**U.S. Department of Housing and Urban Development**

**Office of Housing**

**Special Attention of: Notice H 00-8 (HUD)**

Secretary\'s Representatives

Senior Community Builders **Issued: 5/16/00**

Multifamily Hub Directors **Expires: 5/16/01**

Multifamily Program Center

Directors **Cross References:**

Multifamily Mortgagors

Multifamily Mortgagees

State Agencies

**SUBJECT: Guidelines for Continuation of Interest Reduction Payments
after Refinancing: \"Decoupling\", under Section 236(e)(2) and
refinancing of insured Section 236 projects into non-insured Section
236(b) projects.**

1\. **[APPLICABILITY]{.underline}: This Notice applies to multifamily
projects currently receiving Interest Reduction Payments pursuant to
Section 236 of the National Housing Act, including all projects with
mortgages insured or held by HUD and all State Agency non-insured
projects. This Notice does not apply to any former Section 236 projects
owned by HUD or sold by HUD from the HUD-owned inventory.**

2\. **[PURPOSE]{.underline}:** This Notice establishes procedures for
the optional continuation of Interest Reduction Payment (IRP) assistance
when projects assisted under Section 236 are refinanced. Under two
separate options, Section 236(e)(2) or Section 236(b), IRP subsidy may
continue provided owners enter into new IRP Agreements and Use
Agreements to maintain the projects as low-income housing resources. For
the Department to determine what adjustments may need to be made to
these guidelines for more effective administration of these procedures,
any processing variance from these guidelines need to sent to
Headquarters, attention Office of Portfolio Management, for
consideration of the variance. One of the objectives of this Notice is
for the Department to obtain practical case-by-case experience
processing these types of transactions before promulgating, by
regulation, requirements that are applicable to all transactions.

Under Section 236(e)(2), a Section 236 mortgage may be prepaid and the
IRP subsidy continued provided the owner enters into IRP and Use
Agreements that require the continuation of the low-income housing
resource for 5 years beyond the new IRP term. Under Section 236(b), an
approved

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State or local agency Section 236(b) mortgagee must purchase the insured
Section 236 mortgage, terminate the FHA insurance, keep the Section 236
mortgage intact, and the owner must enter into new IRP and Use
Agreements to maintain the property as a low-income housing resource.

3\. **[BACKGROUND]{.underline}:** Section 532 of the Department of
Veterans Affairs and Housing and Urban Development, Independent Agencies
Appropriations Act, 2000 (Public Law 106-74, approved October 20,
1999)("Appropriations Act") established Section 236(e)(2) of the
National Housing Act (NHA) which authorizes the Secretary, under certain
terms and conditions, to continue the payment of Interest Reduction
Payments after the prepayment of a Section 236 mortgage. Because this
portion of the statute is brief, Section 532 of this Appropriations Act
is quoted here in its entirety.

*\"SECTION 532 SECTION 236 ASSISTANCE.*

*(a) CONTINUED RECEIPT OF SUBSIDIES UPON REFINANCING.- Section 236(e) of
the National Housing Act (12 U.S.C. 1715z-1(e)) is amended-*

*(1) by inserting \"(1)\" after \"(e)\"; and*

*(2) by adding at the end the following new paragraph:*

*\"(2) A project for which interest reduction payments are made under
this section and for which the mortgage on the project has been
refinanced shall continue to receive the interest reduction payments
under this section under the terms of the contract for such payments,
but only if the project owner enters into such binding commitments as
the Secretary may require (which shall be applicable to any subsequent
owner) to ensure that the owner will continue to operate the project in
accordance with all low-income affordability restrictions for the
project in connection with the Federal assistance for the project for a
period having a duration that is not less than the term for which such
interest reduction payments are made plus an additional 5 years.\"*

In addition to providing instructions for the implementation of Section
236(e)(2), this Notice also provides instructions for proposals that
convert Section 236 insured mortgages to non-insured Section 236
mortgages that are held by eligible Section 236(b) State or local agency
mortgagees. These transactions permit the continuation of IRP assistance
where the Section 236 mortgage is acquired by an approved State or local
agency Section 236(b) mortgagee, the FHA insurance is terminated, the
Section 236 mortgage remains intact and long-term, low-income housing
use restrictions are imposed.

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4\. **[GENERAL]{.underline}:** For implementation of Section 236(e)(2),
the Department has chosen to use the word, \"decoupling,\" to refer to
continued Interest Reduction Payments that may be paid after a project
is refinanced because the IRP assistance is severed or \"decoupled\"
from the original Section 236 mortgage. A Section 236(b) transaction
involves an approved State or local agency Section 236(b) mortgagee
purchasing the insured Section 236 mortgage, terminating the FHA
insurance, keeping the Section 236 mortgage intact, and the owner enters
into new IRP and Use Agreements to maintain the property as a low-income
housing resource.

**IRP assistance may be suspended:** The Department considers continued
IRP paid on behalf of mortgagors, after their mortgages are refinanced,
to be general project-based assistance that is conditioned upon
multifamily projects owners\' agreeing to meet certain restrictions. The
Department reserves the right to suspend or terminate future IRP
assistance when project owners fail to meet the conditions of the IRP
assistance. Mortgagees who underwrite new loans for these projects
should be aware that the continuation of the IRP assistance is
conditioned on the projects being maintained as affordable housing
resources pursuant to the conditions of the Department's IRP Agreement
and Use Agreement.

**Amount and term of the IRP assistance:** The total amount of IRP
assistance a project was originally scheduled to receive is called its
\"Budget Authority.\" The amount a project was scheduled to receive in
any particular federal fiscal year is called its \"Contract Authority.\"
Under the Section 236(e)(2) or Section 236(b) transactions, the
continuation of the IRP subsidy may not exceed the payment schedule that
was established for the original Section 236 mortgage, either on a
monthly or annual basis (Contract Authority) or over the term of the new
IRP commitment (Budget Authority). However, if the new IRP schedule
provides for lower monthly payments than in the old IRP schedule, then
the term of the new IRP Agreement may be for a longer period than the
original IRP Agreement, (e.g., if the new monthly schedule of payments
(Contract Authority) are less than the old monthly payment, the total
amount of remaining IRP subsidy (Budget Authority) would support a
longer term of IRP payments than the original IRP schedule.) The
extension of the IRP term through reduced monthly IRP payments would be
at the option of the project owner with HUD and mortgagee\'s approval.

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**Low-income use period:** Based on statutory requirements, in return
for the continuation of IRP assistance in Section 236(e)(2)
transactions, owners will be required to enter into use agreements for
the provision of low-income housing for, at least, 5 years beyond the
term of the IRP assistance. If the IRP assistance is extended beyond the
term of the existing (old) IRP term, because of lower monthly usage,
then the 5-year extended use restriction period would commence at the
expiration of the new IRP term. Owners in Section 236(b) transactions
must also maintain their projects as low-income housing for a period 5
years beyond the expiration of the IRP assistance.

**Assistance paid to mortgagee:** IRP assistance, by statute, is paid to
mortgagees on behalf of mortgagors to maintain the viability of a
low-income housing resource. These payments are not and may not be paid
directly to project owners. The Department needs to ensure that IRP
assistance is paid for projects that provide habitable, low-income
housing, therefore an acceptable public agency needs to provide the
regulatory oversight for these projects. If there is no acceptable
agency, then HUD will perform this function.

**Basic structure of after transaction Section 236 project:** In both
the Section 236(e)(2) and 236(b) transactions, there will be a Section
236 regime as the basis for IRP assistance, i.e., establishment of Basic
and Market Rent schedules, occupancy and habitability standards, income
limits, and financial reporting requirements.

In a Section 236(e)(2) transaction, the mortgage may be prepaid and the
IRP subsidy may continue in return for executed use agreements, however,
the owner must demonstrate to HUD how the project will be financially
feasible under the continued Section 236 regime. The continued IRP
assistance may be used for debt service needs.

Projects refinancing under the Section 236(b) method must also
demonstrate how the projects will be financially feasible as continued
Section 236 projects and, further, have the original Section 236 note
and mortgage remain intact. While the FHA insurance will be terminated,
the original Section 236 mortgage, which may be modified, restated and
enveloped in the refinancing transaction, must remain identifiable as
the basis for the IRP assistance. The project must also be maintained as
a Section 236

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project, i.e., establishment of Basic and Market Rents, occupancy and
habitability standards, income limits, and financial reporting
requirements.

**Potential differences in rent structure:** As stated above, in both
Section 236(e)(2) and 236(b) transactions, projects must maintain the
requirements of the Section 236 program after the completion of the
transaction. The Basic and Market Rent are the mandatory rent payment
standards for these transactions. Other lower rent payment standards may
be presented in a given transaction, i.e., Section 8 assistance, LIHTC
rents or other State or local rent payment requirements that may set a
payment standard lower than the Basic or Market Rent levels. However,
the Basic Rent is the approved rent for the property.

> Options for establishing the Basic Rent for these transactions are as
> follows. The tenant can pay a rent below the Basic Rent only if there
> is an available subsidy on the tenant's behalf, which will ensure the
> owner's receipt for the project of the approved rent. An owner may
> provide such a subsidy. Another option is that it is possible to have
> a different Basic Rent for comparable tax credit and other units. An
> example might be if the owner, for the tax credit units, is willing to
> make a concession of its return on equity component, built into the
> Basic Rent and, thereby, lowering the Basic Rent for these units.
> Overall, the Basic Rent must be sufficient to operate the project with
> payments of principal and interest under a hypothetical one percent
> mortgage.

5\. **[ELIGIBLE MORTGAGEES]{.underline}:** **In a Section 236(e)(2)
transaction**, a project may be financed by **any** mortgagee if a
public agency agrees to be the oversight entity (i.e., is a party to the
IRP Agreement) to assure compliance with the requirements of the IRP
Agreement, (i.e., occupancy, habitability and financial requirements).
If a public agency declines to participate as the oversight entity in a
Section 236(e)(2) transaction, then the mortgagee must be a HUD-approved
multifamily mortgagee, the refinancing must be through an FHA insured
mortgage and HUD will perform the oversight functions.

**In Section 236(b) transactions**, a public agency will be
participating as the oversight entity since an approved Section 236(b)
public agency must acquire the Section 236 mortgage in order to receive
the IRP assistance. However, if the agency that acquired the Section 236
mortgage does not wish to finance the remainder of the transaction

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(project acquisition and probable repair costs), any mortgagee may
finance these costs provided the project oversight will be performed by
the Section 236(b) mortgagee.

To participate in the Section 236(b) program, the public agency must be
an approved Section 236(b) mortgagee prior to acquisition of a Section
236 mortgage. If the agency is not approved, it must provide an opinion
of counsel to HUD that it is qualified to be a Section 236(b) mortgagee.
HUD must review and accept the agency\'s opinion that it is qualified to
be a Section 236(b) mortgagee before the agency may acquire an insured
Section 236 mortgage.

6\. **[ELIGIBLE MORTGAGORS]{.underline}:** Owners that participate in
these transactions must be mortgagor entities that are eligible to own
these projects under either a Section 236(e)(2) or Section 236(b)
transaction. The Section 236 statute and regulations have specific, but
slightly different, definitions for eligible mortgagor entities that may
participate in these transactions.

**Under a Section 236(e)(2) transaction involving prepayment of an
insured Section 236 mortgage**, the eligible mortgagor entities are:
nonprofit mortgagors; builder-seller mortgagors; limited distribution
mortgagors; cooperative and investor sponsor mortgagors, (see April 1,
1995 CFR, 24 CFR 236.10). The most likely mortgagors under these
transactions will be nonprofit, limited distribution and, possibly,
cooperative mortgagors.

**Under a Section 236(b) transaction and a Section 236(e)(2) transaction
involving prepayment of a non-insured Section 236 mortgage,** the
eligible mortgagor entities are: private nonprofit corporations or other
private nonprofit entities; limited dividend corporations or other
limited dividend entities; public entities, cooperative housing
corporations, (see Section 236(b) of the NHA).

Any proposal, submitted under this Notice, that contemplates a Transfer
of Physical Assets (TPA) shall have the new mortgagor entity processed
and approved under HUD\'s Previous Participation Clearance procedures
(2530 Process) prior to HUD\'s approval of any proposal.

7\. **[TENANT PARTICIPATION]{.underline}:** Any transaction approved
pursuant to this Notice is subject to the requirements of HUD\'s Tenant
Participation in Multifamily Housing Project Regulations at 24 CFR part
245.

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8\. **[ELIGIBLE PROJECTS]{.underline}:** Any insured, non-insured or
HUD-held Section 236 project, where the owner or prospective owner is an
eligible mortgagor and is in good standing with the Department (2530
Clearance approval), is eligible for a Section 236(e)(2) or 236(b)
transaction, **except that**, Preservation Projects (processed under the
LIHPRHA and ELIHPA programs) may only participate provided there is
**no** **rent increase** necessitated by the Section 236(e)(2) or 236(b)
transaction.

9\. **[APPLICATION PROCEDURES]{.underline}:**

**Under Section 236(e)(2)**, the project\'s mortgagor or prospective
mortgagor may elect to refinance the Section 236 mortgage by providing a
written proposal to the Multifamily Hub having jurisdiction for the
project. In addition to the information required by the Proposal section
set forth below, the proposal should be from the mortgagor or proposed
mortgagor **with** a letter of support from the proposed mortgagee. The
proposal should provide income data on the existing tenants and what
effect the proposed transaction will have on any tenants. The proposal
should explain how the remaining IRP assistance will be used in the
proposed transaction. Finally, the proposal should explain how
(financially and legally) the project will be maintained as a low-income
housing resource for, at a minimum, the remaining term of the existing
or new IRP term plus five years.

**Under a Section 236(b) transaction**, the substance of the proposal
should be identical to a Section 236(e)(2) transaction, except that the
proposal should be submitted to the Hub by the public agency that will
be acquiring the Section 236 mortgage and subsequently will become the
public agency non-insured mortgagee Section 236 mortgagee.

10\. **[PROPOSALS]{.underline}:** The proposal must be submitted to the
Multifamily Hub having jurisdiction over the project. The Multifamily
Hub director shall determine which office within its Hub shall process
the proposal. However, only the Multifamily Hub director has the
authority to approve these transactions under the parameters of this
Notice. The proposal must provide all the information necessary for HUD
to make an informed decision that there is good cause to continue IRP
assistance because the proposal presents an acceptable plan for the
long-term preservation of the project as a viable low-income housing
resource.

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The proposal should provide the following information:

**Sponsor:** A brief description of the sponsor\'s demonstrated
experience in the development, management and maintenance of multifamily
low-income housing

**General Project Description:** Size, location, age of project, current
holder of the mortgage, original mortgage amount, current unpaid
principal balance, mortgage maturity date and mortgage interest rate,
current owner, and detailed description and experience of the proposed
owner, and identification of proposed ownership entity. The proposal
should identify the number of units receiving project-based Section 8
assistance or any other type of assistance, i.e., tenant-based Section
8, Rent Supplement, Rental Assistance Payments (RAP), etc.

**Financing/Leveraging Public Dollars:** Full details of the financing
for the project, including all sources and uses of funding, i.e., any
new FHA insurance, State or local bond financing, LIHTC, HOME Funds,
CDBG funds, other State or local funds.

**Termination of FHA Insurance:** For a Section 236(b) transaction,
willingness and ability of current mortgagee to sell mortgage to public
agency.

**Continuing the IRP Assistance and Authority of Mortgagee or Public
Agency to accept IRP Assistance:** **For Section 236(e)(2)
transactions**, where the new mortgagee is not a HUD-approved
multifamily mortgagee, a commitment of a public agency to perform
oversight functions (i.e., willing to be a party to the IRP Agreement.)
If there is no public agency oversight, then the new mortgagee must be a
HUD-approved multifamily mortgagee, the new mortgage must be FHA insured
and HUD will perform the oversight functions.

**For Section 236(b) transactions**, the public agency must either be an
approved state agency Section 236(b) mortgagee or provide a legal
opinion that it has the authority and capacity to be a Section 236(b)
mortgagee (holder of a Section 236 noninsured mortgage.) The public
agency must be an approved Section 236(b) mortgagee before it may
acquire an insured Section 236 mortgage.

**Regulatory Oversight:** Discussion of the experience and capability of
the new mortgagee and/or public agency to monitor the project after
termination of FHA insurance and

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to otherwise discharge its responsibilities under the Agreement for
Interest Reduction Payments, \"IRP Agreement\".

**Physical Improvements:** Discussion of the physical condition of the
project and the cost and nature of any physical improvements that will
be undertaken to address all repair needs and place project in good
condition for the foreseeable future. If the cost of repairs is
significant, the proposal should provide a detailed breakout of the
repair costs.

**Affordability:** Discussion of how the project will be maintained as a
long-term, low-income housing resource for the term of the IRP
assistance plus 5 years.

**Tenant Protections:** **Approved Section 236(e)(2) or 236(b)
transactions will prohibit the owner from causing any involuntary
displacement.** Provide narrative of how tenants will be protected from
any rent increase due to the proposed transaction. What if any subsidies
will be provided to assist in the provision of low-income housing, i.e.,
Section 8 either project-based or tenant based, LIHTC equity, bond
financing with lower interest rates, HOME funds, CGDB funds, etc..

Since projects effected by this Notice will have existing tenants,
special care should be given to the use of other subsidies. The income
limitations of the other subsidy programs might cause the involuntary
displacement of existing residents which is unacceptable under this
Notice. For example, projects that will use LIHTC must meet use
requirements under the LIHTC program. Specifically, on the day the units
are \"placed in service\" under the LIHTC program, each tenant must be
eligible for occupancy under the LIHTC income limits established for the
project. To maximize the tax credit value, any tenant over the income
limits on the day the project is \"placed in service\" may be requested
to vacate the project. Therefore, to avoid displacement, it might be
prudent for an owner to include less than 100 percent of the units under
the LIHTC program, thereby giving the project room to retain tenants
ineligible for LIHTC units. A detailed tenant income survey should be
completed to permit everyone to know the impact of the proposed
transaction on existing residents.

Any Preservation eligible project that has its FHA insurance terminated
or mortgage prepaid is eligible for Enhanced Vouchers (see PIH Notice
00-9). Additionally, HUD's 2000

10

Appropriations Bill expanded Preservation eligible projects to include
Section 236 projects that had Flexible Subsidy Assistance as eligible
projects for Enhanced Voucher assistance.

**HUD Approvals Requested:** Proposals must describe what approvals HUD
needs to provide to permit the proposal to proceed to closure: e.g.,
acceptance of public agency\'s claim that it is authorized to be the
Section 236 non-insured mortgagee; transfer of IRP assistance to the new
mortgage holder; Previous Participation Clearance (2530 Process) for the
owner (streamlined Transfer of Physical Assets (TPA) approval since FHA
insurance should be terminated under transaction); transfer of Section 8
HAP Contract to new owner; potential transfer of Section 8 HAP Contract
administration to public agency; increase in Basic/Market/Section 8
rents, if necessary; issuance of Enhanced Vouchers for eligible tenants
not residing in project-based Section 8 assisted units; Subsidy Layering
review/approval; Risk Sharing loan approval or new FHA insurance
processing, if applicable, and others as applicable.

**Source and Use Statement:** The proposal should present a full Source
and Use Statement that **fully delineates** the costs associated with
the transaction, including fees, escrow and reserves accounts.

**Disclosure of other Federal/State/local assistance:** The proposal
must identify the presence of all other Federal/State or local
assistance that will be used in the transaction and **specifically**
state the existence and length of any use restriction(s) associated with
any of the assistance.

11\. **[OTHER OUTSTANDING HUD DEBT AT TIME OF
REFINANCING:]{.underline}** To the extent that it is financially
feasible and consistent with the long-term preservation of the
affordable housing resource, all outstanding HUD debt, such as Flexible
Subsidy loans, Section 241 loans, Section 106(b) loans owed the
Department, should be repaid under the proposed transaction. Multifamily
Hubs may not approve proposals that request the deferral of HUD debt not
listed above. If the Flexible Subsidy assistance is in the form of
Operating assistance, it must be repaid pursuant to HUD regulations
(24CFR219. 220(b) revised April 1, 1995 and saved by 24CFR219.2) absent
a waiver for good cause.

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12\. **[RENTS]{.underline}:** Whether an office is processing a Section
236(e)(2) or Section 236(b) proposal, the project owners in either case
will be required to execute an IRP Agreement that will mandate that the
project be maintained and operated as a Section 236 project. Section 236
Basic and Market Rents must be established pursuant to outstanding
procedures. After-transaction rents must not exceed comparable market
rents less IRP assistance provided, however rents shall not be decreased
from current rents as a result of this comparison.

Rent increases that are requested and processed at the time of
refinancing may be processed by using either the Section 236
budget-based rent increase procedure or, if there is Section 8
project-based assistance, and the project is eligible for the \"Mark Up
to Market\" rent increase procedure (HUD Notices H 99-15 and H 99-36).
Rents are capped by market comparable rent less the annual IRP
assistance.

A rent increase, approvable by a Multifamily Hub, is **limited to** the
a 10 percent increase over current rents in the project. The result of
the rent setting process shall not produce rents, that in the aggregate,
are above comparable market rents **less** the annual IRP assistance
provided for the project. The Section 8 Contract Rents shall be in
accordance with HUD Notice H 99-36. The tenant rent contribution must be
consistent with Section 236 or Section 8 rent payment policies, or other
lesser rent standards that may be imposed from the LIHTC program or
public agency rent requirements, whichever is applicable.

Under both the Section 236(e)(2) and 236(b) transactions, the
after-transaction rent standard for residents will be the formula for
the Section 236 program that utilizes both a Basic and Market Rent.
Under the program, the rent can never be lower that the Basic Rent.
However, a tenant can pay less than the Basic Rent in cases where there
is subsidy assistance available to make up the difference, e.g., Section
8 assistance, section 236 Rental Assistance Payments (RAP), owner
subsidy, etc.. There can be a different Basic Rent for comparable tax
credit and other units as discussed in Section 4 of this Notice.

Multifamily Hubs should carefully analyze the restructuring proposal to
assure that any cost saving in the operating expenses due to the
proposed rehabilitation is reflected in the after-repair operating
budget. The results of the analysis should be reflected in the final
rent for the project, wherein any rent increase for acquisition, repair

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and restructuring costs should have some offset savings due to lower
operating expenses. Based on careful analysis, appropriate added debt
service resulting from the restructuring may be included in the Basic
and Market Rent calculation, if it is treated as an operating expense of
the project subject to the rent increase limitations.

For either a Section 236(e)(2) or Section 236(b) transaction,
limitations on distributions from surplus cash are prescribed by 24 CFR
236.50, (see the April 1, 1995 CFR). These limitations on distributions
must apply to any type of ownership that is created as a result of a
Section 236(e)(2) or 236(b) transaction.

If the public agency has a methodology for establishing Basic and Market
Rent that is acceptable to HUD, then the Multifamily Hub may accept the
agency\'s Basic and Market rent for a transaction. However, if HUD does
not accept the agency\'s calculation or there is no agency to establish
the Basic and Market rent, then the Multifamily Hub will undertake the
following procedure to establish these rents. In conjunction with other
outstanding procedures for establishing Basic and Market Rents, the
following provides the procedures for setting the return on equity
component of the Basic and Market Rent. For transactions where there
will be new FHA insurance or a Risk Sharing Loan and equity from LIHTC
syndication proceeds, the return on equity calculation is based on a ten
(10) percent return on ten (10) percent of the amount of the new
mortgage debt on the project after the Section 236(e)(2) or 236(b)
transaction. Where the transaction will keep the Section 236 mortgage in
tact, the return on equity calculation may be based on a six (6) percent
of the equity provided during the original underwriting and development
of the Section 236 project.

HUD shall retain regulatory approval over future rent increases for
either Section 236(e)(2) or 236(b) projects. The public agency will
process Section 236 rent increases pursuant to 24 CFR part 245, subpart
D, with HUD retaining approval authority. Rent increases for units
receiving Section 8 assistance will be governed by outstanding
procedures, at the time of the requested rent increase, for properties
that are Section 236 projects with some or all units assisted with
Section 8 subsidy. Currently, these procedures are described in HUD
Notice H 99-36.

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13\. **[CONVERSION FROM INSURED TO NONINSURED]{.underline}:** **Under a
Section 236(b) transaction**, immediately upon sale of the project's
Section 236 insured mortgage to the public agency, the former mortgagee
must submit Form HUD-9807, \"Insurance Termination Request for
Multifamily Mortgage\". Form HUD-9807 should be sent to the
Headquarters, Multifamily Financial Operations Division, Room 6258. It
is very important to file the Form HUD-9807, which has been executed by
the insured lender, with a cover letter stating that the mortgage is
being converted from insured to noninsured financing (indicate the new
and old project numbers) and stating that the Section 236 Interest
Reduction Payments **[must not be terminated]{.underline}**. The
termination of mortgage insurance must occur as of the date the mortgage
is assigned to the public agency.

The public agency must be fully aware of the responsibilities which it
will be required to fulfill under an Agreement for Interest Reduction
Payments (IRP Agreement), model copy attached. These responsibilities
include, among others, monthly requests for interest reduction payments;
processing periodic rent increases pursuant to 24 CFR part 245, subpart
D; physical inspections of the property to assure habitability and
monitoring to assure owner compliance with the terms of the IRP
Agreement and all other HUD rules governing the project. The IRP
Agreement is effective as of the date the mortgage is acquired by the
public agency.

The transaction will be simplified if the effective date of all
documents is the first day of the month. The IRP Agreement should be
executed by the new owner and mortgagee and, if possible, submitted to
Headquarters for execution by the DAS for Multifamily Housing Programs,
at least 10 days before its effective date.

The project must be assigned the next sequential number for a
non-insured Section 236 project for your office (example: 122-001-NI).
In order to avoid accounting and HUD system problems, both the
noninsured number and \"former\" insured number should be shown on the
IRP Agreement, the Form HUD-9807 \"Insurance Termination Request for
Multifamily Mortgage\", and the mortgage documents and entered in all
appropriate systems such as TRACS, REMS, etc..

14\. **[TRANSFER OF SECTION 236 INTEREST REDUCTION
PAYMENTS]{.underline}:** The assignment of the mortgage from the present
mortgagee to a new mortgagee or a public agency with HUD approval, and
execution of the new IRP Agreement gives the new mortgagee

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> or the public agency the right to receive IRP assistance on behalf of
> the mortgagor. IRP assistance is always limited to existing Contract
> and Budget Authority amounts, unless the proposal requests a lower
> Contract amount wherein the term of the IRP assistance may be for a
> longer period than the existing IRP Agreement.

**In Section 236(e)(2) transactions**, the IRP assistance shall be used
to help make debt service payments for the project. The payments may not
exceed the existing monthly or total payments under the existing IRP
Agreement. \"Lump sum\" payments of the total remaining IRP are not
allowed, since a lump sum payment of the remaining IRP assistance would
be greater than the current annual or Contract payment amount.

**In Section 236(b) transactions**, the IRP assistance must be supported
by the existing or new amortization schedule. The IRP assistance may not
exceed monthly payments for principal, interest and Mortgage Insurance
Premiums (MIP) under the mortgage and the monthly payments for principal
and interest if the mortgage bore interest of one percent The payments
may not exceed the payments that would have been made under the old
amortization schedule for the project. IRP payments must not continue to
be made, in a Section 236(b) transaction, if any modification made to
the Section 236 note or mortgage has the legal effect of terminating the
existing Section 236 note or mortgage. In addition, in a Section 236(b)
transaction, any IRP assistance may only be made based on the existing
Section 236 note and amortization schedule. The IRP assistance could be
provided for a longer period if the Section 236 mortgage was recast over
a longer term and monthly debt service needs were reduced. **(This is a
very complex calculation and Headquarters assistance should be requested
to assure a correct calculation of these payments.)**

> The IRP assistance must not exceed the term of permitted payments
> authorized under the old IRP Agreement as reflected on the
> amortization schedule for the original Section 236 insured mortgage,
> **unless** the IRP assistance has been recalculated and will be paid
> out at a lower monthly amount. In this case, the new term of the IRP
> may be extended beyond to the old term, **however** the total amount
> of the payments may not exceed the remaining Budget Authority that was
> available from the original Section 236 mortgage and IRP Agreement.

15

Assistance is paid in arrears and in response to the mortgagee\'s
monthly filing of Form HUD-3111, \"Mortgagee\'s Certification and
Application for Interest Reduction Payments\". These vouchers must be
submitted to the Office of Accounting Operations, Room 3246, HUD
Building, 451 Seventh Street, S.W., Washington, D.C. 20410. The first
voucher filed by the new mortgagee or the public agency must have
attached, a copy of the mortgage, mortgage note and mortgage
amortization schedule and evidence that the mortgage has been assigned
by the old mortgagee to the public agency. If the mortgagee prefers
electronic transmission of the payments they must request the necessary
forms from the office of Accounting Operations.

The Committed Subsidy Balance and a copy of the existing amortization
schedule must be obtained from the Office of Financial Reporting at
(202) 708-1313. The Committed Subsidy Balance cannot be exceeded, either
annually or totally, for any reason. The IRP Contract must reflect the
maximum annual payment amount. This amount cannot exceed the annual
amount for the billing year at the time of conversion to noninsured. If
there is any over-ride or administrative fee charged by the public
agency for its financing, the charge must not exceed one half of one
percent of the declining mortgage balance and must be covered by the
existing subsidy balance.

15\. **[SECTION 8 HAP CONTRACT RENEWAL REPAIR
REQUIREMENTS]{.underline}:** In addition to the general requirements for
HAP Contract renewals, the renewal HAP Contract for a project that must
complete repairs under the transaction must have a specific condition
which will require the completion of repairs within a time frame agreed
to by HUD and the owner. Failure to complete repairs within the time
frame may cause the stoppage of Section 8 payments until the repairs
have been completed. The public agency, if any, will be responsible for
monitoring repairs and reporting any delays in the repair schedule to
HUD.

16\. **[CHANGE OF SECTION 8 CONTRACT ADMINISTRATOR AND ANNUAL
CONTRIBUTIONS CONTRACT ADMINISTRATIVE FEE]{.underline}:** If the
proposal requests that the public agency become the HAP Contract
Administrator for a project where HUD is currently the contract
administrator, the Multifamily Hub director must determine that the
public agency has the capacity and experience to be the contract
administrator through the use of an Annual Contributions Contract (ACC).
The ACC must be prepared and executed between HUD and the public agency.
The fees for the ACC service must be covered by existing

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Section 8 contract authority, (see 24 CFR 880.505(c)(3)). The public
agency must agree to the following fee conditions if it is to be the HAP
Contract administrator for this project:

The fee may only be either (a) an override on the permanent financing as
prescribed by 24 CFR 883.606 or, (b) up to three (3) percent of the
2-bedroom Section 8 FMR for the project\'s locality times the number of
units under the HAP Contract.

If the public agency chooses to take a fee from Section 8 funds under
the ACC, then the agency must agree, as a condition of entering into the
ACC for this project, that if it is chosen or has been chosen as a HAP
Contract administrator under the Section 8 HAP Contract Administration
Request for Proposals (RFP) solicitation, the public agency will modify
its ACC for this project to make it consistent with all conditions,
including the fee structure, of the ACC that will be executed for HAP
Contract administration under the RFP.

17\. **[SECTION 8 ENHANCED VOUCHERS]{.underline}:** In preservation
eligible projects, Enhanced Vouchers will be provided for eligible
families not living in project-based Section 8 assisted units at the
time of closing of these transactions pursuant to HUD Notice PIH
00-9(HA). HUD will not consider transfer of third party Enhanced Voucher
administration under these transactions.

18\. **[USE AGREEMENT]{.underline}:** Separate Use Agreements, one for
Section 236(b) transactions and one for Section 236(e)(2) transactions
(see attachments), shall be used for transactions undertaken pursuant to
this Notice. The appropriate Use Agreement will be used to require the
projects to maintain the low-income housing requirements of the
transaction for at least 5 years beyond the term of the IRP assistance.
The Use Agreement also will require the project to maintain **any** use
restrictions imposed by other Federal assistance (i.e., LIHTC, HOME,
CDBG, etc.) for at least as long as HUD\'s use restriction requirements
for the proposed transaction. (Example: If there are 13 years remaining
on Section 236 mortgage and IRP Agreement plus additional 5 years, as
required by statute, resulting in an 18-year use restriction from the
transaction\'s closing for the provision of Section 236 restricted
housing. The Use Agreement would require that any use restrictions
imposed by other Federal assistance would have to be maintained for at
least 18 years from the date of the transaction). The Use

17

Agreement shall also require the owner to accept prospective tenants,
who are otherwise eligible for occupancy, who have the assistance of
tenant-based Section 8 Vouchers.

If the project has project-based Section 8 assistance, the Use Agreement
shall require the project to accept project-based Section 8 rental
assistance (or any successor program) for as long as HUD offers such
assistance during the term of the Use Agreement. Further, the Use
Agreement will require that in the event the Section 8 project-based
assistance is terminated or not renewed, the project shall continue to
be maintained as a low-income housing resource under the terms of the
Section 236 Interest Reduction Payments Agreement.

19\. **[RELOCATION/DISPLACEMENT]{.underline}:** There shall be **no
involuntary displacement** caused by the approval of a transaction under
this Notice. Any temporary relocation costs, due to repairs, shall be at
no expense to any tenant and shall be fully borne by the project.

20\. **[SUBSIDY LAYERING]{.underline}**: Any transaction that has any
combination of the following assistance must be reviewed and certified
as meeting HUD\'s current Subsidy Layering requirements: project-based
Section 8 assistance, IRP assistance, FHA insurance, HOME funds, CDBG
funds, or any other State or local assistance.

21\. **[IRP AGREEMENT EXECUTION]{.underline}:** The new IRP Agreement,
one for Section 236(e)(2) transactions and one for Section 236(b)
transactions, (model copies attached) must be executed by the new
mortgagee or the public agency, the owner, and then submitted to
Headquarters for HUD execution. IRP Agreements developed pursuant to
this Notice must be executed by the DAS for Multifamily Housing
Programs. The executed IRP Agreements should be sent to Courtland
Wilson, Room 6176.

22\. **[MULTIFAMILY HUB APPROVAL AUTHORITY]{.underline}:** Multifamily
Hubs may approve transactions that **are within the parameters and
procedures outlined in this Notice**. Should a proposal request an
approval action(s) outside of those permitted under this Notice, the
proposal, **with your office\'s review and recommendations**, must be
sent to Headquarters Office of Portfolio Management for consideration of
approval of the proposal by Headquarters.

23\. **[CLOSINGS]{.underline}:** Upon approval of a transaction, the
Multifamily Hub shall coordinate closings with the appropriate field
office counsel and parties to the transaction; owners, State or local
agency, lenders.

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24\. **[ENFORCEMENT]{.underline}:** Any mortgagor who submits a proposal
in accordance with this Notice and is not in compliance with the
instructions and requirements of the Notice or any provisions of the IRP
Agreement or Use Restriction approved in a transaction pursuant to this
Notice, shall be referred to the Department\'s Enforcement Center for an
administrative sanction. Sanctions may include, but are not limited to,
suspension or debarment from engaging in future business with HUD.

25\. **[APPLICATION OF THIS NOTICE TO PROPOSALS ON HAND AS OF THE DATE
OF THIS NOTICE]{.underline}:** Any proposal that has not been approved
by HUD prior to the date of this Notice shall be processed in accordance
with the guidelines contained in this Notice. Further, any unapproved,
on hand proposals will be sent to the Multifamily Hub having
jurisdiction over the project(s) in the proposal for processing pursuant
to the guidelines in this Notice.

The information collection requirements contained in this notice have
been submitted to the Office of Management and Budget (OMB) under the
Paperwork reduction Act of 1995 (44U.S.C. 3501-3520) and OMB approval is
pending. HUD will provide notification of the OMB approval number when
assigned.

Any questions regarding these procedures should be directed to the
Office of Portfolio Management, attention Courtland Wilson at (202)
708-3730.

Attachments

William C. Apgar

Assistant Secretary for Housing-

Federal Housing Commissioner