[Link to
GCH-0042](http://www.hud.gov/offices/adm/hudclips/lops/GCH-0042LOPS.doc)

Legal Opinion: GCH-0088

Index: 2.705

Subject: Limitation on Distributions Provision at 24 CFR 883.306

October 27, 1993

Harold Levy, Esq.

Brownstein Zeidman and Lore

1401 New York Avenue, N.W.

Suite 900

Washington, DC 20005-2102

Dear Mr. Levy:

This is in response to your letter of August 18, 1993, in which you

request that HUD confirm your opinion that the limitation on
distributions

provision contained at 24 CFR 883.306 of the \"new regulations\" does
not apply

to Shippan Place Apartments. Your request relates to the owner\'s

participation in the Department\'s Affordable Housing Preservation
Program and

the ability of the owner to access for purposes of owner distributions
funds

currently held in the project\'s Residual Receipts, Operating, and
Replacement

Reserve accounts.

Your letter indicates that the original Agreement to Enter into a

Housing Assistance Payments Contract (AHAP) for the project was executed
on

September 29, 1978. You further indicate that the AHAP was subsequently

amended on April 27, 1979, and again on March 14, 1980. The March 14,
1980

AHAP, which your letter refers to as the Amended AHAP, is said to have
the

same terms as the original AHAP except for the amount of the maximum
housing

assistance commitment and the amount of the section 8 contract rent,
changes

in dates for commencement and completion of work, and the \"addition of
section

1.7(i), \'Debt-service Vacancy Payments\', to the form of HAP Contract,

reflecting the language of section 883.204(d) of the \[old
regulations\]\".

Although seemingly irrelevant to the current issue, we do not see why
the

construction commencement date would need to be changed in an AHAP
amended

after such commencement. We also find it somewhat anomalous that
although

your letter argues that the new regulations do not apply, the change you

describe to the HAP contract would seem to indicate that the HAP
contract

attached to the amended AHAP was a new regulation HAP contract.

The new regulations were effective on February 29, 1980 and contained a

provision at section 883.105, Applicability of Revised Regulation, that

established to which projects all or a part of the new regulations would

apply. The new regulations at section 883.105(a) first provide the
general

rule of applicability that:

These revised part 883 regulations apply to projects for which the

initial application was submitted on or after the effective date.

Projects for which applications or proposals were submitted before the

effective date will be processed under the regulations and procedures in

effect at the date of submission. (Emphasis added.)

Since your letter indicates that the original AHAP was executed on

September 29, 1978, there is no other conclusion but that the initial

application was submitted prior to the effective date of the new
regulations.

Therefore, under the general rule of applicability quoted above, Shippan
Place

Apartments would not be subject to the new regulations. (This assumes
that

the State Agency did not notify HUD within 60 days of the effective date
of

the new regulations that they were choosing to have the new regulations
apply

to this project, as section 883.105(a) allows.)

However, the regulations at section 883.105(b) then address a situation

where the application is submitted prior to the effective date of the

regulations, but the AHAP is executed after the effective date of the

regulations. In such cases, Subparts F and G are made applicable to the

project. Based on the representations in your letter, and for purposes
of

this discussion, we agree that Shippan Place Apartments had an AHAP that
was

executed prior to the effective date of the new regulations, and
therefore,

the Amended AHAP executed after the effective date of the regulations
would

not have subjected the project to Subparts F and G of the new
regulations.

Section 883.105(b) goes on further to address situations where the AHAP

has already been executed for a project, and the fact that in such cases
the

parties may agree to make Subparts F and G applicable to such projects.

Whether the parties reached any such an agreement is a factual question,
the

answer to which may be in written agreements among the parties, in
actual

amendments to the relevant documents, or in a review of the processing
for the

project. We have undertaken no independent review of files or
documentation

on this issue.

Section 883.105(b)(2) provides in relevant part that:

Subpart F, dealing with the HAP contract and subpart G, dealing with

management, apply to all projects for which an Agreement was not

executed before the effective date of these revised regulations. In

cases where the Agreement has been executed: the Agency, Owner and HUD

may agree to make the revised subpart G applicable (with or without

limitation on distributions) and execute appropriate amendments to the

Agreement or Contract. (Emphasis added.)

As this synopsis of the applicability of the regulations point out,

there are several scenarios under which a project may be subject to all
or a

portion of the new regulations depending on various factual
circumstances and

agreements. Your letter specifically requests a determination as to the

applicability to Shippan Place Apartments of the limitation on
distributions

established in section 883.306 of Subpart C of the new regulations.
Because

the project application was submitted prior to the effective date of the

regulations, in order for this provision to be applicable to the
project, the

State Agency would have had to notify HUD that they were choosing to
have the

new regulations made applicable to this project and to have modified the

application and proposal accordingly. We have no indication that the
State

Agency made such a determination, and based on your representations,
have no

reason to believe that such a determination was made by the State
Agency, and,

therefore, conclude that Subpart C of the regulations, and the
limitation on

distributions contained in section 883.306, is not applicable to Shippan
Place

Apartments.

However, we do not believe that this conclusion ends the inquiry. As

indicated above, even where the AHAP was executed prior to the effective
date

of the regulations, the parties may agree to have Subparts F and/or G
(which

incorporates the limitations on distributions contained in section
883.306)

made applicable to the project. Such an agreement could be evidenced in
the

several ways discussed above. If there was an agreement of the parties
to

make Subpart G applicable to the project, even without the limitations
on

distributions contained in section 883.306, there are certain controls
on

project funds contained in Subpart G. Subpart G, section 883.702(e)
provides

in pertinent part that:

Project funds must be used for the benefit of the project, to make

required deposits to the replacement reserve in accordance with §

883.703, or to provide distributions to the owner as provided in §

883.306. Any remaining project funds must be deposited with the
\[State\]

Agency, other mortgagee, or other Agency-approved depository in an

interest-bearing account. Withdrawals from this account may be made

only for project purposes and with the approval of the Agency. (Emphasis

added.)

To the degree that a limited distribution owner becomes subject to the

requirements of Subpart G, the limited distribution owner is subject to
the

restriction on the residual receipts account that must be established in

accordance with the above-quoted provision, regardless of whether the
owner is

subject to the requirements of section 883.306. That is, the requirement
for

the establishment of a residual receipts account under section
883.702(e)

derives from the fact that the owner is a limited distribution owner. In
the

case of Shippan Place Apartments, your letter indicates that the owner
is such

a limited distribution owner and that the State Agency has required the

establishment of a residual receipts account. Therefore, if Shippan
Place

Apartments is subject to Subpart G, and specifically section 883.702(e),
then

withdrawals from the residual receipts account may be made only for
project

purposes.

The question then becomes a factual one as to whether the parties agreed

in accordance with section 883.105(b) that the project would be subject
to

Subpart G. Assuming that your representations are correct that there is
no

evidence in the owner or State Agency files on the project that the
parties

agreed that the project would be subject to Subpart G requirements, then
the

controls on the residual receipts account contained in section
883.702(e) are

not applicable to Shippan Place Apartments. As indicated earlier, HUD
has

undertaken no independent investigation to determine whether the facts
conform

to the representations made in your letter. We would suggest, if you
have not

done so already, that you confirm your understanding of the underlying
facts

with the State Agency and the HUD Field Office having jurisdiction over
this

project.

I trust that this letter addresses your questions. Please feel free to

contact Bessie Henderson or me, if you have additional questions or need

further information.

Sincerely,

Michael H. Reardon

Assistant General Counsel

Assisted Housing Division