July 1, 1996
 
                                   PRESERVATION LETTER NO. 8
 
MEMORANDUM FOR:     DIRECTORS OF HOUSING
                    MULTIFAMILY HOUSING DIRECTORS
                    MULTIFAMILY PRODUCTION CHIEFS
                    MULTIFAMILY ASSET MANAGEMENT CHIEFS
                    PRESERVATION COORDINATORS
 
             /s/
FROM:     Nicolas P. Retsinas, Assistant Secretary for Housing -
          Federal Housing Commissioner, H
 
SUBJECT:  Definition and Review of a Related Party under the Low-
          Income Housing Preservation and Resident Homeownership
          Act of 1990
 
     Section 231 (c) of the Low-Income Housing Preservation and
Resident Homeownership Act of 1990 (LIHPRHA) describes what is
generally referred to as the "related party" rule.  The related
party rule is relevant in a sales transaction when the current
owner of a LIHPRHA-eligible project proposes to transfer
ownership of its project to another party.  The related party
rule in Section 231 (c) was created to assure that legitimate,
independent nonprofits would have special purchase rights while
preventing for-profit owners from setting up sham nonprofits for
the purpose of buying back their own projects in pre-arranged
sales transactions between related entities.  In the current
environment where sales to nonprofits are a very high priority
for funding in the Fiscal Year 1996 LIHPRHA program, the
Department is concerned that field office staffs and program
participants are reminded of the statutory requirement and that
field offices pay particular attention to the review of this
aspect of a sales transaction very closely.  To that end, the
following guidance is offered.
 
I.  WHAT IS A RELATED PARTY/ THE RELATED PARTY RULE
 
Definition.  Except as outlined below, the related party rule
generally prohibits direct or indirect, whole or partial control
or ownership, or any financial interest between the owner of a
LIHPRHA-eligible project and a purchaser.
 
     Section 231 (c) of LIHPRHA defines "related party" as
follows:
 
     o    Except as provided in subsection (d) [management
          exception], the terms "qualified purchaser" and
          "priority purchaser" do not include any entity that,
          either directly or indirectly, is wholly or partially
          owned or controlled by the owner of the housing being
          transferred under this subtitle, is under whole or
          partial common control with such owner, or has any
          financial interest in such owner, or has any financial
          interest in such owner or in which such owner has any
          financial interest.  The Secretary shall issue
          regulations appropriate to implement the preceding
          sentence.
 
Prohibition against financial interest.  Examples: there can be:
 
     a.   no common stock ownership between the owner and a
          purchaser;
 
     b.   no loans between the owner and a purchaser, except as
          provided for in 24 CFR Section 248.101 (related party
          definition),  and
 
     c.   no donation of funds between the owner and the
          purchaser,
 
     except that nonprofit owners who were involved in developing
     the eligible low-income housing shall not be prohibited from
     buying out the interest of its limited dividend or for-
     profit partners in connection with the sale of such housing
     under LIHPRHA as long as the sale is made on an arms length
     basis and the partners who sell their interest completely
     divest themselves of any input in the continued operation of
     the project.
 
Prohibition against direct or indirect, whole or partial,
ownership or control. Examples:  there can be:
 
     a.   no voting common board members between the owner and
          purchaser;
 
     b.   no general or limited partner, shareholder, director
          with voting rights or compensation, officer, employee
          or authorized representative in common between the
          owner and a purchaser, and,
 
     c.   no general or limited partner, shareholder, director
          with voting rights or compensation, officer, employee
          or authorized representative of the owner or purchaser
          can directly or through one or more intermediaries
          control or influence the decisions or policies of the
          other,
     except that the definition of "related party" under the
     regulations [24 CFR Section 248.101] permits owners and
     former owners to be members of the board of directors of
     nonprofit purchasers as long as the owners and former owners
     are nonvoting members, sit in their personal capacity and do
     not receive any compensation for their board membership.
 
Examples are illustrations.  The examples provided above are for
illustrative purposes only and are not intended to be an
exhaustive list of the elements that may trigger the related
party rule.  As questions arise regarding whether an interest
triggers the related party rule, you should consult with your
local counsel or with members of the Headquarters  Preservation
staff.
 
II.  THE  POINT OF APPLICABILITY OF THE RELATED PARTY RULE IN THE
     LIHPHRA PROCESS
 
Relevance of Point in Time.  In determining whether a super
priority, priority or qualified purchaser is a related party to
the seller, the point in time at which the parties divested their
mutual interests is essential.  This point of reference is very
useful in cases where the purchaser and the seller were once
related parties and now assert they are no longer related
parties.  There has been some confusion among owners and
prospective purchasers of Preservation-eligible projects and
field offices regarding the point in time related parties must
have divested their mutual interest.  As a result, the guidance
provided below shall be used in making the determination whether
purchasers are qualified to purchase a Preservation-eligible
project.
 
Purchaser's Responsibility.  24 CFR Section 248.157(e)(1)
requires a purchaser to submit to HUD, "a statement identifying
the priority purchaser as a State or local government agency, a
nonprofit organization or a resident council."    This statement
is required to accompany the purchaser's Expression of Interest
(EOI).
 
     To make such a statement, the purchaser must assess its
     status pursuant to the definition of a priority purchaser
     which states, in part, "an entity that is not a related
     party to the owner  . . ." and should describe any current
     or past affiliations it has or may have had with the owner.
 
HUD's Responsibility.  24 CFR Section 248.157(f) of the
regulations requires the Department to establish the priority
status of purchasers within 30 days of the submission of the EOI.
Specifically, HUD must advise the purchaser as to whether it
qualifies as a resident council, community-based nonprofit
organization or State or local government and in so doing, must
assess whether or not the purchaser and owner are related
parties.
 
What happens if the determination was not made at the EOI stage.
It has come to our attention that some purchasers have failed to
submit the required information regarding their priority status
and or that Field Offices have not been reviewing purchasers'
status to determine whether they are eligible purchasers under
the related party rule.
 
     For such transactions, where the determination of priority
     status was not made at the EOI stage, the Department hereby
     makes a finding, pursuant to 24 CFR Section 248.7, that good
     cause exists to waive 24 CFR Section 248.157(f) to the
     extent necessary to permit field offices to determine the
     purchaser's priority status at the submission of the Bona
     Fide Offer (BFO) stage for purchasers that have already
     submitted an EOI and the 30-day review process has elapsed.
     The waiver of Section 248.157(f) is necessary due to
     inconsistent application by field offices of the review
     process and to prevent inequitable treatment of program
     participants who, nevertheless, were approved to proceed to
     the BFO stage of the sales process.
 
Divestment.  To prevent program participants from being unfairly
penalized but to comply with the related party rule under Section
231(c) of LIHPRHA, the Department will permit purchasers who were
related parties to an owning entity, but who divested that
interest prior to the submission of the BFO, to continue with
processing for incentives.  Therefore, for purchasers who have
already submitted an EOI to the field office and the field office
has approved such purchasers to negotiate with owners for the
purchase of a Preservation-eligible project, the field office
should determine whether the seller and the purchaser divested
any mutual interest prior to the submission of the BFO by the
purchaser to the field office.  If the divestment did not occur
prior to the submission of the BFO, the purchaser is considered a
related party and does not qualify as a priority purchaser.
 
III. RULES FOR TRANSACTIONS WHERE EOI HAS NOT BEEN SUBMITTED OR
     HUD HAS NOT COMPLETED REVIEW OF THE EOI
 
On a going forward basis for transactions where the EOI has not
yet been submitted or HUD s review of the EOI has not yet been
completed, purchasers and field offices should follow the
provisions in Sections 248.157 (e) and (f) of the regulations.
 
At the time prospective purchasers submit an EOI, the field
office should, within 30 days from the submission, determine
whether the purchaser and the seller are related parties.  If the
parties are related, the purchaser does not qualify as a priority
purchaser.
 
     Questions regarding the foregoing may be directed to the
Preservation staff at 202-708-2300.