4571.1 REV-2

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CHAPTER 1. GENERAL INTRODUCTION TO SECTION 202 PROGRAM

1-1. AUTHORITY. The program of direct loans for housing for

the elderly or handicapped is authorized by Section 202

of the Housing Act of 1959, as amended, Public Law 86-372,

73 Stat. 654, 667, 12 U.S.C. 1701q. Applicable regulations

appear in the Federal Register, 24 CFR Part 885, and are

hereby incorporated by reference and made a part of this

Handbook. (See Appendix 1.)

1-2. DELEGATION OF AUTHORITY. Under a decentralized Section 202

program, responsibility for program administration has been

delegated to Area Managers, including the Supervisors of

Multifamily Service Offices. These Service Offices are identified

at 24 CFR 200.128. Area Managers, Supervisors of Multi-family

Service Offices, and their deputies, are delegated

authority to approve or disapprove loans for housing for the

elderly or handicapped under Section 202, to amend fund

reservations for approved Borrowers, and to make contracts

and execute documents. As used in this Handbook, Area Managers

and Housing Directors shall also refer to Supervisors of

Multifamily Service Offices.

1-3. DEFINITIONS. Definitions applicable to this Handbook are

covered in Section 885.5 of the Section 202 Regulations.

1-4. PURPOSE AND POLICY.

a\. Purpose. The purpose of the Section 202 program is to

provide direct Federal loans for a maximum term of 40

years under Section 202 of the Housing Act of 1959, as

amended, to assist private, nonprofit corporations and

consumer cooperatives in the development of new or

substantially rehabilitated housing and related

facilities to serve the elderly, physically handicapped,

developmentally disabled or chronically mentally ill

adults.

b\. Policy. The policy of this program requires that

Section 202 loans be used to finance the construction

or substantial rehabilitation of residential projects

for the elderly or the handicapped. With the

consolidation of the application requirements of both the

Section 202 and Section 8 programs in Part 885 \-- Loans

for Housing for the Elderly or Handicapped, projects

which meet the requirements of the Section 202 program

shall be deemed to have met the requirements for housing

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4571.1 REV-2

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(1-4) assistance payments under the Housing Assistance Payments

Program as provided in the U. S. Housing Act of 1937, as

amended. Accordingly, a separate application for Section 8

assistance is not necessary.

\(1\) Eligibility for Occupancy. Occupancy of housing financed

under the Section 202 program is open to elderly or

handicapped families and to handicapped persons, as

defined and discussed below:

\(a\) An elderly or handicapped family means:

1 Families of two or more persons the head of which

(or his or her spouse) is 62 years of age or over

or is handicapped, or

2 The surviving member or members of any family

described in subparagraph 1 above, living in a

unit assisted under the Section 202 program with

the deceased member of the family at the time of

his or her death, or

3 A single person who is 62 years of age or over, or

a nonelderly handicapped person between the ages of

18 and 62, or

4 Two or more elderly or handicapped persons living

together, or one or more such persons living with

another person who is determined by HUD, based upon

a licensed physician\'s certification provided

by the tenant family or prospective tenant family,

to be essential to their care or well-being.

\(b\) A handicapped person means:

1 Any adult having an impairment which is expected to

be of long-continued and indefinite duration, is a

substantial impediment to his or her ability to live

independently, and is of a nature that such ability

could be improved by more suitable housing

conditions, or

2 The term \"developmental disability\" means a severe,

chronic disability of a person which

\(A\) is attributable to a mental or physical

impairment or combination of mental and physical

impairments;

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4571.1 REV-2

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(1-4) (B) is manifested before the person attains age

twenty-two;

\(C\) is likely to continue indefinitely;

\(D\) results in substantial functional limitations

in three or more of the following areas of

major life activity: (i) self-care, (ii)

receptive and expressive language, (iii)

learning, (iv) mobility, (v) self-direction,

\(vi\) capacity for independent living, and

\(vii\) economic self-sufficiency; and

\(E\) reflects the person\'s need for a combination

and sequence of special, interdisciplinary,

or generic care, treatment, or other services

which are of lifelong or extended duration

and are individually planned and coordinated.

3 An adult who is chronically mentally ill, i.e.,

with a severe and persistent mental or emotional

disorder that seriously limits his or her functional

capacities relative to primary aspects of

daily living such as personal relations, living

arrangements, work, recreation, etc., and whose

disability could be improved by more suitable

housing conditions. NOTE: Alcoholism and drug

addiction are not included in the definition of

chronically mentally ill.

\(2\) Independent Living. Housing intended specifically

for occupancy by the elderly or the handicapped or

the disabled should be designed to maximize their

ability to live independent . Except for group

homes or other shared living arrangements for the

nonelderly handicapped, only projects with housekeeping

apartments, with or without central dining, and

with a variety of appropriate services, are eligible.

Consideration in the planning and design of projects

must be based on the recognition that the individual

units are the residents\' own homes. This means that

their rights to privacy are the same as if they were

living In a single family house, or any other private

home. At the same time, architects and owner-managers

must at least provide opportunities to encourage

residents to participate in various activities with

their fellow project residents and others in the

community.

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4571.1 REV-2

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(1-4) (3) Significance of Sponsor. Under Section 202, the Sponsor of

the housing project is expected to have a continuing

relationship with the project and its residents over the life

of the project. Partly because of this continuing

relationship, the nature of the Sponsor has had a significant

effect on the composition of the tenancy. In particular,

research indicates that minority participation as residents is

directly related to minority sponsorship of projects.

\(4\) Affirmative Marketing. In carrying out affirmative marketing

activities, the Borrower must determine the racial or ethnic

groups least likely to apply, taking into consideration the

location of the project, and shall establish a plan to inform

and encourage such groups to apply. In soliciting applicants,

the aim of the Borrower shall be to provide housing

opportunities for a broad range of eligible

elderly/handicapped persons.

\(5\) Significance of Location. The significant role of a good

location in the success of any housing project is difficult

to overstate. As indicated above in subparagraph b(1) in

the discussion of the need to design for independent living

and below in subparagraph b(6), to assure the availability of

a variety of services, the location selected for housing for

the elderly or the handicapped is of even greater importance

to such projects than in housing intended for others in the

community-at-large. Projects which, by their location or

architectural design, discourage continuing relationships

with others in the community will not be approved. However,

a project should not be rejected simply because it would be

located next to or in close proximity to a nursing home, for

example, or other institutional facilities, but should be

considered on its own merit. In this regard, a primary

concern is that the project not be dominated by an

institutional environment.

\(6\) Services.

\(a\) The housing projects shall be designed to provide, and

management plans also shall include, an assured range

of necessary services for the occupants, such as, among

others, health, continuing education, welfare,

informational, recreational, homemaker, counseling and

referral services, as well as transportation where

necessary to facilitate convenient access to such

services and also to employment opportunities and

participation in religious activities.

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4571.1 REV-2

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(1-4) (b) Management plans must be designed to encourage and

assist occupants in the use of such services and

facilities which are made available. Management plans

also must include a discussion of the management and

maintenance responsibilities of the Borrower, as well as a

discussion of how the Borrower plans to deliver necessary

services and what arrangements will be made to pay for

such services.

\(c\) Various HUD Handbooks and Guides concerning management

of and services needed in housing for the elderly may

be obtained from HUD Field Offices. They include HUD

Handbook 7460.1, HUD-Assisted Housing Management Guide

on Congregate Housing; HUD Handbook 7460.3, Management

Guide on Housing for the Elderly.

\(d\) Each Field Office has staff with community services

functions or experience. This staff has specialized

knowledge of agencies and organizations at the State and

local level which have the capacity to provide assistance

to residents of housing for the elderly and the

handicapped. Borrowers, Sponsors, consultants, and

architects should feel free to consult this staff about

the special needs of the elderly and the handicapped, the

types of services available to residents, the resources

available for the provision of such services, and

information on any agreements between HUD and other

Federal agencies and between HUD and State and local

agencies on aging or Departments of Welfare or Social

Services.

\(e\) Interested groups also might wish to obtain information

directly from other Federal agencies which administer

various social services programs. These include, among

others, the Administration on Aging (AoA) of the

Department of Health and Human Services (HHS), the

Rehabilitation Services Administration (RSA), the

Administration on Developmental Disabilities and the

Department of Transportation (DOT).

\(7\) Health Care. Under Section 202, provisions for health

and medical care are expected to be based primarily on

facilities and services offered in the community rather

than by the project. Provisions for emergency care must

be included in management plans and a project might

Incorporate an emergency room, if necessary, for temporary

treatment, but not to provide care overnight or for extended

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4571.1 REV-2

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(1-4) periods. However, multi-purpose rooms could be used for

such purposes as blood donations, vaccinations, or other

similar activities. No staff provisions for doctors,

nurses or other medical personnel are permitted under the

program, although consideration may be given to renting

space for a doctor, dentist, or other medical professionals.

\(8\) Facilities for Religious Observances. Under Section 202,

facilities cannot be set aside for use only for religious

purposes. However, a multipurpose room may be used for

religious services and other related purposes from

time-to-time. Religious articles or equipment may not be

installed permanently and must be removed promptly at the

conclusion of any service or observance. In addition, any

room or space used for such purposes must be available for

use on an equitable basis by all religious groups comprising

the tenancy.

\(9\) Statutory Requirement for Economies. There is a statutory

requirement that all projects financed under this program

must not be elaborate or extravagant design or materials.

In addition, all participants must be kept aware that cost

limits and Section 8 Fair Market Rent Limits are intended

to serve as the upper limits of acceptability, and projects

with maximum costs and maximum rents should be the exception,

rather than the rule. Requests for Conditional or Firm

Commitments for Direct Loan Financing must be based on

realistic cost and rent estimates and all facets of each

proposal will be subject to suggested changes by HUD staff

to achieve maximum economies, both in development costs and

operating costs, consistent with the goal of good housing

and related Facilities for the intended occupants. At the

same time, false, short-term economies must be avoided to

minimize maintenance and replacement costs over the long

run. This requires fine tuning between initial and

long-term costs. Good housing, together with reasonable

costs and reasonable rents, can be achieved through the

continuous cooperation of all concerned\--HUD staff,

Borrowers, Sponsors, consultants, architects, the builders,

management, residents and the community. (For additional

cost containment and modest design requirements, see

paragraph 1-5h.)

\(10\) High-rise Construction for the Elderly may be utilized when

\(a\) Land costs are so high that providing equivalent

accommodations in structure types of lower density

would threaten the economic feasibility of the

housing; or

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4571.1 REV-2

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(1-4) (b) The social environment is such that the provision

of safety and security is of special importance

and concern; or,

\(c\) The only sites which offer adequate proximity to

community services and facilities and accessibility

to low cost transportation are so costly that only

high-rise construction is feasible; or

\(d\) Established land use patterns mandate high-rise

construction.

1-5. GENERAL APPLICATION LIMITS.

a\. Unit Limits for Borrowers and Sponsors. Each invitation

for applications for Section 202 reservations shall state that

no single Borrower shall apply for more than 3,000 units of

Housing and Related Facilities nationwide, nor for more than

300 Housing Units and Related Facilities in a single Region.

No single Borrower shall receive a reservation of loan funds

in a single Region in excess of the amount necessary to finance

the construction or substantial rehabilitation of 300 units of

Housing and Related Facilities. No Borrower or Sponsor can be

a party independently or as a co-Borrower with one or more

other Borrowers, co-Borrowers or Sponsors in any HUD Region

for more than 300 units or receive a reservation of loan funds

for more than the amount necessary for 300 units of Housing

and Related Facilities. If it is found that any Borrower

or Sponsor is a party to more than 300 units in that Region,

it will be asked to identify which 300 units in that Region

to which it wishes to be party for consideration for a

fund reservation in that Region.

b\. Unit Limits for Housing for the Elderly. Although a

Borrower may be a party to one or more applications for

up to 200 units in any Region, reservations for projects

intended primarily for the elderly generally will not

be approved for more than 200 units. This policy is

intended to avoid undue concentration of housing for the

elderly in any one part of the community and to expand the

number of areas in the community in which the elderly can

choose to live in housing specially designed to meet their

needs. Given the limited funds available, such a limit

also is more equitable as it provides for a broader range

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4571.1 REV-2

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(1-5) of sponsor participation and greater geographic distribution.

Accordingly, proposals which would result in more than about

200 units of specially designed housing for the elderly in

that immediate area should not be approved. Exceptions to

this policy may be considered, however, in connection with

rehabilitation proposals and others on a case-by-case basis.

Field Office Directors must fully document the reasons for

approving proposals which contemplate projects in excess of

the approximate 200-unit limit.

c\. Unit Limits for Housing for the Physically Handicapped.

Prospective Borrowers should be aware of HUD\'s policy

to encourage housing for the physically handicapped which

provides for their continued integration in the community

among the nonhandicapped of all ages, rather than permitting

them to live only among the elderly. Accordingly,

proposals for the nonelderly physically handicapped

generally will be approved only for small apartment

complexes of up to 40 units or group homes for occupancy

of up to 15 persons, not including resident assistants.

Projects for the physically handicapped also should be

scattered throughout their communities in the continuing

effort to normalize living for disabled people and to try

to assure that they will continue in the mainstream of

community life.

d\. Unit Limits for Housing for the Developmentally Disabled.

\(1\) Housing for the developmentally disabled may be proposed

for small group homes of up to 15 persons per site or

independent living residences of up to 40 units. Facilities

for six to eight persons are preferable, if feasible, as

smaller projects can provide more normal and home-like

noninstitutional environment. As with housing for the

elderly and the physically handicapped, facilities should

be scattered throughout their communities and should not

be located on adjacent sites, if they would exceed the

above limits.

\(2\) Most proposals involving the developmentally disabled are

for group homes. However, to be consistent with the basic

objective of maximizing independence, proposals for the

developmentally disabled which provide opportunities for

more independent living will be encouraged.

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4571.1 REV-2

CHAPTER 1

(1-5) e. Units Limits for Housing for the Chronically Mentally Ill.

Projects designed exclusively for the chronically mentally

ill are eligible and may provide group homes for up to

15 persons or independent living residences to serve up

to 20 persons. As for other projects under the Section

202 program, group homes or independent living residences

for the chronically mentally ill should be scattered

throughout their communities in residential neighborhoods.

f\. Flexible Design. HUD policy requires that all projects

intended for occupancy by the elderly will be designed for

independent living. While projects are eligible which include

both group homes and independent living residences, the two

types of facilities must be on scattered sites. Shared living

arrangements may require a variety of support or assistance

that may take the form of resident houseparents or assistants,

supervisors, attendant or personal aides, who may live-in or

may come in daily or as needed by the residents. Any proposal

for a waiver of limits for the number of handicapped persons

or units on single or contagious sites will be considered only

on a case-by-case basis and must be fully documented. Such

waiver requests must be submitted to the appropriate field

office and must be approved by the Assistant Secretary.

g\. Other Considerations for Housing for the Physically

Handicapped, Developmentally Disabled and Chronically Mentally

Ill.

\(1\) Housing for the physically handicapped, the

developmentaly disabled, and the chronically mentally ill

should be located in predominantly residential

neighborhoods where other family housing is located and

in reasonable close proximity to shops, commercial

facilities and services, job opportunities, recreational

facilities, and the like. Such housing shall

not be located in areas characterized by or adjacent

to institutional facilities including, but not limited

to schools for the handicapped, workshops, day-care

centers or medical facilities.

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4571.1 REV-2

CHAPTER 1

(1-5) (2) For new construction, all units must be accessible to

and usable by the physically handicapped, either by

inclusion of elevators or entrances at each grade level.

Preferably, all units in a rehabilitation project also

should be accessible to and useable by the physically

handicapped. However, a rehabilitation proposal may be

considered marginally acceptable if, for example, it

involves a two-story building, in which an elevator

would not be feasible, in which case the second story

would not be accessible to some physically handicapped

persons.

\(3\) In group homes, either the zero-bedroom or one-bedroom

cost and rent limit will be applicable. The

one-bedroom limits may be used only if the bedroom

space, plus the proportionate part of the common

spaces which ordinarily make up a living unit, such

as the living room, dining room, kitchen, pantry,

bathrooms and hallways, which should be allocated

to the bedroom unit, are equal to the minimum space

requirements for one-bedroom units. Otherwise, zero-bedroom

unit limits shall be used. Cost Not Attributable to

Dwelling Use and Cost Not Ordinarily Attributable to

Dwelling Use will be treated in the same

manner as in other Section 202 projects as discussed

in Chapter 5, paragraphs 5-23 and 5-24. It is anticipated

that bedrooms intended for two-person occupancy will be

designed to accommodate two persons

comfortably and with more space than in bedrooms

intended for single occupancy. In any case, the

cost limits and rents are to be determined on a

per-unit and not on a per-person basis.

\(4\) In all group homes, only one or two-person occupancy

will be permitted in each bedroom unit.

\(5\) In all group homes, the living unit occupied by the

houseparents must be accessible to all residents of

the homes.

\(6\) Lavish design must be avoided.

\(7\) There shall be at least one full bathroom for every

four residents.

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4571.1 REV-2

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(1-5) (8) Each group home should be designed so that corridors

are kept to a minimum length to avoid the appearance

of an oversize home or an institution.

\(9\) Provisions should be made both for active and passive

recreational activity, and plans should include facilities

both for indoor and outdoor recreation at the project site.

\(10\) Careful attention should be given to limiting the number

of exterior entrances to provide security for the residents.

\(11\) Sufficient storage should be incorporated in each living

unit for each prospective resident.

\(12\) The budget for management normally should include

sufficient funds for houseparents as well as relief

houseparents. Financing for other staff needs should

be obtained from sources other than income from rents.

\* (a) Title XX, a Social Security Act social services

program (now included under the Social Services

Block Grant program) would be an acceptable

source of funds needed for such purposes. Under

Title XX, a 75 percent Federal formula grant to

the State is used for a wide variety of social

and other services for low-income persons,

including the elderly. Examples of these services

include a variety of meal, housekeeping and

personal care services, recreation, continuing

education, employment opportunities, transportation,

counseling, legal services, welfare, health-related

services, vocational and rehabilitation

service and housing services.

\(b\) If the Borrower and Sponsor indicate that

they would be dependent on Title XX grants, they

should be able to document their success in

obtaining such funds in the past or that such

funds will, in fact, be available for their

project. In this regard, Title XX funds cannot

be assured beyond a limited number of years.

Thus, the Borrower or Sponsor must identify

alternative sources of funds if Title XX grants

are not available when the project opens for

occupancy, or when such funds are no longer

available. The Sponsor, various Federal, State,

and local public or private agencies might be

among other sources of funds.

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4571.1 REV-2

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(1-5) h. Cost Containment and Modest Design Requirements.

\(1\) Each application will be examined to assure that

design is not excessive in terms of amenities and

cost of materials (but not including materials

which result in energy efficiency).

\(a\) Where alternative methods of construction and

materials are available at significantly less

cost than those being proposed, HUD has an

obligation to urge consideration of such alternatives

and give greater consideration in approving

projects to those proposals that incorporate

efficient construction design.

\(b\) Unacceptable amenities include, but are not limited

to bowling alleys, swimming pools, saunas, jacuzzis,

balconies, atriums, dishwashers, and individual

trash compactors.

\(c\) Unusual building configurations, not required to

provide for the needs of the occupants, which

unnecessarily increase the extent of exterior

walls, or which require special materials or

construction methods, shall not be accepted

unless there are demonstrated cost savings.

\(2\) The proposed unit sizes and number of bathrooms proposed

shall not exceed the following (except for substantial

rehabilitation projects where it would be more expensive

to comply with these limitations than to retain the

existing features):

Number Bedrooms 0 1 2 3 4

Sq. Ft. Rentable Area 415 540 800 1050 1150

Number Baths 1 1 1 1-1/2 2

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4571.1 REV-2

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(1-5) 1 For projects involving five or more bedrooms

the maximum unit size may be increased by

up to 100 sq. ft. for each additional bedroom.

2 With regard to group homes, the following

sq. ft. are applicable in determining the

applicable Fair Market Rents and Cost Limits:

0 Bedroom up to 449 sq. ft.

1 Bedroom 450 to 540 sq. ft.

\(3\) All applications for housing for the elderly shall

include at least 25 percent efficiency units, unless

a waiver request is submitted at the Fund Reservation

stage and the EMAD and Valuation staffs determine that

such units are not readily marketable in the community

where the project is to be located. This efficiency

requirement does not apply to independent living

complexes for the handicapped, disabled or chronically

mentally ill nor to substantial rehabilitation projects

where it would be more expensive to comply with

the requirements than to retain the existing unit

composition.

\(4\) Two bedroom units are prohibited except for the resident

manager\'s unit. This two-bedroom prohibition will not

apply to independent living projects designed wholly

for the nonelderly handicapped. Additionally, projects

designed wholly for the nonelderly handicapped may

include three and four or more bedroom units to meet

the needs of larger nonelderly handicapped families.

\(5\) Cost not attributable to dwelling use normally shall not

exceed 10 percent of the total project space. Central

kitchen and dining facilities may only be approved if the

Borrower demonstrates that the dining facility will be

self-sustaining and in full use at initial occupancy. To

achieve economies in development cost, special spaces and

accommodations must be designed to serve more than one

function, i.e., multipurpose rooms used to the maximum

extent feasible.

\(6\) Commercial space such as beauty and barber shops and

convenience stores may not be provided unless they are

self-sustaining, provide needed services for residents,

and do not exceed five percent of the total project space.

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1-6. AMOUNT OF LOAN.

a\. Loan Amount Limitations. The loan amount shall not

exceed the lowest of:

\(1\) The total development cost of the project,

\(2\) An amount which entails a debt service not in

excess of 97 percent of the estimated net income, or

\(3\) An amount attributable to dwelling use, excluding

exterior land improvement as defined in paragraph

1-6b(1), not to exceed:

\(a\) \$22,900 per family unit without a bedroom;

\$26,550 per family unit with one bedroom;

\$31,500 per family unit with two bedrooms;

\$37,100 per family unit with three bedrooms; and

\$42,000 per family unit with four or more

bedrooms.

\(b\) To compensate for the higher costs incident to

the construction of elevator-type structures,

the above dollar limitations per family unit

may be increased to:

\$26,400 per family unit without a bedroom;

\$30,550 per family unit with one bedroom;

\$36,200 per family unit with two bedrooms;,

\$42,700 per family unit with three bedrooms; and

\$48,700 per family unit with four or more

bedrooms.

\(c\) The limitations specified in this paragraph

for two, three, four or more bedrooms shall be

restricted to the nonelderly handicapped families,

except for a project manager\'s unit.

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(1-6) b. Exceptions to loan amount limitations are as follows:

\(1\) The loan amount may exceed the limits listed above

in subparagraphs (3)(a) and (b) by not more than 100

percent of the cost not attributable to dwelling use

(see Chapter 5, paragraphs 5-23 and 5-24), including

exterior land improvements.

\(2\) The Assistant Secretary may increase any of the

foregoing per family unit limitations by up to 75

percent in any geographical area where the cost

level requires. The Assistant Secretary may increase

any of the foregoing per family unit limitations

by up to 90 percent on a project-by-project basis.

\(3\) If the Assistant Secretary finds that because of

high costs in Alaska, Guam or Hawaii, it is not

feasible to construct dwellings without the

sacrifice of sound standards of construction,

design, and liveability, within the limitations of

maximum loan amounts provided above, the principal

amount of mortgages may be increased by such

amounts necessary to compensate for such costs,

but not to exceed in any event, the maximum,

including the high cost increases, if any, otherwise

applicable by more than one-half thereof.

c\. Reduced Loan Amounts for Leaseholds. In the event the

loan is secured by a leasehold estate rather than a fee

simple estate, the allowable cost of the property upon

which the loan amount is based shall be reduced by the

value of the leased fee which is defined to be the value

of the lease (and reversionary rights) to the fee simple

owner. (See Handbook 4465.1, Valuation Analysis for

Project Mortgage Insurance, Chapter 3 for discussion of

leaseholds.)

d\. Adjusted Loan Amounts for Rehabilitation. Loans which

involve projects to be rehabilitated shall be subject

to the following additional limitations.

\(1\) Property Held in Fee. If the Borrower is the fee

simple owner of the project not encumbered by a

mortgage, the maximum loan amount shall not exceed

100 percent of the cost of the proposed repairs

or rehabilitation.

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4571.1 REV-2

CHAPTER 1

(1-6) (2) Property Subject to Existing Mortgage. If the

Borrower owns the project subject to an outstanding

indebtedness which is to be refinanced

with part of the Section 202 loan, the maximum

loan shall not exceed the cost of repair or

rehabilitation, plus such portion of the outstanding

indebtedness which does not exceed the fair market

value of such land and improvements prior to the

repair or rehabilitation, as determined by the

field office. Any outstanding indebtedness placed

against the owned property within a year of the

date of the application for a Section 202

reservation will be excluded in calculating the loan

amount under this criterion, unless it is clearly

evident that it was not created to circumvent this

loan amount limitation. If the property(ies) was

(were) acquired within a twelve-month period prior

to submission of the application for a fund reservation,

the limitation for \"Property to be Acquired\"

(see below) shall apply in lieu of the limitation

for \"Property Subject to Existing Mortgage.\"

\(3\) Property to be Acquired. If the property is to be

acquired by the Borrower and the purchase price

is to be financed with a part of the Section 202

loan, the maximum loan amount shall not exceed the

cost of the repair or rehabilitation, plus such

portion of the purchase price that does not exceed

the fair market value of the land and improvements

prior to the repair or rehabilitation as

determined by the field office. Where there is an

identity-of-interest between the seller(s) of the

existing property and the Borrower and/or Sponsor,

the application shall be considered as a refinancing

rather than a purchase transaction for the purpose of

determining the loan amount. The limitation for

\"Property Subject to Existing Mortgage\" shall apply

in lieu of the limitation for \"Property to be Acquired.\"

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4571.1 REV-2

CHAPTER 1

1-7. RELATED PROGRAMS.

a\. Section 106(b) Financial Assistance for Nonprofit

Borrowers for Section 202 Housing. Interest-free loans

may be made to eligible Borrowers to cover 80 percent of

certain eligible preconstruction costs of planning the

Section 202 project (see Handbook 4535.2, Section 106(b)

Nonprofit Sponsor Assistance Loans for Section 202 Projects

for the Elderly or Handicapped). Such costs may include,

but are not limited to, organizational expenses, land

options, and legal, housing consultant, and architectural

fees. Such loans are repayable out of the Section 202

loan. Applicable Regulations appear at 24 CFR, Part 271,

Subpart B. The request for a Section 106(b) loan may be

submitted with the application for a fund reservation

or at any time prior to the initial closing of the

Section 202 loan.

B. Section 8 Housing Assistance Payments Program. Participation

in the Section 8 Housing Assistance Payments Program

is required for a minimum of 20 percent of the units in

any Section 202 project. However, if the Borrower

proposes Section 8 assistance for fewer than 100 percent of

the units (with the exception of one nonrevenue resident

managers unit), Headquarters must review and approve

the request prior to selection of the application.

1-8. SPECIAL FINANCIAL PROVISIONS.

a\. A minimum capital investment of one-half of one percent (.5%)

of the total HUD-approved loan, not to exceed \$10,000

has been established.

\(1\) This minimum investment may be satisfied by making

a cash contribution no later than the initial closing

or by contributing all or a portion of the land draw

available to the Borrower at the initial closing,

as determined by HUD. Where the Borrower proposes

to donate all or a portion of its land draw, an

amount equivalent to the minimum capital investment

required shall be entered on the Project Application

Form HUD-92013.

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4571.1 REV-2

CHAPTER 1

(1-8) (2) At initial closing, these funds shall be placed in

escrow with HUD, or other escrow agent acceptable to

the Field Office Director, and shall be held through

the construction period and for at least a three-year

period from the date of initial occupancy. These

funds may be used only for operating expenses or

deficits (see Chapter 7, paragraph 7-16).

\(3\) The prior approval of the Area Manager is required

to use such escrowed funds. Any unexpended balance

remaining in the minimum capital investment account

at the end of the escrow period shall be returned

to the Borrower.

\(4\) In addition to the minimum capital investment, the

Borrower also might have to provide additional funds

at initial closing for an off-site escrow, or an

initial operating deficit, or other requirements

that may be determined during technical processing.

Additional funds also may be required of the Borrower

during the construction period because of unforeseen

expenses.

b\. Loans from the Contractor or other parties standing to gain a

profit from the project are prohibited. The Borrower may

borrow funds required for any project purpose from the Sponsor.

Also, Borrowers may obtain funds from persons or firms in no

way connected with the project provided that the indebtedness

will not create a situation where the person or firm can

exercise any direction or control over the Borrower. If funds

are to be borrowed for project purposes (except for funds to

meet the required minimum capital investment) not to be included

in the mortgage, the total amount of the debt must be secured

by a promissory note executed by the Borrower on Form FHA-1710.

The form provides for the prior written approval of the Assistant

Secretary for payment of the loan. However, for Section 202

nonprofit Borrowers, the notes may be endorsed as follows:

\"Approval to make repayment of this loan from Residual Receipts

is hereby granted this\_\_\_\_\_\_\_day of \_\_\_\_\_\_\_\_\_\_\_\_\_\_,
19\_\_.

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

Assistant Secretary for Housing

Federal Housing Commissioner by

\'Authorized Agent\'\"

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4571.1 REV-2

CHAPTER 1

1-9. COOPERATIVES.

a\. If the Borrower is a nonprofit consumer cooperative, the

proposed housing cooperative would be developed as a

management-type. Instructions in HUD Handbook 4550.2, except

as modified herein, would be applicable and the requirements

of Form FHA-3206, Commitment for Insurance of

Advances, would be followed. If the Borrower is a

private, nonprofit corporation other than a cooperative,

and it intends from the outset of the application process

to convert to a cooperative, HUD Handbook 4550.5 instructions

would be applicable, except as modified herein,

and the requirements of Form FHA-3206 would be followed.

In either case, Section 202 cooperatives will follow the

organization format of Section 221(d)(3) Market Interest

Rate cooperatives.

b\. Interested groups should be aware that the physical assets

of the cooperative corporation cannot be sold for the

personal gain of any of its members. In addition, the

Articles of Incorporation shall provide that after a decision

of the members to discontinue operations as a cooperative,

the physical assets of the cooperative will be

conveyed to HUD or at HUD\'s discretion, to an eleemosynary

organization.

c\. It also should be noted that consumer cooperatives intending

to provide rental housing would be subject to the

same provisions as nonprofit corporations providing rental

housing.

1-10. USE OF HOUSING CONSULTANTS.

a\. Some nonprofit Borrowers sincerely interested in providing

housing for the elderly or handicapped lack the staff

and other facilities to develop a project. HUD recognizes

that there may be a need for these organizations to use the

services of professional housing consultants. Qualified

consultants can expedite the development of the proposal,

improve the quality and help lower costs. In recognition

of such services, HUD will permit a reasonable fee for

consultant\'s services to be included in the Section 202

loan amount. However, a Borrower is not required to

contract for consultant services to develop a project if

it does not wish such services.

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4571.1 REV-2

CHAPTER 1

(1-10) b. The selection of the consultant is the responsibility of

the Borrower, but HUD reserves the right to review the

qualifications and suitability of any proposed consultant

and to approve the arrangement for the services. The

Borrower should be cautioned against selecting a housing

consultant who is located an unreasonable distance from

the location of the project, the HUD Field Office, and the

Borrower. Upon selection, the Borrower and the housing

consultant shall enter into a contract for services to be

performed by the housing consultant on behalf of the Borrower.

The contract form to be used is Form HUD-92513A-EH, Guide

Form of Contract for Housing Consultant Services for

Nonprofit Projects Under Section 202.

c\. As used here, a housing consultant is defined as an

individual or firm possessing experience and competence

in organization and planning of housing projects, housing

market evaluation and marketing, procurement of financing,

evaluation and selection of attorneys, architects,

building contractors, property managers, and other required

participants, and preparation of applications and other

necessary documents. The consultant\'s efforts must be

directed exclusively toward serving the nonprofit Borrower

and the interest of the tenants.

d\. HUD reserves the right to pass upon the qualifications and

suitability of any proposed housing consultant and approve

the terms and conditions of the Contract. The Mortgage

Credit staff shall review the Contract terms and conditions

and recommend acceptance, rejection or modification of the

Contract. Nonprofit Borrowers and housing consultants, as

well as general contractors, project managers and management

agents are required to file a Form HUD-2530, Previous

Participation Certificate, which enables the field office

to evaluate the previous experience of the participants in

the project. The review of the Contract and the 2530

procedure will take place simultaneously with the

determination of eligibility of the Borrower. Upon

completion of the evaluation of the housing consultant, the

Mortgage Credit staff shall prepare a letter to the Borrower

for the signature of the Area Manager advising of approval,

disapproval or suggested revisions of the Contract.

Disapproval of the housing consultant will not constitute

rejection of the project or the Borrower. However, the

Borrower must either select another housing consultant

acceptable to HUD or proceed with the project without using the

services of a consultant. Guidelines for the Mortgage Credit

review are discussed in Chapter 4, paragraph 4-16 of this

Handbook.

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4571.1 REV-2 CHG 3

(1-10) e. Although HUD reserves the right to approve the terms and

conditions of the contract between the Borrower and the housing

consultant, HUD is not a party to the contract and the Borrower

has sole responsibility for enforcing the covenants, agreements

and stipulations of the contract.

1-11. HOW THE SECTION 202 PROGRAM WORKS. The Assistant Secretary

determines the Section 202 loan authority to be allocated to the

HUD Regional and Field Offices, based upon the requirements of

Section 213(d) of the Housing and Community Development Act of

1974\.

a\. HUD Field Offices invite, receive and review and rate

applications and submit recommendations to the Regional

Offices. Regional Offices score the applications on the

Regional Administrator\'s criterion and rank applications in

accordance with instructions for the current fiscal year.

b\. Application packages, which contain applicable regulations,

handbooks, forms and notices, as well as information concerning

the level of loan authority, may be obtained from the

appropriate HUD Field Office. Field Office staff also will

conduct workshops to explain and answer questions concerning

the Section 202 program. Information concerning the time and

place of the workshop will be included in the Field Office

Invitation in order that representatives of prospective

Sponsors, as well as consultants, architects, etc., may attend.

These workshops are helpful to all Sponsors, but particularly

to inexperienced groups. The Field Office staff cannot,

however, provide direct assistance with regard to specific

applications.

c\. Field Office staff, in the workshops and in discussing the

Section 202 development process with Sponsors, will encourage

the use of minority prime and sub-contractors, as well as other

businesses owned by minorities and women to the maximum extent

feasible in developing projects.

d\. Application review documentation by the Field Office staff

must support the conclusions reached. Therefore, review guides

which have been used successfully for this purpose are included

as appendices to this Handbook. These guides are recommended,

but are not mandatory. If Field Offices develop their own

guides, they should be sufficiently comprehensive in scope to

permit Regional and Headquarters staff to determine whether

statutory and regulatory program requirements have been met.

If a reviewer\'s recommendations are overridden, full

documentation shall be included as to the bases for such

action.

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