Normally, Loan/Asset Management staff should not

approve incentive fees tied solely to an agent\'s

performance in increasing net income, or decreasing total

expenses. Such fees might encourage agents to forego

necessary maintenance or expenditures.

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(3)The fee is structured so that it is payable only if the

agent completes the required actions or obtains the required

results.

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EXAMPLE: A new agent might receive a special fee for

satisfactorily correcting all items of deferred maintenance

by a specific date.

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(4)The fee does not include services that are covered by

residential, commercial, or miscellaneous management fees,

or by other sources of compensation.

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EXAMPLE: An agent may not collect a special management

fee for supervising rehabilitation work if those services are

being paid for through BSPRA (Builders/Sponsors Profit and

Risk Allowance), a construction oversight fee.

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(5)The fee is reasonably related to the time, effort, and

expertise required of the agent.

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3-512/94

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(6)The fee is paid only for a limited period of time. The

length of this period should be no longer than the time

required to resolve a specific problem or complete a certain

task.

c.Bookkeeping Expenses Are Treated as a Project Cost. The cost of

bookkeeping services for a project performed as part of a

centralized bookkeeping system are treated as a project cost and

should not treated as a special fee. Such expenses are paid out

of project funds based on actual costs attributable to the

project. Further guidance on the treatment of such costs and the

amount payable out of project funds is provided in Chapter Six,

paragraph 6.37.

3.7 ADD-ON FEES

NOTE: ONLY AFTER computation of the permitted percentages for

residential, commercial and miscellaneous income have been determined

and approved by HUD, may add-on fees be considered. In approving the

permissible percentage fees, the PUPM Yield must fit within the range

established by the Area Office. Although the total yield including

the add-on fees may exceed the range, add-on fees may not be used to

increase this range and in turn increase the percentage fee.

a.Add-on fees are a flat dollar per unit fee paid to agents

managing projects with long-term project

characteristics/conditions that require additional management

effort beyond than the activities covered by the residential

management fee. For example, scattered site projects will often

will often require greater management effort than single site

projects.

(1)HUD Area Offices will establish a schedule of project

characteristics/conditions that warrant add-on fees and a

flat fee amount (PUPM) for each characteristic/condition

(see paragraph 3.21). Area Offices will make this schedule

available to owners/agents of projects within its

jurisdiction.

(2)Figure 3-4 list examples of project characteristics/

conditions that may warrant the use of add-on fees.

(3)For short-term or temporary project conditions,

owners/agents should seek special management fees (see

paragraph 3.6). Area Offices will not approve add-on fees

for temporary projects conditions.

(4)HUD Area Offices must not establish add-on fees for project

characteristics/conditions that are already covered in its

residential management fee range. For example, an add-on

fee for a subsidy contract would not be appropriate if a

significant number of the projects used to establish the

residential fee range were Section 8 New Construction or

Substantial Rehabilitation projects.

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12/943-6

4381.5 REV-2

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===========================================================================

Figure 3-4

Examples of Long-Term Project Conditions That Could Justify Add-On Fees

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A.High Density Projects: A high percentage of units with three or more

bedrooms increases the population density and can increase the cost of

managing a project.

B.Location:

1.Remote location. A higher fee may be justified if:

o No local management is available and agent will incur

unusually high travel costs.

o Special outreach is required to attract residents.

2\. Scattered site. The agent may be paid additional compensation

for the extra travel expenses incurred in overseeing several sites.

3\. Adverse neighborhood conditions (e.g., high incidence of crime or

vandalism, or large concentration of deteriorated or substandard

housing). These characteristics tend to increase maintenance and

repair problems resident turnover, vacancies, and rent collection

losses.

NOTE: While higher fees may be allowed for these conditions. Area

Offices should not allow higher fees for collection losses caused by

these conditions if the owner and agent used a collections base of

less than 95 percent to estimate the residential management fee yield.

C.Type of ownership: Because owners of nonprofit projects may be less

experienced in property management or because cooperative projects

have additional legal and organizational responsibilities, management

of these projects may require extra knowledge and effort on the part

of the agent.

EXAMPLE: To manage a cooperative, the agent must understand State and

local cooperative laws, the cooperative subscription process, how

homeownership works in cooperative housing, and other requirements

specific to cooperative housing.

D.Subsidy mix: A higher fee may be appropriate if:

1.A project has more than one type of subsidy.

AND

2.The combination of subsidies to the project requires more

administrative oversight than the projects that were used to

establish the residential fee range.

EXAMPLE A: An agent who manages a 236 project with a Rent Supplement,

RAP, or Section 8 contract may receive a higher fee than an agent who

manages an otherwise comparable 236 project with no tenant-based

subsidy.

EXAMPLE B: An agent who manages a 236 project with both Rent

Supplement and Section 8 may receive a higher fee than an agent who

manages an otherwise comparable 236 project with only one tenant-based

subsidy. (NOTE: This does not apply if the project has both RAP and

Section 8. Since the rules for these two programs are so similar,

having both subsidies does not require significantly more work from

the agent.)

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3-712/94

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a.Owner/Agent Requests for Add-on Fees. Owners/agents requesting

add-on fees for a project must submit a new Management

Certification (Form HUD-9839-A, or B) and list the requested fees

under the Special Fees section of Attachment 1 of this form. In

completing Attachment 1 of the Management Certification,

owners/agents must clearly distinguish any add-on fees requested

from any special fees listed on the form. The owner may request

any dollar amount for a specific add-on so long as the amount

does not exceed the dollar limit established for that add-on fee

by the appropriated Area Office.

3.8 PROJECTS SUBJECT TO HUD MANAGEMENT FEE REVIEWS

a.General. Whether a project is subject to a management fee review

depends upon several key factors:

(1)Type of Ownership (i.e., whether the ownership is profit

motivated, limited dividend, or nonprofit.)

(2)Management Agent: (e.g., whether the agent has previously

received approval from the Area Office or has outstanding

findings of noncompliance.)

(3)Project Conditions: (i.e., whether the project\'s financial,

physical, or administrative problems suggest the need for a

review.)

Projects subject to review may be reviewed either up-front

(before the project is obligated to pay the management agent) or

after-the-fact (in conjunction with other servicing activities).

Figure 3-5 summarizes the requirements and timing of management

fee reviews.

b.Types of Ownership

(1)Profit-Motivated Project. A profit-motivated (PM) project

is one in which the ownership entity is legally allowed to

distributed surplus cash to its members.

(2)Limited Distribution Project. A limited distribution (LD)

project is one in which distributions of surplus cash to the

ownership are limited and certain conditions must be met

before the project\'s surplus cash can be distributed.

(3)Nonprofit Project. A nonprofit project is one in which the

ownership entity generally does not receive distributions of

surplus cash from the property. Surplus funds from the

operation of these projects are used for project-related

improvements or services.

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Figure 3-5

Timing of Area Office Review of Management Fees

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UP-FRONT REVIEW

===========================================================================

All projects:

1\. Whose agents have not received previous approval from the HUD Area

Office in the jurisdiction.

2\. In default under a mortgage or other approved payment program.

3\. Where the Director of Housing Management has determined that an

up-front review is needed to protect HUD\'s interests. This

determination should be made if a project exhibits any of the

following conditions:

a\) Poor financial position with a need to control expenses. Evidence

that this condition is present includes:

\-- recent defaults

\-- delinquent mortgage payments

\-- marginal or negative cash throw-off (i.e., income less than or

only slightly more than operating expenses, debt service, and

reserve requirements)

\-- high vacancy/turnover rates

\-- excessive accounts receivable/payable.

b\) Serious noncompliance with HUD financial requirements, including

outstanding diversions and/or significantly overdue financial

reports.

c\) Poor physical condition, including significant deferred maintenance.

d\) Serious outstanding findings from IG or GAO audits.

e\) Agent has not made satisfactory progress toward correcting

problems found in project reviews (HUD, IPA, administrator, or

mortgagee).

f\) A persistent pattern of poor communication or relationships with

tenants or tenant associations and/or a persistent pattern of

failure to address tenant service requests or complaints.

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AFTER-THE-FACT REVIEW NO REVIEW

===========================================================================

Projects not subject to up-front No fee review is performed for the

reviews that fall into any of the following types of projects, unless

following categories. one or more of the conditions

necessitating an up-front review

1\. Limited distribution and exists.

nonprofit projects (regardless

of how project rents are set). 1. Profit-motivated projects that

do not have rental assistance

2\. Profit-motivated Section 8 contracts.

projects subject to budgeted

rent reviews. 2. Profit-motivated Section 8

projects that have rents set

3\. Subsidized cooperative through use of the Annual

projects. Adjustment Factor (AAF).

3\. Profit-motivated Preservation

projects that use the Operating

Cost Adjustment Factor

(OCAF) to determine rent

adjustments.

4\. Unsubsidized cooperatives

and Section 234(d)

condominium projects.

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3-912/94

4381.5 REV-2

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In certain cases nonprofit entities, such as those receiving

Title II or Title VI Preservation funding, are allowed to

receive distributions. Such projects retain their nonprofit

designation even though the organization is allowed to

receive distributions of project funds. For detailed

guidance regarding Preservation projects, see Processing

Plans of Action under the Low-Income Housing Preservation

and Resident Homeownership Act of 1990, HUD Handbook 4350.6.

(4)Determining the type of ownership. The applicable

Regulatory Agreement or rental assistance contract for the

project will indicate the extent to which surplus cash can

or cannot be distributed to the owner.

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NOTE: Generally speaking, Section 8 projects issued a

notice of selection after November 5, 1979 (for New

Construction) and February 20, 1980 (for Substantial

Rehabilitation) should be LD projects.

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c.Projects Not Subject to HUD Management Fee Reviews. Owners of

the following types of projects do not have to obtain HUD

approval of the management fee payable out of project funds

unless the project is in default under a mortgage or other

approved payment program or HUD determines a review is necessary

to protect its interests. See Figure 3-5 for examples of project

conditions that might trigger the requirement for a review.

(1)PM projects that do not have rental assistance contracts.

(2)PM projects that hold Section 8 contracts and use the Annual

Adjustment Factor (AAF) to compute rental adjustments for

Section 8 units.

NOTE: If owners of this type of project request a special

rent increase or have their rents set through a budget, HUD

will process the rent increase request using the lower of:

(a)The project\'s actual management fee (as shown on the

current management certification); or

(b)The maximum fee that would be allowed under this

chapter\'s procedures, if the fee were subject to HUD

review.

(3)PM Preservation projects that use the Operating Cost

Adjustment Factor (OCAF) to determine rent adjustments.

(4)Unsubsidized cooperatives and Section 234(d) condominium

projects.

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3.9 APPLICABLE MANAGEMENT FEE FOR RENT INCREASE REQUESTS

a.Budget-based Rent Increases. For projects where rents are set

through an expense-based rent formula, HUD will use the approved

management fee percentage in processing all rent increase

requests. The approved fee percentage is used regardless of the

fee yield provided by this percentage fee, except in cases where

the provisions of paragraphs (b) or (c) below apply.

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EXAMPLE: Last year HUD approved a management fee of five

percent for Property X. At that time, this management fee

provided a potential fee yield of \$25 per unit per month

(PUPM). This year the owner is applying for a budgeted

rent increase.

In processing this request, Loan Management staff will use the

management fee of five percent. If the five percent fee would

result in a potential fee yield of \$28 PUPM and this amount

exceeded the upper limit of the reasonableness range of \$26

PUPM for that area (see Section 3), Loan Management staff

would use the approved fee percentage and no cap would be

placed on the fee yield.

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b.Capped Fee Percentage for Projects Receiving Significant Rent

Increases. When a project will receive a rent increase equal to

20 percent or more of its current rent potential (e.g., as a

result of large increases in project costs, capital improvement

activities, or preservation incentives), the management fee

percentage must be adjusted. Figure 3-6 illustrates when an

owner request for a rent increase affects the residential

management fee percentage.

(1)In such cases, the residential management fee yield is

limited to the yield that would be allowed under a 20

percent rent increase using the current management fee

percentage.

(2)The residential management fee percentage is then adjusted

to reflect the maximum allowable yield under the new rent

structure for the project.

(3)This adjustment to the fee percentage will not be subject to

a reasonableness review as described in Sections 2 of this

chapter. It is merely an adjustment of the percentage fee

which will occur at the same time the rent increase is

approved by HUD.

(4)This adjusted percentage fee will apply to all future rent

potentials without regard to the fee range limits until such

time as the agent requests a change in the percentage fee.

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3-1112/94

4381.5 REV-2

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Figure 3-6

EFFECT OF A RENT INCREASE

ON THE MANAGEMENT FEE

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12/943-12

4381.5 REV-2

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Figure 3-7 illustrates the method for determining the revised

residential management fee for these projects and adjusting the

residential fee percentage for these projects.

c.Adjusting the Management Fee for Rent Decreases. When project

rents are reduced as a result of refinancing or other reason

permitted by HUD regulation, HUD will also adjust the residential

management fee percentage in order to ensure that agents retain

their current yield. In readjusting the percentage, the

following formula should be used:

Revised Management Current Fee Yield x Number of Units

Fee Percentage =
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Collections Percentage x Reduced Monthly Rent

Potential

(0.95 or other factor determined by HUD)

This adjusted percentage fee will apply to all future rent

potentials without regard to the fee range limits until such time

as the agent requests a change in the percentage fee.

d.Capped Fee Yield In Hold-Harmless Projects. For projects where

the residential management fee yield has been capped pursuant to

the hold-harmless provisions set forth in paragraphs 3.24 and

3.27, Loan Management staff must use the capped fee yield when

processing rent increases. (NOTE: This only applies to Pre-1986

contracts covered by paragraphs 3.24 and 3.27)

3.10 OWNER REQUESTS FOR CHANGES IN EXISTING FEES

a.Owner Submission. To initiate a change in the management fee

percentage, the owner and agent must submit a new Management

Certification showing the revised management fee(s).

(1)For projects subject to up-front reviews, the fee can be

changed only after the HUD Area Office has given written

approval of the fee.

(2)Owners of projects subject to after-the-fact reviews may

negotiate and implement revised fees with in-place agents

without HUD approval, as long as the fee complies with the

reasonableness standards described in Section 3. A new

Management Certification must be submitted before the

revised fee can be charged.

(3)For projects not subject to HUD review, owners may negotiate

fees and revise fees without HUD review or approval.

However, the owner/agent must submit a new Management

Certification.

b.HUD Review. When HUD receives a request from an owner to change

the management fee for an in-place agent, Loan/Asset Management

staff should take the following steps:

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3-1312/94

4381.5 REV-2

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Figure 3-7

Adjusting the Residential Management Fee Percentage

for Projects Receiving Significant Rent Increases

===========================================================================

METHODOLOGY

Step 1: DETERMINE ALLOWABLE FEE YIELD

Allowable Fee Yield = Projected Fee Yield\*\* Under a 20% Rent Increase

Using Current Management Fee Percentage

Step 2: CALCULATE REVISED MANAGEMENT FEE PERCENTAGE

Revised Management Allowable Fee Yield Under New Project Rents

Fee Percentage =
\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_\_

Annual Net Rent Potential Under New Project Rents

\*\* Projected Fee Yield = Yield Under New Rent Structure Using
Applicable

Occupancy Factor Adjustment

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EXAMPLE

ABC Apartments Assumptions:

A 30% rent increase has been approved

Annual Gross Rent Potential Under 30% Rent Increase = \$1,300,000

Annual Gross Rent Potential Under 20% Rent Increase = \$1,200,000

Current Management Fee = 7.00%

Step 1: Determine Allowable Fee Yield Under New Project Rents

\$1,200,000 (Annual Gross Rent Potential Assuming 20% Increase)

x .95 (Standard Occupancy Adjustment Factor \*\*)

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

1,114,000 (Adjusted Gross Rent Potential)

x .07 (Current Management Fee)

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

\$79,800 (Allowable Fee Yield)

Step 2: Revise Fee Percentage

\$1,300,000 (Annual Gross Rent Potential Assuming 30% Increase)

x .95 (Standard Occupancy Adjustment Factor \*\*)

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

\$1,235,000 (Adjusted Gross Rent potential)

\$79,800 (Allowable Fee Yield) / \$1,235,000

(Adjusted Gross Rent Potential) = 6.46%

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\*\* Standard Occupancy Adjustment factor of 95% is used in this
example.

However, the factor normally used in the budgeted rent increase

process and/or in processing the Management Fee percentage should be

used.

===========================================================================

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12/943-14

4381.5 REV-2

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(1)Review the Management Certification to determine the type of

review required, if any.

(2)Write the applicable review category (i.e., up-front,

after-the-fact, or no review) on the first page of the

Management Certification.

(3)For projects not subject to up-front reviews, Loan/Asset

Management staff should update the office computer system

with data items used in determining reasonableness ranges.

This information will be used when revising residential fee

ranges.

(4)Follow the procedures in Section 2 to assess the

reasonableness of the proposed changes in the existing

management fees.

3.11 TERM OF HUD-APPROVED MANAGEMENT FEES

a.Once HUD has reviewed and approved the percentage management fees

for a project (i.e., completed an up-front or after-the-fact

review), these management fees will not be subject to further

review unless:

(1)There is a change in management agents; or

(2)Owners/agents request a change in the approved management

fee percentage (see paragraph 3.10).

b.Rents increases do not trigger HUD management fee reviews. Large

rent increases may require an adjustment of the fee percentage

(see paragraph 3.9).

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3-1512/94

4381.5 REV-2

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SECTION 2: PROCEDURES FOR PERFORMING MANAGEMENT FEE REVIEWS

============================================================

KEY STEPS IN MANAGEMENT FEE REVIEW PROCESS

oReceive owner/agent request and management certification

oDetermine if up-front or after the fact review is required

oDetermine if \"Hold-Harmless Provisions\" are Applicable

oDetermine whether fees are reasonable

oNotify the owner and agent

oDocument the results of the review

============================================================

3.12 BASIC PROCEDURES FOR PERFORMING MANAGEMENT FEE REVIEWS

Loan/Asset Management staff must follow the procedures below when

performing management fee reviews. These procedures are used for both

up-front and after-the-fact management fee reviews. See Figure 3-5 to

determine the type of review required.

a.Determining If \"Hold-Harmless Provisions\" Are Applicable. HUD

instituted reasonableness reviews of management fees on August 1,

1986\. If an owner/agent is seeking an increase in the

residential management fee percentage and the agent\'s current

management agreement was executed prior to August 1, 1986,

specific hold-harmless provisions may apply to the review of the

residential fee. See Section 4 of this chapter.

b.Determining Whether Management Fees Are Reasonable. Section 3 of

this Chapter provides guidance for determining the reasonableness

of these fees.

(1)If the agent listed on the Management Certification is a new

agent for the project, all four types of management fees

(i.e., residential, commercial, miscellaneous, and special

fees) must be reviewed for reasonableness.

(2)If the fee review is being performed because the existing

agent for the project is requesting an increase in the

percentages for any management fee or new special fees, only

the fees where a change is

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12/943-16

4381.5 REV-2

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requested must be reviewed. For example, if the Management

Certification submitted indicates the owner/agent is seeking

a higher residential fee percentage but no change in the

commercial fee percentage or special fees for the project,

then Loan/Asset Management staff need only review the

reasonableness of the proposed increase in residential fee

percentage.

c.Documenting the Results of the Review. The analysis and results

of the review must be documented as required by paragraph 3.17.

d.Notifying the Owner and Agent. The owner and agent must be

notified of the results of the review as required by paragraph

3.15.

3.13 UP-FRONT MANAGEMENT FEE REVIEWS

For affected projects, an up-front review is required whenever an

owner proposes a new management agent or requests a change in the fee

percentages or special or add-on fees paid to the existing agent.

Loan/Asset Management staff determine the reasonableness of the

proposed fees following the criteria provided in Section 3.

a.HUD Notice to Owners. Loan/Asset Management staff must notify

the owner and agent in writing if an up-front review is required.

Owners/agents receiving notices that an up-front management fee

review is required remain subject to up-front reviews until

notified by HUD that such reviews are no longer required.

b.Prior Approval is Required. For projects subject to an up-front

review of management fees, owners/agents must obtain HUD approval

of the amount listed in the management fee line item of the

project\'s operating budget before (1) charging any portion of the

fee against the project operating account or (2) otherwise

obligating the project to pay a management fee.

(1)If the proposed agent has not previously received HUD

approval, the owner and the agent may sign a management

agreement that contains a clause specifying that the

agreement is conditional upon HUD approval of the agent.

The agent may not be paid from project funds until the owner

receives HUD approval of the agent.

(2)If, in an emergency, an agent assumes management of a

project without prior HUD approval of the management fee,

the agent may begin collecting the fee and charging these

amounts against the project\'s account. However, the

management fee is subject to reduction if Loan/Asset

Management staff determine the fee amount is excessive. In

such cases, Loan/Asset Management staff must review the fee

immediately upon receipt of the Management Certification.

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3-1712/94

4381.5 REV-2

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c.Owner Requests for Up-front Review. An owner with a project

subject to an after-the-fact review may request that HUD perform

an up-front review. Loan/Asset Management staff must conduct an

up-front review if the owner requests one.

d.Time Period for Completion of Review. Loan/Asset Management

staff should complete up-front management fee reviews within 60

days of receiving the Management Certification.

(1)If the owner and agent do not receive written notice of the

results of HUD\'s management fee review within 60 days, the

agent may begin collecting the management fees documented in

the Management Certification under review.

(2)If the results of a HUD review completed after this date

indicate that the management fees must be reduced, these

reductions will take effect on the date that notice of the

review results is issued to the owner and agent.

3.14 AFTER-THE-FACT MANAGEMENT FEE REVIEWS

For projects which are subject to after-the-fact reviews (See Figure

3-5), owners/agents may establish and charge the management fee amount

listed in the project\'s budget without prior HUD approval.

Owners/agents must submit a new management certification prior to

changing the management fee for a project.

a.Timing of Review. Loan/Asset Management staff may assess the

reasonableness of these fees at any time, but will usually

perform this review in conjunction with other servicing

activities (e.g., reviewing annual or monthly financial reports,

processing rent increase requests, or negotiating transfers of

physical assets or provisional workout arrangements). Whether

performed in conjunction with other servicing activities or

independently, Loan/Asset Management staff should complete the

fee review within 12 months of receiving the owner/agent\'s

request for a fee increase.

b.Results of the Review. If the review shows that the residential

fee yield falls within the applicable fee range at the time the

fee was established, the fee will be approved. If the fee

exceeds the applicable range, the fee must be reduced to an

amount considered reasonable under the range.

c.Fee Reviews Performed in Conjunction With Financial Reviews. If

the fee review is performed in conjunction with the review of the

project\'s annual financial statements or monthly accounting

reports, Loan/Asset Management staff should perform the

procedures established in paragraph 3.12 in accordance with the

following requirements.

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12/943-18

4381.5 REV-2

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(1)Use the data on actual rent collections from the project\'s

most recent financial statement to make reasonableness

determinations.

(2)If a review of the project\'s financial statements show that

the owner/agent\'s collection assumptions were wrong, rework

the yield computation using the actual collections data.

(3)Compare the yield with the acceptable range that is in

effect at the time of the after-the-fact review.

(4)If after-the-fact reviews reveal that the fee amount charged

to the project exceeds the amount the HUD Area Office

determines to be reasonable, Loan/Asset Management staff

should immediately review fees at all other projects that

are:

(a)Managed by the same agent; and

(b)Subject to after-the-fact reviews and have not already

been reviewed.

(5)Loan/Asset Management staff must also perform a compliance

check on the amount of management fee charges, as required

in Paragraph 2.21.d of HUD Handbook 4370.1, Reviewing Annual

and Monthly Financial Reports. These checks assess whether

the fees collected by the agent are within the limits shown

on the Management Certification.

d.Fee Reviews Performed in Conjunction With Rent Increase Requests.

If the review is performed in conjunction with the processing of

a rent increase request, Loan/Asset Management staff should take

the review in the following manner.

(1)Complete the procedures established in paragraph 3.12.

Assess the reasonableness of the management fee and

determine the residential income fee percentage on the basis

of current rents.

(2)Use the instructions in Appendix 4 to process rent increases

that use a cost approach.

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NOTE: If an after-the-fact review is done in conjunction

with the processing of a rent increase request, review the

fee early during the rent increase processing so that HUD\'s

decision on the rent increase will not be delayed.

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3-1912/94

4381.5 REV-2

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3.15 NOTIFICATIONS TO OWNERS AND AGENTS

a.Acceptable Fees. If the fee amount to be charged to the project

account is acceptable, Loan/Asset Management staff must send a

letter to both the owner and agent stating that: \"HUD has

approved a residential management fee of \_\_\_\[specify\]% and other

fees set forth in the Management Certification dated \_\_\_\_\_\_\_\_

\[enter the date shown in the top right portion of Page 1 of the

Management Certification\].\"

b.Unacceptable Fees. If the fee amount(s) is(are) not acceptable

under the procedures set forth in this chapter, Loan/Asset

Management staff must send the owner and agent a letter that:

(1)Explains the reasons HUD cannot approve the fees shown in

the Management Certification.

(2)Sets forth the fees HUD could approve.

(3)Indicates whether the residential fee is held harmless due

to the transition provisions in Section 4 of this chapter.

(4)Includes the statements required by paragraph 3.27(d) if the

residential fee yield is capped under the provisions of that

paragraph.

(5)Within 30 days of the letter, requires the owner and agent

to:

(a)reduce the fee(s) to the amount(s) specified in the

letter;

OR

(b)appeal HUD\'s decision (see paragraph 3.16).

(6)With 30 days of the initial notification letter or HUD\'s

decision letter responding to the owner\'s/agent\'s appeal:

(a)Refund to the project any excessive fees collected.

(b)Reduce any management fees payable by the excessive

amounts included in them.

3.16 APPEALS

a.The owner and management agent may appeal the results of a

management fee review to the Multifamily Division Director in the

Area Office.

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12/943-20

4381.5 REV-2

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(1)Appeals must be submitted in writing within 30 days after

the date of HUD\'s decision letter.

(2)In the appeal, owners/managers must show how special needs

and conditions at the project and the type of management

services required justify a higher fee.

(3)If agents submit an appeal without the owner\'s signature,

the agent must certify that the owner consents to the

appeal.

b.The Director of Housing in the Area Office must issue a decision

within 30 days after receiving an appeal.

c.From the time the Area Office issues its initial decision letter

until the Director of Housing renders a decision on the appeal,

management agents can collect fees only as provided below.

(1)If the appeal follows an up-front review and HUD has

approved the agent, the agent may collect only the fee

specified in HUD\'s initial decision letter.

(2)If the appeal follows an after-the-fact review, the agent

can continue to collect the disputed fee until the Area

Office issues a decision on the appeal. If the appeal

decision requires a reduction in the fee, the reduction will

be retroactive to the date the agent began charging the

excessive fee. Therefore, within 30 days after the date of

the appeal decision, the owner and the agent must:

(a)Reduce the fee to the amount specified in Area Office

decision on the appeal.

(b)Refund to the project any excessive fees collected.

AND

(c)Reduce any excessive fees payable by the excessive

amounts included within them.

d.If the agent submitted the appeal without the owner\'s signature

and, on appeal, HUD allows part or all of the amount appealed,

the appeal decision letter must state that HUD\'s approval of the

fee is subject to the owner\'s written approval of that fee.

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3-2112/94

4381.5 REV-2

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3.17 DOCUMENTING MANAGEMENT FEE DECISIONS

Loan/Asset Management staff must document their approvals and

disapprovals of management fees.

a.Fees Approved.

If the fees are approved:

(1)Indicate HUD\'s approval on the last page of the Management

Certification; and

(2)Staple a copy of the HUD approval letter to the Management

Certification.

b.Fees Disapproved.

If fees are disapproved:

(1)Annotate Page 1 and Attachment 1 of the Management

Certification to show which fee(s) were not approved;

(2)Indicate HUD\'s disapproval on the last page of the

Management Certification and enter the date of the

disapproval letter. If the residential fee percentage is

held harmless, indicate this condition on the certification

and enter the hold harmless percentage or yield; and

(3)Staple a copy of the disapproval letter to the Management

Certification.

c.Retaining Key Documents.

Management fee documents must be retained in the project file for

at least three years. This documentation must include:

(1)Management Certifications;

(2)Decision letters; and

(3)Management fee correspondence with owners/agents.

d.Updating Computerized Files.

Loan/Asset Management staff must enter information on approved

management fees into their office\'s computer system.

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12/943-22

4381.5 REV-2

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SECTION 3: ASSESSING REASONABLENESS OF MANAGEMENT FEES

NOTE: The procedures in this Section are intended to apply only when

assessing the reasonableness of a percentage fee when an agent requests
a

change in the fee percentage. Once a percentage fee is approved by HUD,

reasonableness is not further assessed under this Section. (See Chapter
3,

Section 4 and Paragraph 3.9(b)-(d) for reasonableness tests which may be

applicable to a specific project after the approval of a percentage fee
by

HUD).

3.18 OVERVIEW

a.Goals of the Reasonableness Determination. The goals of HUD\'s

review of management fees for reasonableness are to assure that

fees approved for projects:

(1)Provide sufficient compensation to attract the quality of

management needed to administer the project during the time

period covered by the fee.

(2)Do not significantly exceed the amount that HUD determines

independent agents and owners would ordinarily negotiate for

comparable services at projects in the same geographic/cost

area, except as justified by conditions that require more

time and effort on the part of the management agent.

b.Determining Comparable Costs for the Residential Management Fee.

HUD Residential income fee ranges are established by HUD that

reflect costs by geographic/cost area. Paragraph 3.19 below

provides instructions for developing and updating fee ranges.

(1)For projects subject to fee reviews, Loan/Asset Management

staff use the applicable ranges to determine whether the

owner-proposed fee percentages initially yield a PUPM dollar

amount that is reasonable.

(2)If using the owner\'s proposed percentage results in a dollar

yield that falls within the applicable range, the proposed

percentage will be approved and remain in effect until the

management agent requests an increase in the percentage fee

amount.

c.Additional Fees Based upon Project Conditions. Residential

Income fee ranges are developed using data on the fees

independent management agents charge for managing projects with

market-based incentives for controlling both operating costs and

management fees. The presence of certain project characteristics

or conditions may warrant the approval of fees in excess of the

residential fee.

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3-2312/94

4381.5 REV-2

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(1)Add-on fees may be approved to recognize long-term

characteristics or conditions. Paragraph 3.21 below

provides instructions for developing a list of permissible

Add-on fees and determining the reasonableness of proposed

Add-on fees.

(2)Special fees may be approved to recognize temporary project

conditions. Paragraph 3.23 below provides instructions for

determining the reasonableness of Special Fees.

d.Additional Fees Based upon Income

(1)Commercial Fees. Commercial fees are considered reasonable

if they do not significantly differ from the fee yield HUD

determines would be generated by projects with similar types

of commercial space.

(2)Miscellaneous Income Fees. Miscellaneous income fees are

considered reasonable if the fee percentage does not exceed

the approved residential income fee percentage.

e.Compensation for Section 202/Section 811 Project Administrators

Loan/Asset Management staff must also determine whether the

salaries of Section 202/811 Project Administrators are

reasonable. Project administrators\' salaries should be compared

to the salaries of other project administrators in the area,

taking into consideration the level of management required to

operate the property.

3.19 CALCULATING THE RANGE OF ACCEPTABLE RESIDENTIAL FEE YIELDS

Each Super A Area Office must assure that residential fee ranges are

established for its jurisdiction. An individual Area Office may

establish their own residential fee range, if the market (or a

specific portion of the market) covered by the Area Office varies

significantly from the Super A Office. At the Area Office\'s option, a

single range may be used with add-ons, several different ranges may be

established, or the Area Office may develop its own process for

developing ranges. For example, if fee data show that yields vary

significantly by a project\'s location, a range for high and low cost

areas might be appropriate. Ranges must be reviewed and updated every

two years. Updated ranges should be set more frequently if: (1)

staff workload permits; or (2) the fees used to set the range(s)

change significantly. If the ranges are not reviewed and published by

an Area Office at the two year interval, they will automatically be

adjusted by the Services Consumer Price Index (CPI) for the total of

the 2 years.

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12/943-24

4381.5 REV-2

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At the request of an owner/agent, information regarding the process

for which ranges are established should be made available. Area

Offices are encouraged to publish their method for deriving the range

as well as the approved range on an annual basis.

Whenever the permissible fee range is developed or revised, a copy

should also be forwarded to HUD Headquarters, Attention: Director of

Multifamily Housing Management. This will assist in the monitoring

and review of nationwide financial data.

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NOTE: As used in this paragraph and throughout this

chapter, \"monthly rent potential\" means the sum of the

contract rents of all units, including rent-free units, shown

on the most recent Rent Schedule (Form HUD-92458)

submitted to HUD.

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a.Data Collection. To establish a range of acceptable fee yields,

HUD Area Office staff will gather information on the fees charged

for HUD-insured and HUD-assisted projects where the owners/agents

have incentives to control management costs.

(1)If possible, ranges should be established using data from

unassisted, HUD-insured projects.

(2)Projects included must meet all of the following criteria:

(a)Be owned by profit-motivated entities and have fees

that are not subject to HUD review.

(b)Be managed by independent agents who have no

identity-of-interest with the owners.

(c)Properly allocate the management costs between the

management fee and the project account as required by

the procedures specified in Chapter 6.

(d)Have no problems that would merit special or add-on

fees, whether or not these fees are paid.

(e)Be well-managed and in good physical condition (e.g.,

generally receive at least satisfactory ratings on any

IPA, GAO, IG or HUD reviews). Mortgagee physical

inspections should show that the physical condition of

the project is satisfactory.

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3-2512/94

4381.5 REV-2

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(3)If an Area Office does not have enough unassisted,

HUD-insured projects to establish a meaningful range for a

particular market area, the office may include data from

Section 8 New Construction or Substantial Rehabilitation

projects that meet the criteria in paragraph (2) above.

(4)If the office still does not have enough projects to

establish a meaningful range for a particular cost area or

project type, the office may further expand the range by

including projects subject to after-the-fact fee reviews

that also meet criteria (b) through (e) in paragraph (2)

above. Projects must be added in the following sequence.

(a)Limited Distribution Section 8 New Construction and

Substantial Rehabilitation projects.

(b)Nonprofit Section 8 New Construction and Substantial

Rehabilitation projects.

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NOTE: Use the fee yield proposed by the owners/agents

rather than any revised amount allowed by HUD following

an after-the-fact review.

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EXAMPLE: The proposed residential fee yield shown on

Line 1d of Attachment 1 of the original Management

Certification of a LD was \$22 per-unit per-month (PUPM).

As a result of an after-the-fact review, the Area Office

approved a fee yield of \$19 PUPM. The originally quoted

yield of \$22 should be used rather than the \$19 figure

approved by HUD.

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b.Calculating the Fee Yield. Residential fee yields used for

establishing the range(s) must be computed by applying the

residential fee percentage to the monthly rent potential for all

revenue-producing units (adjusted to reflect a 95 percent

collection rate).

(1)The fee percentage and the rent potential used must be those

in effect at the time the ranges are established.

(2)Yields must be computed on a per-unit per-month (PUPM)

basis.

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12/943-26

4381.5 REV-2

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c.Determining the Acceptable Range. HUD will use the following

procedures to set the acceptable range. These will ensure that

the top of the acceptable range does not exceed \"amounts

ordinarily paid\" for management services and is not distorted if

some fee yields significantly exceed the average amount of most

fee yields. Figure 3-8 provides an example of the range

determination process.

(1)List all fee yields in ascending order. Express fee yields

in dollars PUPM. Show the number of projects with each fee

yield.

(2)Determine the mean (average) fee yield by dividing the total

dollar amount in column (c) by the total number of projects

in column (b). Round the result to the nearest dollar.

(3)Determine the top of the acceptable range. If the highest

fee yield is:

(a)Less than or equal to 120 percent of the mean, use the

highest fee yield rounded to the nearest dollar.

(b)Greater than 120 percent of the mean, use 120 percent

of the mean fee yield rounded to the nearest dollar.

(4)Use the lowest fee yield among the figures collected to

establish the lower end of the acceptable range.

============================================================

Figure 3-8

Example of Residential Fee Range Determination

============================================================

\(a\) (b) (c)

Fee Yield Number of Total

(PUPM) Projects (a x b)

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\$12 2 \$24

\$14 1 \$14

\$15 4 \$60

\$17 5 \$85

\$18 7 \$126

\$19 5 \$95

\$20 4 \$80

\$21 1 \$21

\$25 2 \$50

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Total 31 \$555

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Average: \$555 / 31 = \$17.90 (rounded to \$18 PUPM)

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Top of Acceptable Range:

Lower of: \$18 x 1.20 = \$21.60 or \$25

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Lower End of Acceptable Range = \$12

============================================================

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3-2712/94

4381.5 REV-2

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3.20 REVIEWING RESIDENTIAL MANAGEMENT FEES

a.Review Owner Estimate of Monthly Collections for Accuracy and

Reasonableness.

Loan/Asset Management staff must examine the

occupancy/collections assumptions and yield computations shown in

Attachment #1 of the Management Certification (Form HUD-9839-A,

B, or C) and confirm that they are accurate. If inaccuracies are

found, the figures must be corrected.

(1)Determine if the estimate of monthly collections shown on

Line 1(a) of the attachment is accurate. Except for the

following cases, this figure should be 95 percent of the

monthly contract rent potential shown in the last

HUD-approved Rent Schedule (Form HUD-92458).

(a)Owners may use a collections base of less than 95

percent of potential only if the conditions that impede

collections were not caused or exacerbated by the

current management agent.

(b)If the conditions leading to collections of less than

95 percent will last less than one year, a special fee

should be used instead of a lower estimate of

collections.

(2)If the owner/agent listed rent collections of less than 95

percent on the Management Certification, review the

following items to identify the cause of the lower rent

collections.

(a)The owner\'s/agent\'s explanation for the lower

collections base provided in Attachment 1 of the

Management Certification.

(b)The project\'s recent monthly accounting and occupancy

reports.

(c)Market area vacancy trends.

(d)Any marketing/management initiatives the agent is or

will be taking to increase occupancy and/or reduce

collection losses.

(3)If the lower rent collections percentage is due to the

current agent\'s poor rent collection or leasing practices,

compute the PUPM yield using 95 percent rather than the

collections percentage proposed by the owner/agent.

(4)If the lower rent collections percentage is due to factors

beyond the current agent\'s control:

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12/943-28

4381.5 REV-2

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(a)Use the collections percentage most likely to be

realized through aggressive management effort during

the term the fee will be in effect.

(b)Limit the term of that collections percentage.

Generally, the term should not exceed one year. If

collections will improve significantly within the year,

different percentages may be used during the year

(e.g., 85 percent for first six months and 90 percent

for the next six months).

(c)Determine if the agent will receive a special fee for

the conditions related to lower rent collections. If

the agent will receive special fees for these

conditions, a 95 percent rent collections figure should

be used to determine the fee yield.

(d)Recompute the PUPM fee yield using the allowable

collections percentage.

b.Review the Owner\'s Estimate of total fee yield and PUPM yield

shown on the Management Certification to ensure that they were

properly computed.

c.Assess Whether the Proposed Fee Percentage is Reasonable. Loan

Management staff must assess whether the yield produced by the

fee percentage is reasonable. If the yield is not reasonable,

the fee percentage may not be approved. (Note: If PUPM fee

yield listed in the Management Certification was inaccurate, use

the corrected fee yield calculated under paragraph (b) above.)

(1)If the PUPM fee yield falls within the residential fee range

established by the Area Office at the time approval was

requested, the residential management fee is considered

reasonable and the fee percentage may be approved. As

future rent increases are approved, this percentage fee may

provide a fee yield that exceeds the upper limit of the

range. This yield is allowable as long as the fee

percentage remains the same.

(2)If the PUPM fee yield falls below the current residential

fee range established by the Area Office, Loan/Asset

Management should assess the project\'s past and current

performance. The agent may have proposed a low fee to win

the management contract with the owner. If the fee

percentage is unrealistically low, the agent may experience

management problems resulting in poor services and

conditions at the project.

(a)If there are no problems attributable to the management

agent, Loan/Asset Management staff should approve the

fee and

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3-2912/94

4381.5 REV-2

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monitor the project periodically to make sure that

management services are adequate.

(b)If there have been problems with management agent

performance, Loan/Asset Management staff should discuss

with the owner the possible need to upgrade management

services and to propose a fee commensurate with these

services,

(3)If the PUPM fee yield exceeds the acceptable range, the

requested residential fee percentage may not be approved.

Loan/Asset Management staff must advise the owner/agent of

the residential fee percentage that could be approved.

3.21 REVIEWING THE REASONABLENESS OF ADD-ON FEES

a.Developing an Add-on Fee Schedule. An add-on fee reflects the

amount HUD will pay management agents to cover a higher level of

management service for a project with specific characteristics or

recognized long-term conditions.

(1)Each Area Office must develop and publish a list of

permissible Add-on fees that may be applicable to projects

within its jurisdiction.

Whenever this fee list is developed or revised, a copy

should be forwarded to HUD Headquarters, Attention: Director

of Multifamily Housing Management. This will assist in the

monitoring and review of nationwide financial data.

(2)Add-on fees are separate and distinct from residential fee

percentage and should not be used to provide agents a fee

for functions covered by the residential fee percentage.

For example, if the projects used to establish the

residential fee range were all unassisted, HUD-insured

projects, allowing an Add-on fee for subsidy contract

administration could be appropriate. However, if the

residential fee was established by relying heavily on

assisted projects, an add-on fee for this project

characteristic would be inappropriate.

(3)Add-on fees may be established for specific types of

projects and locations (e.g., an add-on fee for projects

located in high-cost areas). Add-on fees must be reviewed

and published every two years.

(4)The schedule of Area Office approved add-on fees must be

made available to owners/agents upon request.

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12/943-30

4381.5 REV-2

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b.Determine Whether the Project\'s Characteristics Warrant Add-On

Fees. Examine the add-on fees listed by the owner/agent in the

Management Certification (see Item #4 - Special Fees, Attachment

1 to the Management Certification form) and determine whether the

project\'s characteristics or conditions qualify the agent to

receive the add-on fees requested.

(1)Loan/Asset Management staff should review the project\'s

records to assess whether add-on fees are warranted. For

example, an add-on fee is not warranted if the owner/agent

has requested the add-on fee for small projects established

by the Area Office, but the number of units in the project

exceeds the size limit to qualify for the fee.

(2)Loan/Asset Management staff must not allow add-on fees for

short-term problems or services when a special management

fee would be more appropriate. For example, the Area Office

may have established an add-on fees for adverse neighborhood

conditions, but the adverse conditions at the project under

review are temporary. The following steps should be taken

to determine whether add-on fees are warranted.

(a)Assess whether the project conditions the add-on fee is

intended to cover are likely to be long-term

conditions.

(b)If the project conditions are likely to be short-term,

the add-on fee must not be approved.

(c)If the add-on cannot be approved, consider whether the

project conditions warrant a special fee. If such fees

are appropriate, inform the owner/agent.

(3)If the owner/agent has requested an add-on fee for a project

condition that does not have an established add-on fee, the

add-on fee should be disallowed.

(a)If this occurs, Loan/Asset Management staff should

assess whether the condition warrants a special fee.

(b)If a special fee is warranted, the notice issued to the

owner/agent should indicate that the add-on fee was not

allowed but that a special fee could be used.

c.Assess Whether the Project\'s Add-On Fees are Reasonable.

Loan/Asset Management staff must assess whether the add-on fee

amounts requested are reasonable.

(1)Only the add-on fees warranted for the project need to be

reviewed for reasonableness.

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3-3112/94

4381.5 REV-2

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(2)The amount of the add-on fee listed on the Management

Certification must be compared to the schedule of add-on

fees established by the Area Office.

(3)Add-on fees that do not exceed the current schedule are

considered reasonable and may be approved.

(4)If the amount requested exceeds the fee amount on the

current fee schedule, the add-on fee may not be approved.

The notice to the owner/agent should indicate the amount the

Area Office could approve.

3.22 REVIEWING THE REASONABLENESS OF COMMERCIAL AND MISCELLANEOUS FEES

a.Commercial Fees. The yield likely to be derived from the fee

proposed for the project must not exceed the yields generated by

projects with comparable types of commercial space (e.g., stores,

offices, etc.).

b.Miscellaneous Fees. The miscellaneous fee percentage must not

exceed the residential income fee percentage.

3.23 REVIEWING THE REASONABLENESS OF SPECIAL FEES

a.Determine if Circumstances Warrant Special Fees. Loan/Asset

Management staff must confirm that:

(1)The agent did not cause the problem that the fee is designed

to address.

(2)The fee is tied to the correction of specific problems or

the accomplishment of specific tasks.

(3)The fee is structured so that it is payable only if the

agent completes the required actions or obtains the required

results.

(4)The fee does not include services that are covered by

residential, commercial, or miscellaneous management fees,

or by other sources of compensation.

(5)The fee is reasonably related to the time, effort, and

expertise required of the agent.

(6)The fee is paid only for a limited period of time. The

length of this period should be no longer than the time

required to resolve a specific problem or complete a certain

task.

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12/943-32

4381.5 REV-2

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b.If the amount requested exceeds the amount determined by the Area

Office to be reasonable, the special fee may not be approved.

The notice to the owner/agent should indicate the amount the Area

Office could approve.

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3-3312/94

4381.5 REV-2

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SECTION 4: SPECIAL PROVISIONS FOR FEES APPROVED

ON OR BEFORE AUGUST 1, 1986

3.24 GENERAL

The provisions in this section apply only to management fees subject

to HUD review that were approved by HUD on or before August 1, 1986

and continue to remain in effect. These provisions are referred to as

the \"hold harmless\" provisions for management fees. Figure 3-9

contrasts the fee review procedures for projects with management fees

approved prior to August 1986 with the procedures for all other

projects subject to HUD management fee reviews.

3.25 CONTINUATION OF EXISTING AGREEMENTS

On August 1, 1986, HUD implemented the reasonableness criteria for

management fees described in the above sections of this chapter for

projects that are subject to management fee reviews. If the current

management agreement and fee percentages payable from project funds

were approved by HUD on or before August 1, 1986, the agent may

continue collecting that approved fee percentage for the term of the

agreement. This is true even if the per-unit per-month (PUPM) fee

yield exceeds the upper limit of the fee range that the Area Office

would use to assess the reasonableness of the agent\'s fees if a fee

review were being performed.

3.26 REQUESTS FOR INCREASES IN PERCENTAGE FEES AT OWNER-MANAGED PROJECTS

AND PROJECTS WITH OPEN-ENDED AGREEMENTS

The following procedures apply to projects with active management

agreements signed on or before August 1, 1986 that have self-managing

owners or owners/agents with open-ended agreements. If the

owner/agent requests an increase in the residential management fee

percentage payable out of project funds and the fee is subject to HUD

review, Loan/Asset Management staff must use the following procedures.

a.The proposed fee percentage increase may not be approved if the

PUPM yield under the new fee would exceed the maximum amount

allowed by HUD under the criteria set forth in Sections 2 and 3

of this chapter. A smaller increase in the percentage fee may be

approved as long as the fee yield does not exceed the maximum

allowable amount.

b.If the proposed increase cannot be approved because it exceeds

the reasonableness range, the existing fee percentage is held

harmless. Area Offices may not reduce the current HUD-approved

residential fee percentage for these projects, even if the yield

produced by this percentage exceeds the applicable reasonableness

range.

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12/943-34

4381.5 REV-2

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Figure 3-9

THE MANAGEMENT FEE REVIEW PROCESS

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OWNERS REQUESTING FEE PERCENTAGE INCREASES

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Post-1986 Agreements Pre-1986 Fixed Term Pre-1986 Open Ended

Subject to HUD Review Agreements Agreements

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Use ranges to determine Use ranges to determine Any increase in the fee

the approvable fee. the approvable fee. percentage must result

in a yield within the

range limits.

However, the old

percentage may continue

to be used, even if the

yield exceeds the range

limits.

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RENEWALS OF PRE-1986 FIXED TERM AGREEMENTS

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If the fee percentage is not increased but the current

fee yield exceeds the range:

\(1\) cap the yield at the current yield

\(2\) adjust the fee percentage by dividing the capped PUPM

yield by the new net monthly rent potential

See paragraph 3.27

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3-3512/94

4381.5 REV-2

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EXAMPLE: An owner who has an open-ended

management agreement with the in-place agent executed in

November 1985 requests a residential fee increase from the

previously approved figure of six percent to 6.25 percent.

The results of the review by Loan/Asset Management staff

reveal that not only does the yield under the proposed

increase (\$32 PUPM) exceeds the maximum allowable yield

of \$26 PUPM, but the yield under the current fee of six

percent (\$29 PUPM) also exceeds the maximum. In this

case, the residential fee percentage must remain at the

previously approved figure of six percent.

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c.Commercial and miscellaneous income percentage fees remain

subject to the reasonableness criteria discussed in paragraph

3.12.

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REMINDER: Commercial and miscellaneous income

percentage fees cannot exceed the residential fee

percentage.

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3.27 RENEWALS OF EXISTING FIXED-TERM AGREEMENTS

The provisions of this paragraph apply only to management agreement

renewals where the residential management fee percentage remains the

same as the fee percentage previously approved by HUD. Owners/agents

of projects with fixed-term agreements that propose to change the

management fee percentage must be reviewed in accordance with Section

3 of this chapter.

a.If the fee is subject to HUD review and the residential fee yield

shown on the Management Certification exceeds the maximum amount

allowed under Section 3 of this chapter, Loan/Asset Management

staff must cap the fee at its current yield.

b.If the fee was not previously capped, Loan/Asset Management staff

must use the procedures described in paragraphs 3.20(a) and (b)

to compute the yield the agent is likely to collect. The

residential fee yield must be capped at this amount.

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12/943-36

4381.5 REV-2

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EXAMPLE: In a letter dated October 31 of last year, HUD

approved a monthly rent potential of \$94,737 for Project A,

which consists of 200 units. On November 15, Project A

submitted a Management Certification showing a six

percent residential management fee, which is the same

percentage that HUD approved under the initial

Management Agreement signed in November 1985. (Note:

The fee for this property was not previously capped.)

Attachment 1 of the Management Certification shows that

this fee\'s yield at 95 percent of the \$94,737 rent potential

is \$27 PUPM. The maximum amount HUD would otherwise

approve under Sections 2 and 3 of this chapter is \$26

PUPM. In this case, the residential fee yield must be

capped at \$27 PUPM.

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c.The residential fee for such projects will remain capped at this

level until conditions change and HUD approves a revised fee due

to such changes. The types of situations in which Loan/Asset

Management staff may consider revising the approved fee payable

from project income include the following:

(1)The capped yield no longer exceeds the maximum allowable

yield;

(2)The financial or physical condition of the project have

changed; or

(3)The scope of management services have changed.

d.In the decision letter authorizing the renewal of the Management

Agreement, Loan/Asset Management staff must:

(1)State the capped residential fee yield.

(2)If the fee was previously capped and the fee percentage had

to be reduced to comply with the cap (see paragraph (e)(1)),

state the revised fee percentage payable out of project

income.

(3)If necessary, require the owner and the agent to revise

their Management Agreement to show the revised management

fee.

(4)State that the cap on the residential fee yield will remain

in effect until HUD approves a revised fee as a result of

changes in one of the following:

(a)Acceptable fee range.

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3-3712/94

4381.5 REV-2

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(b)Project conditions.

(c)Scope of management services.

e.Each time Loan/Asset Management staff approve a rent increase for

these projects, the following steps must be taken.

(1)Recompute the residential fee percentage using the formula

below.

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Revised Residential Capped PUPM Fee Yield x No. of Units

Management Fee %
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Collections Percentage x New Monthly

(Standard = 95%) Rent Potential

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(2)Highlight the adjusted residential management fee percentage

in the letter approving the rent increase. Require this

adjustment to be effective on the date on which the rent

increase takes effect.

(3)Enter the following items on the last page of the Management

Certification.

(a)Effective date of the rent increase/management fee

adjustment.

(b)New monthly rent potential.

(c)Collections percentage assumed.

(d)Adjusted management fee percentage.

(4)An owner/agent of a project where HUD has capped the fee

yield as provided above may request that HUD reconsider the

fee at any time. Loan/Asset Management staff must perform

such a review up-front, even if the project would otherwise

be eligible for an after-the-fact review.

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12/943-38

4381.5 REV-2

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f.Commercial and miscellaneous income percentage fees remain

subject to the reasonableness criteria discussed in paragraph

3.12.

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REMINDER: Commercial and miscellaneous income

percentage fees cannot exceed the residential fee

percentage. If the residential fee percentage is reduced

to maintain the capped fee yield, the commercial and

miscellaneous income percentage fees must be reduced

accordingly.

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3-3912/94