July 1, 1996
 
                                                PRESERVATION LETTER NO. 6
 
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:  Implementation of Housing Opportunity Program Extension
            Act of 1996, the Department of Veterans Affairs,
            Department of Housing and Urban Development
            and Independent Agencies Appropriations Act, 1996
 
     On April 26, 1996, the President signed the Department of
Veterans Affairs, Department of Housing and Urban Development and
Independent Agencies Appropriations Act, 1996.  The
Appropriations Act provides $624 million plus authority to use
interest reduction payment recaptures resulting from mortgage
prepayments or terminations, for preservation activities for
Fiscal Year (FY) 1996.  Program design requirements for the
FY 1996 preservation program were initially contained in the
Housing Opportunity Program Extension Act of 1996, which was
signed on March 28, 1996.  Now that full funding for the program
has been provided, we must move swiftly to implement the program
and provide the maximum time possible to tenants, owners,
purchasers and HUD to accomplish the processing necessary to
complete program activities before the end of the FY.  We will be
issuing guidance via a series of preservation letters and
questions and answers (Q's & A's).
 
     The attached Q's & A's, which include the Q's & A's from
Preservation Letter Nos. 2, 4, and 5, will provide guidance to
you as we continue implementation of the FY 1996 program.  Please
continue to fax your questions to the Preservation Branch at
(202) 708-1300.  Responses will be included in future
preservation letters.  If this line is busy, you may use
(202) 708-3104.
 
     You should share this information with program participants
(i.e., owners, housing consultants, tenant organizations,
nonprofit housing organizations, and mortgagees, etc.).  Any
questions relating to the Preservation program should be
addressed to Kerry Mulholland of the Preservation staff at
(202) 708-2300, and questions relating to Public Housing
certificates or vouchers should be addressed to Gerald Benoit at
(202 708-0477.
 
Attachment
                                        PRESERVATION LETTER NO. 6
 
                       Preservation Acronym Lexicon
 
 -  Designates a new Question and Answer
 
* -  Designates a Revision to an existing Question and Answer
 
AMB -   ASSET MANAGEMENT BRANCH.  Area within the HUD Field Office
        responsible for maintaining information on the physical,
        financial and other relevant information on the preservation
        project.
 
ELIHPA - EMERGENCY LOW INCOME HOUSING PRESERVATION ACT.  Title II
of the Housing and Community Development Act of 1987.  Designed
to prevent the loss of affordable housing units.
 
EPE - EXTENSION PRESERVATION EQUITY.  Owner's equity from Form
HUD 9607, adjusted for principal repayment and reasonable value
fluctuations for condition since the issuance of the form.
Calculated as Extension Pres. Value (Highest and Best Use)
 
EXTENSION ACT - Housing Opportunity Program Extension Act of
1996.
 
FH&EO - Fair Housing and Equal Opportunity.  The area in HUD
responsible for determining whether there are any findings of
noncompliance with the Fair Housing Act, Title VI of the Civil
Rights Act of 1964, Exec. Order 11063, Sec. 504 of the
Rehabilitation Act of 1974.
 
FMR - FAIR MARKET RENT.  Calculated rental rate determined by the
Secretary for use in facilitating Section 8 rental payments and
ceilings.
 
LIHTC - LOW INCOME HOUSING TAX CREDITS.  Form of assistance used
by some deals to attract investors into an affordable housing
deal.  Generally discouraged in Preservation deals.
 
LOCCS - LINE OF CREDIT CONTROL SYSTEM  (See VRS).  Automated
accounting system used by HUD to distribute on-going grant fund
disbursements, i.e., rehabilitation funds, oversight costs, and
approved consultant fees.
 
MCE - MORTGAGE CREDIT EXAMINER.  This HUD Staff person is
responsible for reporting on the project's financial requirements
as well as the credit capacity of the mortgagor, its principals
and the general contractor if any.  Additionally, the MCE sets
the bonding requirement and the mortgage amount.
 
NOI - NOTICE OF INTENT FORM HUD-9608.  Sent by owner to HUD and
other required entities to let them know the owner(s) are
interested in participating in the preservation process under
either Title II or Title VI.
 
                                        PRESERVATION LETTER NO. 6
 
OCAF - OPERATING COST ADJUSTMENT FACTOR.  Factor applied only to
operating expense items to insure adequate coverage for
inflationary conditions adjusted for vacancy, management fees,
and, in case of priority purchaser, oversight costs.
 
OPH - Office of Public Housing located in the State or Area HUD
Office.
 
PC - PRESERVATION COORDINATOR.  Staff person(s) in each
processing Office designated as the point of contact for all
preservation related processing and information for a given
office.
 
PCNA - PRESERVATION CAPITAL NEEDS ASSESSMENT.  Report which was
made during the pre-appraisal processing stage to identify the
condition of the property, and estimate the cost associated with
the needed repairs.
 
PIH - Office of Public and Indian Housing located in
Headquarters.
 
PHA - The local Public Housing Authority or the State Housing
Authority
 
POA - PLAN OF ACTION.  Documentation submitted by Purchaser and
Owner that details how the affordable restrictions will be
maintained in the project, as well as how grant funds will be
allocated.
 
PPR - PRESERVATION PROJECT RENT.  The Preservation Project Rent
has two components, the GRP (Gross Rent Potential) which is all
expected rental income  from units and other operations, plus all
approved tenant utility allowances.
 
RIS - RESIDENT INITIATIVES SPECIALIST.  Staff person in select
Offices who has the responsibility of maintaining relationships
with nonprofit entities throughout the field office's
jurisdiction.
TPA - TRANSFER OF PHYSICAL ASSETS (PACKAGE).  The documentation
needed to be submitted to HUD to allow for a change in ownership
under the Low Income Housing Preservation and Resident
Homeownership Act.
 
TPE - TRANSFER PRESERVATION EQUITY.  Owner equity from Form HUD
9607 adjusted for principal repayment since issuance and changes
in value due to condition since issuance of the 9607.  Calculated
by taking Transfer Preservation Equity value less outstanding
balance of federally assisted mortgage(s) for the project.
 
                                        PRESERVATION LETTER NO. 6
 
TPV - TRANSFER PRESERVATION VALUE.  Value established and
reported on FORM HUD-9607, which represents the Fair Market Value
based on its highest and best use.
 
VRS - VOICE RESPONSE SYSTEM (See LOCCS).  The voice activated
automated system used by HUD for requesting and disbursing
approved and allocated grant funds.
 
NOTE:     Termination of mortgage insurance is requested by the
          mortgagee to HUD, at the request of the owner.
 
          Prepayment and termination of mortgage insurance is
          used interchangeably in the statute.  Whenever either
          of these terms is used, it shall mean both.
 
               IMPLEMENTATION OF HOUSING OPPORTUNITY PROGRAM
 
                           EXTENSION ACT OF 1996
 
                    PRESERVATION QUESTIONS AND ANSWERS
 
I.   TENANT PROTECTIONS
 
*    Q1.  What are tenants' rights when an owner prepays/
          terminates mortgage insurance?
 
     A1.  a.   Owner cannot raise rents for 60 days from date of
               prepayment.
 
          b.   An unassisted low- or very low-income family
               residing in the project may be eligible for a
               Preservation Section 8 certificate or voucher.
               (See Q2 and A2 below.)
 
          c.   A tenant living in a Section 8 project-based
               assisted unit under an existing Housing Assistance
               Payments (HAP) contract may continue to reside in
               the project until the contract expires.  The
               tenants may receive a Section 8 certificate or
               voucher when the HAP contract expires, subject to
               the availability of funds, and the tenant's
               eligibility.
 
          d.   Tenants in low-vacancy areas and special needs
               tenants are addressed in Q's and A's 3, 4, and 5
               below.
 
          e.   Owners' responsibilities relative to relocation
               expenses are addressed in Q14 and A14 below.
 
          f.   Owners must provide tenants and HUD with 1 year's
               written notification of termination or expiration
               of Section 8 project-based assistance.  Prepayment
               of the mortgage or termination of the mortgage
               insurance contract does not release the owner from
               the statutory duty.  See Section 8(c) of the U. S.
               Housing Act of 1937 (42 U.S.C. Section 1437f) .
 
*    Q2.  How do unassisted low- and very low-income tenants
          qualify for Preservation Section 8 certificates or
          vouchers?
 
     A2.  The Balanced Budget Down Payment Act, II states:
 
          a.   Notwithstanding any other provision of law,
               subject to the availability of appropriated funds,
               each unassisted low-income family residing in the
               housing on the date of prepayment or voluntary
               termination whose rent, as a result of an increase
               occurring no later than 1 year after the date of
               the prepayment, exceeds 30 percent of adjusted
               income, shall be offered tenant-based assistance
               in accordance with Section 8 . . . under which the
               family shall pay no less for rent than it paid on
               such date . . . . Any family receiving tenant-
               based assistance . . . may elect:
 
               1.   to remain in the unit of housing and if
                    the rent exceeds the Fair Market Rent (FMR)
                    or payment standard, as applicable, the rent
                    shall be deemed to be the applicable
                    standard, so long as the administering PHA
                    finds that the rent is reasonable . . . or
 
               2.   to move from the housing and the rent will be
                    subject to the FMR or payment standard, as
                    applicable, under existing program rules and
                    procedures.
 
          b.   There are three events that must occur before
               Section 8 tenant-based assistance can be provided:
 
               1.   Tenant must qualify;
 
               2.   The owner of the preservation eligible
                    project must either prepay its mortgage or
                    terminate the mortgage insurance contract;
                    and
 
               3.   The owner must raise rents on the unassisted
                    units in the project at some point during a
                    1-year period after prepayment or termination
                    of the mortgage insurance contract, and the
                    rent of the low-income or very low-income
                    family which was residing in the project on
                    the date of prepayment or voluntary
                    termination (and that is to be provided
                    Section 8 tenant-based assistance) exceeds 30
                    percent of the family's adjusted income.
                    However, no family shall pay less for rent
                    then it paid on the date of prepayment or
                    termination of the mortgage insurance.
 
     Q3.  What is a low-vacancy area?
 
     A3.  A low-vacancy area is defined as a Metropolitan
          Statistical Area (as defined by Office of Management
          and Budget) with a rental vacancy rate of 3 percent or
          less.  If there are questions whether the current
          vacancy rate is 3 percent or less, the Preservation
          Coordinator should request a determination from the
          Economic and Market Analysis Section as to the current
          rental vacancy rate.
 
*    Q4.  Who are special needs tenants?
 
     A4.  Special needs tenants include those elderly persons [62
          years of age or older], elderly families, or families
          that include disabled persons.  Special needs tenants
          also means large families of five or more persons
          requiring units with three or more bedrooms.  Special
          needs tenants may be either moderate-income or low- or
          very low-income.
 
*    Q5.  What are the rights of tenants in a low-vacancy area
          and/or special needs tenants?
 
     A5.  Section 223(c) of LIHPRHA requires that each owner that
          prepays/terminates mortgage insurance on eligible low-
          income housing in a low-vacancy area or eligible low-
          income housing that contains special needs families
          shall allow the families occupying units on the date of
          submission of the initial notice of intent to remain in
          the housing for a 3-year period at rent levels existing
          at the time of prepayment [except for increases
          necessary for increased operating costs].
 
          Section 223(c) applies to the following classes of
          tenants provided they were residing in the project on
          the date the owner submitted the first Notice of
          Intent.
 
          a.   Moderate-income and market rate special needs
               tenants.
 
          b.   Moderate-income and market rate tenants in low-
               vacancy areas.
 
          c.   Unassisted low- and very low-income tenants whose
               rents are not raised during the first year
               following prepayment of the mortgage or
               termination of the mortgage insurance contract and
               who live in a low-vacancy area.
 
          d.   Unassisted low- and very low-income tenants whose
               rents are not raised during the first year
               following prepayment of the mortgage or
               termination of the mortgage insurance contract and
               who are special needs tenants.
 
    Q6.  Section 223(c) protects certain tenants residing in the
          project on the date the owner submitted the first NOI.
          What happens where an owner prepays without ever filing
          an NOI?
 
     A6.  Where an owner never filed an NOI, use the mortgage
          prepayment date or the insurance termination date.
 
*    Q7.  Since Section 223 is only found in LIHPRHA, does it
          also apply to Title II projects?
 
     A7.  No.  Section 223 is not applicable to Title II
          projects.
 
    Q8.  What happens if the owner chooses to convert his/her
          rental project to condominium?
 
     A8.  If an owner chooses to convert his/her project to a
          condo, he/she may meet the requirements of Section
          223(c) by providing such assistance necessary for the
          tenant to rent a decent, safe, and sanitary unit in
          another project for the same period and at a rental
          cost to the tenant not in excess of the rental amount
          the tenant would have been required to pay in the
          housing of the owner, except that the tenant must
          freely agree to waive the right to occupy the unit in
          the owner's housing.
 
    Q9.  Will HUD provide the Public Housing Authority/State
          Agency (PHA) enough funds for Preservation Section 8
          certificates or vouchers, to cover eligible unassisted
          families as their leases expire?
 
     A9.  Yes.  HUD's number one priority in the Preservation
          program is to ensure that tenants are protected when an
          owner prepays the mortgage or terminates the mortgage
          insurance contract, and, within 1 year following
          prepayment or termination, raises the rent.  To date,
          based on current needs' estimates, the Office of
          Housing has provided $10 million of "Preservation
          dollars" to the Office of Public Housing for
          distribution to PHA for Preservation Section 8
          certificates or vouchers for unassisted low- and very
          low-income families residing in the project
          when the prepayment or termination occurred.
          Additional funding will be provided as needed for
          tenant protections subject to availability of funding.
 
    Q10. How will the issuance of Preservation Section 8 rental
          vouchers or certificates be handled?
 
     A10. The Preservation Coordinator (PC) and the Office of
          Public Housing (OPH) in the local HUD State/Area Office
          will coordinate funding vouchers or certificates.  See
          Section IV Funding of this document.
 
    Q11. If a family already has a voucher or certificate and
          moves, does the voucher or certificate go with family
          or does PHA recapture and use money for other
          certificates or vouchers?
 
     A11. A family retains the voucher or certificate and
          complies with the regular program rules.
 
    Q12. If an owner prepays its mortgage on a project with
          project-based Section 8 assistance and, thereafter,
          fails to properly maintain Section 8 units, will there
          be a process for securing Housing Section 8
          certificates or vouchers for the tenants?
 
     A12. Yes.  HUD employs the contract administrator to
          administer the HAP contract.  The contract
          administrator performs HQS inspections.  HUD monitors
          the contract administrator's performance.  The contract
          administrator will perform compliance (monitoring)
          responsibilities of the owner and make recommendations
          to HUD concerning enforcement of the HAP contract.
          Before the contract administrator makes its
          recommendation to HUD, the owner would be put on
          notice, he/she would be required to produce a
          corrective plan and be monitored by the contract
          administrator accordingly.  If he/she fails
          and/or does not comply, Asset Management may terminate
          a Section 8 HAP contract and have the undisbursed
          budget authority transferred to the rental certificate
          or voucher program.
 
    Q13.  If an owner prepays or terminates mortgage insurance
          contract, is he/she required to accept Section 8
          certificates/vouchers, etc., for assisted tenants?
 
     A13. Yes, but only for Title VI projects, except as provided
          in Q & A#8.  Pursuant to Section 223(d) of LIHPRHA, an
          owner who prepays the mortgage/terminates the mortgage
          insurance contract on eligible low-income housing and
          maintains the housing for residential rental occupancy
          may not refuse to rent, refuse to negotiate for the
          rental of, or otherwise make unavailable or deny the
          rent of a dwelling unit in such property to any person,
          or discriminate against any person in the terms,
          conditions, or privileges of rental of a dwelling (or
          in the provision of services or facilities) because the
          person receives assistance under Section 8.
 
    Q14. What will be the payment standard/FMR for previously
          unassisted families that wish to stay in the project?
 
     A14. If the family chooses to stay in the project, the
          Preservation Section 8 certificate/voucher payment
          standard is the actual gross rent for the unit
          resulting from the rent increase, provided the rent for
          the unit is determined reasonable by the Housing
          Authority.  If the rent for the unit is not reasonable,
          as determined by the Housing Authority, the family may
          either move and receive the Section 8 tenant-based
          assistance or elect to stay in the unit, receive the
          tenant based assistance and pay the difference between
          the normal payment standard or certificate FMR/voucher
          exception rent limit and the actual gross rent for the
          unit.
 
          If the family chooses to move from the housing, the
          Preservation Section 8 Certificate or Voucher payment
          will revert to the PHA's normal payment standard or
          certificate FMR/voucher exception rent limit.
 
*    Q15. Will relocation expenses be provided for tenants?
 
     A15. The owner of a preservation eligible project who
          prepays or terminates the mortgage insurance contract
          resulting in displacement is required by 24 CFR
          248.165(d) to pay 50 percent of the actual, reasonable
          moving expenses of each market rate, moderate-, low-
          and very low-income family which is relocated.
 
          The owner is only required to pay for moving expenses
          to a unit in the area where the project from which the
          displaced family is located.
 
     Q16. Will LMSA contracts be terminated upon prepayment or
          allowed to go to the end of their current terms?
 
     A16. HUD will not terminate existing LMSA contracts.  The
          tenant contribution for a Section 8 assisted unit
          within a project that prepays or terminates the
          mortgage insurance contract will not be affected.  When
          the LMSA contract expires, the tenants residing in the
          assisted units may receive a Section 8 certificate or
          voucher, subject to the availability of funds and their
          eligibility.  The Department's policy on Section 8
          contract renewals is found in Asset Management's Notice
          H-96-7.
 
II.  PREPAYMENTS
 
*    Q1.  Who is eligible to prepay?
 
     A1.  The Extension Act and the FY 1996 Appropriations Act,
          reinstated the rights of all Preservation eligible
          owners to prepay their mortgages or terminate the
          mortgage insurance, if they are otherwise eligible to
          prepay the mortgage by the terms of the mortgage and
          the regulations under which the mortgage was insured
          (i.e., a limited dividend mortgagor at the 20th year).
 
          Note:     A mortgagor between the 18th and 20th year is
                    not eligible to prepay until the 20th
                    anniversary from final endorsement.
 
                    In addition, an owner with legally binding
                    financial assistance contracts, e.g.,
                    flexible subsidy, etc., in effect which would
                    render the property ineligible for
                    Preservation incentives also renders the
                    property ineligible to prepay.  At the time
                    the owner requested and accepted certain
                    funds from the Department, he/she signed a
                    binding contract which contained a lock-in
                    for the remaining term of the mortgage.
 
    Q2.  Will prepaid Preservation eligible projects be eligible
          for mortgage insurance under Sections 223(f) and 221(d)
          substantial rehabilitation loans under the National
          Housing Act?
 
     A2.  Yes.  Depending on the condition of the property,
          the owner's mortgagee may apply for mortgage
          insurance under either the Section 221(d) substantial
          rehabilitation program or the Section 223(f) purchase
          or refinancing program.
 
*    Q3.  Must an owner request HUD approval prior to prepayment
          or termination?
 
     A3.  No.  However, restoration of an owner's right to prepay
          does not eliminate the need for HUD notification of the
          owner's intent or the need for HUD review.  As part of
          its normal prepayment/mortgage termination procedure,
          HUD must assure that it will be made whole in the event
          that the mortgage is in default or HUD-held.  Further,
          under the Extension Act and the FY 1996 Appropriations
          Act, the Department is required to offer protections to
          tenants who may be displaced due to prepayments or
          mortgage insurance terminations.
 
          In order to comply with HUD's statutory mandate, the
          Department needs the full cooperation of the owners as
          early as possible in the process and will request that
          owners provide HUD with tenant protection information
          requested in A9 below within 30 days of identifying
          tenants for displacement.  HUD will use this
          notification period, in cooperation with the owners, to
          ensure that actions relative to tenant protections, are
          implemented.
 
          In addition, if there is a Section 8 project-based
          assistance contract that will expire in one year, an
          owner must provide tenants and HUD with 1 year's
          written notification of termination or expiration of
          Section 8 project-based assistance.  Prepayment of the
          mortgage or termination of the mortgage insurance
          contract does not release the owner from the statutory
          duty.  (See Section 8(c)(9) of the U. S. Housing Act of
          1937 (42 U.S.C. Section 1437f.)
 
    Q4.  A voucher/certificate given in connection with the
          Preservation program is for a 1-year period.  What
          should the owner tell his/her tenants will happen at
          the end of the 12-month period?  Will tenants receive
          certificates or vouchers?
 
     A4.  Tenants will be offered certificates and vouchers,
          subject to the availability of renewal funding.
 
*    Q5.  What is the process by which a Preservation eligible
          owner notifies affected parties of its intention to
          prepay or seek termination of mortgage insurance?
 
     A5.  The owner should submit the various components of a
          prepayment notification simultaneously to the
          mortgagee, State or local government agencies, and
          tenants.
 
          a.   Provide the mortgagee with a certification that
               there are no legally binding contracts in effect
               which would render the property Preservation
               ineligible for prepayment.  The certification will
               contain the following warning:  HUD will prosecute
               false claims and statements.  Convictions may
               result in criminal and/or civil penalties.  (18
               U.S.C. 1001, 1010, and 1012; and 31 U.S.C. 3729,
               and 3802)
 
          b.   The owner also provides HUD with tenant protection
               information within 30 days of identifying tenants
               for displacement.  The State or local government
               notification should be submitted to the Chief
               Executive Officer of the same agency that received
               the Notice of Intent (NOI).
 
          c.   To assure tenant protections, the Field Office
               must have all the tenant information required of
               an owner intending to prepay, including a
               certification that all tenants have been properly
               notified before granting prepayment approval.
 
          d.   The mortgagee will submit the official Form HUD-
               9807, Request for Termination of Multifamily
               Mortgage Insurance to the Mortgage Insurance
               Accounting Staff as required by current
               instructions.
 
*    Q6.  Did the Extension Act or the FY 1996 Appropriations Act
          change the time frames (6 months, 9 months or 15 months
          after Plan of Action (POA) approval) for prepayment
          contained in Section 224(a) of LIHPRHA and, if so, what
          are the changes?
 
     A6.  Yes.  The time frames are eliminated.  Prepayment of
          the mortgage for any eligible project can take place
          with the requisite notice as detailed in response,
          Section III, A1 below.
 
          In addition, the owner must certify that he/she will
          not raise rents for 60 days after prepayment.  This is
          an important requirement because it will allow eligible
          families to apply to the PHA for tenant-based rental
          assistance so that the rental assistance can be
          available when any resulting rent increase becomes
          effective or the tenant can find other suitable
          housing.
 
*    Q7.  Can an owner prepay if he/she is in the processing
          pipeline, processed and in the funding queue, or
          approved and closed on the loan/grant?
 
     A7.  Yes.  The Extension Act and the FY 1996 Appropriations
          Act restored the owner's prepayment right on all
          Preservation eligible low-income housing. (Section II
          Q1 above). However, for approved and closed projects,
          while an owner may prepay the mortgage, the project
          shall continue to be governed by the Use Agreement
          resulting from acceptance of preservation incentives.
          If HUD is no longer able to provide the original
          incentives approved in the POA or a revised package of
          incentives, the owner may request release from Use
          Agreement from the local HUD State/Area Office.
 
*    Q8.  What are the steps to process a prepayment or
          termination of mortgage insurance?
 
     A8.  A contract of mortgage insurance may be terminated
          either by prepayment in full of the insured mortgage or
          by acceptance of a request for voluntary termination of
          the mortgage insurance contract made jointly by the
          mortgagor and mortgagee.  The owner is requested to
          provide tenant protection information to the local HUD
          AMB within 30 days of identifying tenants for
          displacement.
 
          a.   The mortgagor notifies the mortgagee, consistent
               with the terms and conditions of the mortgage,
               that the mortgagor wishes to prepay the mortgage
               in full or desires the mortgagee to seek voluntary
               termination of the insurance.
 
          b.   The owner gives the PC in the HUD State/Area
               Office:
 
               1.   A certification that tenant notification has
                    occurred using Appendix 10-1 of HUD Handbook
                    4350.6.  The certification must indicate that
                    the owner posted a copy of the notice in each
                    building and gave each tenant a copy of the
                    notice.
 
          NOTE:     Appendix 10-1 is being revised and will be
                    distributed in the very near future.
 
               2.   Tenant information required by 24 CFR
                    248.165(b).  See Section III.
 
               3.   A certification that all of the information
                    submitted to AMB relating to tenants' status
                    was accurate and correct.
 
          c.   The PC, working with the RIS will:
 
               1.   Check for accuracy and completeness of the
                    list submitted by the owner which identifies
                    the tenants expected to need assistance.
 
               2.   Request the OPH to contact the PHA to let
                    them know about the particular project and
                    find out if the PHA is willing to administer
                    Preservation Section 8 certificates or
                    vouchers for tenants.
 
               3.   Assure that the owner notified each tenant by
                    a letter in the form discussed in b.1. above
                    which described to tenants their rights and
                    protection.
 
          d.   The Office of Housing is working with the PIH to
               assure the availability of Preservation Section 8
               certificates or vouchers in a timely manner.
 
    Q9.  Will HUD issue a letter to a mortgagee that is refusing
          to accept an owner's prepayment without first receiving
          HUD's written permission?
 
     A9.  If the mortgagee requests a letter, HUD State/Area
          Office will send a letter to the mortgagee advising
          that the owner of a Preservation eligible project has a
          right to prepay the mortgage or terminate the mortgage
          insurance contract.  You may use the following in
          response to any prepayment/termination request:
 
          "This is to inform you that the owners of (Insert
          Project Name), FHA Project No.           , Mortgagee's
          Loan No.           (if available) have a Preservation
          eligible project.  (Insert mortgagee name) can proceed
          to accept the prepayment in accordance with the
          notification requirements in the Mortgage and Note."
 
          NOTE:     The HUD State/Area Office should issue this
                    type letter to the mortgagee until such time
                    as new Mortgagee Letter is issued.  A copy of
                    this letter should be sent to Ed Warzel,
                    MIAS, Room 6249, Headquarters Building.
 
*    Q10. The Extension Act and the FY 1996 Appropriations Act
          state that the Secretary may determine priorities for
          distributing available funds including giving priority
          funding to tenants displaced due to mortgage
          prepayment.  It is silent as to priority funding to
          tenants displaced due to voluntary termination of the
          mortgage insurance contract.  Does this class of
          tenants receive priority?
 
     A10. The legislation discusses prepayment and mortgage
          termination interchangeably when tenant protections are
          discussed.  Therefore, the authorizing language permits
          the Secretary to determine priorities for distributing
          available funds, including giving priority funding to
          tenants displaced by mortgage prepayment or by
          termination of the mortgage insurance contract.
 
*    Q11. The Extension Act and the FY 1996 Appropriations Act
          provide that an owner of eligible low-income housing
          may prepay the mortgage or request voluntary
          termination of the mortgage insurance contract, so long
          as the owner agrees not to raise rents for 60 days
          after prepayment.  Does this mean that in the case of
          termination of the mortgage insurance contract, the
          owner could immediately raise rents?
 
     A11. No.  The legislation discusses prepayment and mortgage
          termination interchangeably when tenant protections are
          discussed.  Therefore, the owner must agree not to
          raise rents for 60 days after termination of the
          mortgage insurance contract.
 
*    Q12. Is an owner who prepays the mortgage or terminates the
          mortgage insurance contract required to accept tenants
          with Section 8 assistance?
 
     A12. Yes, if the project is Title VI, but not if the project
          is Title II.  Any owner who prepays the mortgage or
          terminates the mortgage insurance contract on eligible
          low-income housing and maintains the project for
          residential rental occupancy may not refuse to rent,
          refuse to negotiate for the rental of, or otherwise
          make unavailable or deny the rental of a dwelling unit
          in such project to any person, or discriminate against
          any person in the terms, conditions, or privileges or
          rental of a unit, or in the provision of services or
          facilities in connection therewith, because the person
          receives assistance under the Section 8 Certificate or
          Voucher Program.
 
    Q13. In the past, we have approved POA's contingent upon
          processing and approval of the TPA.  Can we continue to
          do this?
 
     A13. Yes.  You may continue this procedure so long as there
          is final approval of TPA when the Regulatory Agreement
          is modified, the Use Agreement is executed, and actual
          closing takes place.
 
III. TENANT INFORMATION REQUIRED OF AN OWNER WISHING TO PREPAY OR
     TERMINATE THE MORTGAGE INSURANCE CONTRACT
 
*    Q1.  What tenant protection information is the owner
          required to submit to HUD?
 
     A1.  In accordance with 24 CFR 248.165(b) the owner must
          provide the State/Area HUD Office with the following
          information:
 
          a.   Project Name and Number.
 
          b.   Complete tenant profile.  Follow outstanding
               instructions found in Paragraph 10-3.A.4 of HUD
               Handbook 4350.6 except that subparagraph e. should
               refer to low-income tenants as well as very low.
 
          c.   Average monthly adjusted income or average monthly
               total tenant payment of families living in the
               development by family size (use Form HUD-50059 for
               unassisted units).
 
          d.   Copies of current Form HUD-50059 for families
               receiving Section 8 assistance and for unassisted
               families.
 
               Also, certifications from residents stating if
               there have been any changes in income since the
               last annual  recertification.
 
          e.   Expiration date of each Lease at the project.
 
          f.   Rent Information -- does owner intend to increase
               the rents?  If known, what is the timing of the
               increase and the amount of such increase?
 
          g.   Tenant information:
 
               --   Name and address of each tenant, the number
                    of residents for which assistance is being
                    requested.
 
               --   Current family size.
 
               --   The unit/bedroom size the tenant is currently
                    dwelling in; the number of resident families
                    that are low- and very low-income and needing
                    assistance by bedroom size.
 
               --   Average monthly total tenant payment by
                    bedroom size.
 
               --   Identify each low- and very low-income tenant
                    and each special needs tenant not receiving
                    Section 8.
 
               --   Identify in low-vacancy areas, moderate
                    income tenants.
 
               --   Individual income verification consent forms,
                    to verify relevant information in determining
                    tenant's eligibility and level of benefits.
                    For a list of the forms, refer to Handbook
                    4350.3, Chg. 26.
 
               --   Expiration date of each apartment lease.
 
          EXCEPTION:     The owner of a project that is currently
                         100 percent Section 8 assisted does not
                         have to comply with the reporting
                         requirements above.
 
    Q2.  Is the staff required to obtain a written certification
          of income change from all families?
 
     A2.  If the project is currently 100 percent Section 8, no
          family information is required.  Obtain written
          certification of income change only if the changes
          occurred since the last annual recertification.
          Otherwise, use the current Form of HUD-50059 that is on
          file.
IV.  FUNDING OF PRESERVATION SECTION 8 CERTIFICATES OR VOUCHERS
 
    Q1.  What is the process for getting funds to the PHA from
          PIH?
 
     A1.  Headquarters' Office of Housing has transferred to PIH
          $10 million to draw upon.  We will transfer additional
          funds on an as needed basis.
 
    Q2.  How will the Preservation Section 8 certificate or
          voucher funds be earmarked for the Preservation Program
          once the Office of Public and Indian Housing (PIH)
          receives them?
 
     A2.  Headquarters' PIH will allocate to the appropriate HUD
          State/Area Office sufficient funds to cover an
          estimated subsidy for the unassisted families in the
          prepaid project.  The Preservation monitoring function
          is handled as follows:
 
          o    PIH will provide a "partial allotment" for an
               agreed-upon percentage of the total number of
               potential units for which assistance could be
               needed.
 
          o    At any time during the year, when the initial
               advance is liquidated, PIH will provide additional
               budget authority as needed.
 
    Q3.  What are the funding procedures?
 
     A3.  Once all prepayment information is received, reviewed
          and approved by the HUD State/Area Office of Housing,
          the following events must occur.
 
          a.   Headquarters Office of Housing transferred $10M to
               PIH for Preservation Section 8 rental certificates
               or vouchers.  Housing Headquarters will notify PIH
               Headquarters of need.  PIH will suballocate to
               Office of Public Housing in the field.
 
          b.   The State/Area OPH will enter into an "open"
               Annual Contributions Contract (ACC) with the PHA
               as soon as Housing has notice of prepayment.  This
               ACC would be for "up to" the number of unassisted
               low- and very low-income families in the project
               who potentially could receive assistance if their
               rent increases within one (1) year after
               prepayment or termination of the mortgage
               insurance contract.
 
     A.   THE STATE/AREA OFFICE OF HOUSING NOTIFICATION TO OFFICE
          OF PUBLIC HOUSING
 
          Step 1.   The State/Area Preservation Coordinator
                    notifies the Public Housing Office Director
                    that a project is prepaying and provides OPH
                    with the following information:
 
                    a.   Project Name, Number and address
 
                    b.   Number of rental vouchers or
                         certificates required by bedroom size
                         (number of unassisted residents and
                         residents eligible to receive
                         Preservation Section 8 assistance)
 
                    c.   Average monthly total tenant payment
                         (contribution) of the families living in
                         the development, by bedroom size {use
                         Form HUD-50059}.
 
                    d.   Average monthly adjusted income of the
                         families living in the development by
                         bedroom size.  Use Form HUD 50058.
 
                    e.   Expiration date of the lease for each
                         low- and very low-income unassisted
                         family in the property.
 
                    f.   The rent to be collected by the owner
                         after the rent increase by unit size.
 
     B.   COORDINATION AMONG THE STATE/AREA OFFICES OF HOUSING
          AND PUBLIC HOUSING AND THE PUBLIC HOUSING
          AUTHORITY/STATE AGENCY
 
          OPH will proceed with the following steps:
 
          Step 2.   Determine the appropriate PHA to administer
                    Preservation Section 8 vouchers or
                    certificates.  The OPH Director makes final
                    selection.  The PHA should be currently
                    operating a Section 8 rental voucher/
                    certificate program without major problems.
 
                    After selecting the PHA to administer the
                    vouchers or certificates, the State/Area OPH
                    immediately:
 
                    a.   Notifies the owner and PHA that funds
                         are available, and notifies the PHA to
                         determine the bedroom mix for
                         Preservation Section 8 certificates or
                         vouchers given the PHA's Section 8
                         subsidy standards, and using the
                         information provided on unassisted
                         families.
 
                    b.   Submits the following to the
                         Preservation Coordinator:
 
                         1)   two separate prepayment funding
                              reservation work sheets for
                              unassisted low- and very-low income
                              tenants.  One work sheet should be
                              submitted for the total number of
                              unassisted households who plan to
                              remain in the project.  Another
                              work sheet is required for
                              unassisted households who plan to
                              relocate.
 
                         2)   The name of the PHA administering
                              the Preservation Section 8
                              Certificates or Vouchers.
 
                    c.   Receives an application package, Form
                         HUD-52515 for Preservation Rental
                         Certificates or Vouchers from the PHA.
 
                    d.   Processes the certificate or voucher
                         application package up to the steps of
                         preparing the application approval
                         letter.
 
     C.   HUD STATE/AREA OFFICE OF HOUSING/OFFICE OF PUBLIC
          HOUSING FUND REQUEST TO HEADQUARTERS HOUSING
 
          Step 3.   The Preservation Coordinator, in consultation
                    with OPH, completes and submits a request
                    memorandum for fund assignment to
                    Headquarters, Office of Multifamily Housing
                    Development, Existing Products and
                    Preservation Division, Attention:  Kerry J.
                    Mulholland, Room 6128.  Attach a prepayment
                    fund reservation work sheet for the rental
                    voucher and certificate program, and the
                    identity of the PHA administering the
                    assistance.
 
     D.   HEADQUARTERS MULTIFAMILY DEVELOPMENT REQUEST TO PIH
 
          Step 4.   The Existing Products and Preservation
                    Division will send the fund assignment
                    request for Preservation Section 8 rental
                    certificates or vouchers to Gerald J. Benoit,
                    Director, Operations Division, PHRO.
                    Operations Division will provide the actual
                    cost of the project specific subassignment,
                    as well as the Section 8 contract numbers.
 
          Step 5.   PIH ASSIGNMENT AND RESERVATION OF FUNDS
 
               1.   The PIH Budget Division will prepare a Form
                    HUD-185, Funds Assignment, assigning the
                    funds to the State or Area Office.  The
                    assignment will be entered into the Program
                    Accounting System (PAS) and will pass to
                    HUDCAPS through an interface.  Two working
                    days after entry in PAS, the fund assignment
                    will appear in HUDCAPS on the Assigned
                    Spending Control Table.
 
               2.   When the fund assignment appears on the
                    Assigned Spending Control Table in HUDCAPS,
                    the State or Area Office must reserve the
                    funds.  Follow instructions in the HUDCAPS
                    User Guide for creation and approval of a
                    reservation document.
 
               3.   Once the reservation document has been
                    approved in HUDCAPS, the State or Area Office
                    prepares the Annual Contributions Contract
                    (ACC), Funding Exhibits, and notification
                    letter to the Housing Authority.  All these
                    documents are then sent to the Housing
                    Authority.  The Housing Authority signs the
                    ACC and returns it to the State/Area OPH for
                    signature.
 
               4.   Upon receipt of the signed ACC from the
                    housing authority, the State/Area Office OPH
                    Director signs the ACC, and generates a
                    contract (CO) document in HUDCAPS.  When
                    appropriate, the CO document may be for less
                    than the full amount of the reservation.
                    However, the initial amount contracted shall
                    be no greater than 25 percent of the amount
                    reserved.
 
    Q4.  If a PHA is aware that a project is going to prepay,
          can it begin the Preservation Section 8 rental
          certificate/vouchers application process with the
          State/Area OPH, in advance of written prepayment
          notification to HUD?
 
     A4.  Yes, if the State/Area OPH has been keeping the PHA
          abreast of information about the project.  Once the
          owner submits a written notice to prepay or to
          terminate mortgage insurance, the application process
          should begin.  See A3. Step B of this section.
 
    Q5.  What is the term of the Preservation Section 8 rental
          certificates or vouchers?
 
     A5.  The initial term of the Preservation Section 8 rental
          certificate or voucher is 1 year.  After the initial
          year funding term, the tenant-based assistance will be
          renewed, subject to the availability of funds.
 
    Q6.  Can a tenant with existing tenant-based assistance
          (certificate for voucher) trade in its existing
          certificate or voucher for "Preservation Section 8
          certificate or voucher" since the permitted rent levels
          are different?  If not, will rent on the existing
          voucher or certificate be amended?
 
     A6.  The Preservation Section 8 certificate or voucher is
          only available to low- and very low-income tenants who
          are unassisted at the time of prepayment or mortgage
          termination.  Currently assisted tenants will continue
          to be assisted under the applicable program rules.
 
    Q7.  Since Sections 882.212 and 887.355 require the PHA to
          reexamine the family's income every 12 months, will
          that 12-month clock start at the time the PHA certifies
          the family?
 
     A7.  The clock will start at the time the PHA certifies the
          family.  PHAs must do recertification at time of
          admission to tenant-based program.  The Form HUD-50059
          from the owner will facilitate PHA recertification.
 
    Q8.  Will the PHA get the same/similar administrative fee
          for these units as for any others and will they get the
          preliminary fee?
 
     A8.  Yes.  PHA will earn the same ongoing fee (based on the
          2-BR FMR) and preliminary fee of $275 per unit and a
          hard-to-house fee of $45 per unit.
 
    Q9.  Will these units be counted toward the PHA's Family
          Self-Sufficiency minimum?
 
               A9.  Yes.
V.   TIME LINE AND TEMPORARY MORATORIUM
 
*    Q1.  What is the time line for processing under the Fiscal
          Year 1996 Preservation Program?
 
     A1.  1.   By April 15, 1996.
 
               Where an owner wants to sell but had not timely
               filed a second NOI prior to October 1, 1995,
               he/she must have done so by this date.
 
          2.   On or before August 15, 1996.  Available
               preservation funds will be distributed as follows:
               a.   Tenant protections, i.e., vouchers and
                    certificates, where needed when an owner
                    prepays or terminates mortgage insurance
                    contract.
 
               b.   Any sale to a priority purchaser with an
                    approved POA.  This includes:
 
                    1)   sale to a priority purchaser that was in
                         the funding queue on April 26, 1996;
 
                    2)   sales to priority purchasers in the
                         pipeline; and
 
                    3)   conversions to sales to priority
                         purchasers.
 
          3.   Between August 16, 1996 and September 15, 1996
               (inclusive).
 
               a.   If the Department determines that there are
                    insufficient funds available to meet all
                    demands for funding, funds will be
                    distributed as follows:
 
                    1)   Tenant protections, (i.e., vouchers and
                         certificates).
 
                    2)   In order of receipt of their approved
                         POA in Headquarters, projects falling
                         into any of the categories listed below:
 
                         a)   Sales to priority purchasers,
 
                         b)   Projects with approved POA that are
                              subject to a repayment or
                              settlement agreement that was
                              executed between the owner and the
                              Secretary before
                              September 1, 1995.
 
                         c)   Projects for which submissions were
                              delayed as a result of their
                              location in areas that were
                              designated as a Federal disaster
                              area in a Presidential Disaster
                              declaration.
 
                         d)   Projects whose processing was, in
                              fact, or in practical effect,
                              suspended, deferred, or interrupted
                              for a period of 9 months or
                              more because of differing
                              interpretations, by the Secretary
                              and an owner concerning the time of
                              the ability of an uninsured Section
                              236 property to prepay, or by the
                              Secretary and a State or local rent
                              regulatory agency, concerning the
                              effect of a presumptively
                              applicable State or local rent
                              control law or regulation on the
                              determination of preservation value
                              under Section 213 of LIHPRHA, as
                              amended, if the owner of such
                              project filed NOI to extend the
                              low-income affordability
                              restrictions of the housing, or
                              transfer to a qualified purchaser
                              who would extend such restrictions,
                              on or before November 1, 1993.
 
               b.   The Department may impose a temporary
                    moratorium on applications for preservation
                    incentives by potential recipients.  Based on
                    our current projection of funding
                    availability, as of August 16, 1996, the
                    Department will likely stop accepting new
                    initial NOI.
 
          4.   Between September 16, 1996 and September 30, 1996,
               (inclusive).*  If the Department determines that
               there are insufficient funds available to meet all
               demands for funding:
 
               a.   Funds will be set aside for tenant
                    protections, (i.e., vouchers and
                    certificates), and thereafter,
 
               b.   In order of receipt in Headquarters, any
                    project with an approved POA.  This would
                    include the funding of extension projects
                    based on their position in the funding queue,
                    as well as sales to other than priority
                    purchasers.  However, at this time, we do not
                    anticipate funding any extension or
                    nonpriority purchasers.
 
          5.   On October 1, 1996, the Department will likely
               suspend further processing of preservation
               applications which do not have approved POA.
 
          *    As stated, reassessments of the funds available
               will, at a minimum, be made at these times and
               such reassessments may result in a change to the
               funding order cited.  In any event, however,
               funding of tenant protections will remain the top
               priority.
 
*    Q2.  Does HUD have to wait until August 15, 1996, to impose
          a temporary moratorium on potential applications?
 
     A2.  Yes.  The Extension Act and the FY 1996 Appropriations
          Act provide that HUD cannot impose a moratorium on
          potential applications until August 15, 1996.
 
     Q3.  What is meant by "may impose a temporary moratorium on
          applications by potential recipients of such funding?"
          Does it mean that we will not accept new applications
          or that we can suspend processing applications we
          currently have?
 
     A3.  It means that we can refuse to accept any new NOI under
          either LIHPRHA or ELIHPA to extend the low-income
          affordability restrictions of the housing or to
          transfer the housing to a qualified purchaser.  HUD
          must continue to process pipeline projects until
          October 1, 1996.
 
*    Q4.  May State and Area Offices still issue conditionally
          approved POAs?
 
     A4.  Interim Notice H95-2-I expired on December 31, 1995 and
          with it expired Offices' ability to issue conditionally
          approved POAs.  Therefore, Field Offices must issue
          FULL approvals on any POA and include all requisite
          components such as Section 241(f) loan processing, TPA
          processing, etc.  The only acceptable condition in the
          approval is that the closing of the transaction is
          subject to the availability of funding.  Remember, the
          funding priorities still hold, so take care to issue
          the full approvals for projects in categories that can
          be funded using conditional commitment language
          provided for Section 241(f) commitments.
VI.  PRIORITY PURCHASERS
 
*    Q1.  What is a priority purchaser?
 
     A1.  A priority purchaser is any entity that is not a
          related party to the owner and that is either:
 
          A.   A resident council intending to purchase the
               project under Resident Homeownership Program which
               has met the requirement for tenant support
               representing 75 percent of the occupied units in
               the project and representing at least 50 percent
               of all the units in the project;
 
          B.   A resident council intending to purchase the
               project and retain it as rental housing, which has
               the support of a majority of the tenants;
 
          C.   A community-based nonprofit organization which has
               the support of a majority of the tenants; or
 
          D.   Any nonprofit organization or State or local
               agency that agrees to maintain low-income
               affordability restrictions for the remaining
               useful life of the housing.  A nonprofit
               organization or State or local agency that is
               affiliated with a for-profit entity for the
               purposes of purchasing a project under subpart B
               of 24 CFR 248 shall not be considered a priority
               purchaser.
 
    Q2.  Will HUD allow the formation of a Resident Council for
          the purposes of establishing a cooperative limited
          equity homeownership program to purchase a project?
 
     A2.  Yes.  The Extender Act nor the FY 1996 Appropriations
          Act did not prohibit the ability of the Resident
          Council from establishing a cooperative limited equity
          homeownership program. However, it will have to be
          established by October 1, 1996.
 
    Q3.  Who is eligible to purchase the property in the first 6
          months?
 
     A3.  The 6-month super priority purchaser marketing period
          no longer exists.  Any nonprofit organization or State
          or local agency that agrees to maintain low-income
          affordability restrictions for the remaining useful
          life of the housing may purchase the project.
 
          NOTE:     Preservation Letter No. 1 provided that
                    provided, in part, a waiver of 24 CFR
                    248.157(c) which unintentionally placed
                    tenant-endorsed sales at risk.  That letter
                    was issued on April 12, 1996.
 
          Preservation Letter No. 3 revised Letter No.1 to
          provide that an owner may sell his/her project to a
          qualified priority purchaser, provided such sale has
          the support of a majority of the tenants.  Such support
          must be evidenced before the POA will be approved.
 
          An owner who accepted a bona fide offer, as defined in
          24 CFR 248.101 from a qualified priority purchaser
          between April 12, 1996 and May 2, 1996, is governed by
          the waiver in Preservation Letter No. 1 and may proceed
          with the submission of the plan of action to the local
          HUD office.
 
          Where the bona fide offer was accepted between April 12
          and May 2, the owner and purchaser must certify that
          the bona fide offer was accepted between April 12 and
          May 2, 1996 (inclusive).  This certification will
          include the following Warning:  HUD will prosecute
          false claims and statements.  Conviction may result in
          criminal and/or civil penalties. (18 USC 1001, 1010,
          and 1012; and 31 USC 3729 and 3802).
 
    Q4.  Can a priority purchaser close without HUD's having
          approved the general contractor for repair or
          substantial rehabilitation work?
 
     A4.  A POA can be approved for a priority purchaser without
          an acceptable general contractor.  Further, you can
          close a Capital Grant involving repair/substantial
          rehabilitation and insure a Section 241(f) loan
          involving repairs.  However, no funds to cover
          repair/substantial rehabilitation will be disbursed
          until such time as a general contractor that is
          acceptable to Housing Production is hired by the
          priority purchaser.
 
          For a Section 241(f) loan involving substantial
          rehabilitation, Housing Production must approve the
          general contractor and the construction contract before
          initial endorsement of the loan.
 
          NOTE:     The priority purchaser runs the risk that
                    repair/substantial rehabilitation costs may
                    escalate when the general contractor is hired
                    after the project is funded.
 
     Q5.  What are project oversight costs?
 
     A5.  Project oversight costs fall into three categories.
 
          1.   Educational Oversight Costs:  These oversight
               costs are used for priority purchasers to gain the
               experience necessary to own and operate low-income
               multifamily housing.  Article VIII of the Capital
               Grant Agreement states that the Grantee may use
               any excess Grant Funds to pay for annual oversight
               costs.
 
          2.   Property Management Fee:  Asset management agent
               duties include protecting the physical security of
               the project, preserving the financial soundness of
               project mortgagors where financial conditions
               relate to the project operations, and assuring
               that the project's residents have affordable,
               well-maintained housing.  This fee is obtained
               from the project's budget each year.
 
          3.   Asset Management Project Oversight Costs:
               Section 307(b) of the 1992 Housing and Community
               Development Act added Oversight Costs as an
               acceptable Preservation project expense.
               These are costs that allow the nonprofit owner of
               the project to be paid for overseeing management
               of the asset and to pay for ownership type items
               not directly related to the project, e.g.,
               ownership financial statements, operational and
               directional well-being, etc.  These costs are
               separate from the property management fees
               associated with the project itself.
 
     Q6.  Will asset management oversight fee be allowed for
          priority purchasers?
 
     A6.  Yes, but the amount has not been determined.  Also,
          eligible items have not been established, but will be
          forthcoming in future guidance.  The Office of Asset
          Management has engaged a contractor to study the issue.
 
    Q7.  To be eligible for incentives, the preservation equity
          must equal the lesser of $5,000 per unit or $500,000
          per project or the equivalent of eight times the most
          recently published FMR for the area in which the
          project is located.  How will HUD assure compliance.
 
     A7.  1.   The PC will reissue Form HUD-9607, Calculation of
               Information to be Returned to Owner.  The PC
               adjusts the Preservation Equity for:
 
               a.   Principal payments made on the insured first
                    mortgage after the form was issued; and
 
               b.   Additional HUD approved debt incurred after
                    the 9607 was issued, if any, to be assumed by
                    the purchaser; and
 
               c.   Cost of completed required repairs as
                    approved by HUD.
 
          2.   In addition, the PC determines that the project
               falls into one of the following categories:
 
               a.   $5,000 per unit,
 
               b.   $500,000 per project; or
 
               c.   Eight times the local existing FMR for each
                    unit.
 
          If not, the 9607 will not be issued.  Instead, the
          owner will be notified that it is not eligible for
          incentives.
 
VII. CONVERSION FROM AN EXTENSION TO A SALE TRANSACTION
 
     Q1.  How do you establish the transfer preservation equity
          on Title II projects wishing to convert?
 
     A1.  To establish the transfer preservation equity, give the
          owner the option of:
 
          a.   Using the owner's equity derived from the owner's
               appraisal previously accepted by HUD.  You may
               adjust the owner's equity for:
 
               1.   Principal payments made on the insured
                    mortgage after the date of the appraisal; and
 
               2.   Additional HUD approved debt incurred after
                    the date of the appraisal, if any, to be
                    assumed by the purchaser; and
 
               3.   Cost of completed repairs as approved by HUD.
 
          b.   Having the owner and HUD obtain Title VI
               appraisals and following outstanding Title VI
               instructions.
 
    Q2.  Can a project that completed the Title II process and
          signed a use agreement file a second NOI to sell under
          Title VI?
 
     A2.  No.  The project has already received incentives under
          ELIHPA and is bound by a Use Agreement.  Already
          "preserved" projects may not receive additional
          Preservation funds.
 
     Q3.  Will PCNA upgrades be permitted for nonprofit
          purchasers?
 
     A3.  Yes, a priority purchaser may propose improvements to
          improve the economic life of the project and its
          livability for the tenants.
 
          Proposals to improve a property are required to contain
          a List of Proposed Improvements and estimated cost with
          the POA application.
 
          See Notice H95-14, Production Branch Instructions to
          Process Section 241(f) Loan Applications Pursuant to
          Title VI of the Low-Income Housing Preservation and
          Resident Homeownership Act of 1990, POA Stage.  These
          instructions also apply to Title II projects.
 
*    Q4.  If an extension transaction in the queue converts to a
          sale, does it keep its original place in the queue and
          get funded in that order?
 
     A4.  When an owner of an extension transaction with an
          approved POA converts to a sales transaction, the
          project is removed from the funding queue.  He/She will
          be funded in the order that the approved Plan of Action
          to transfer to a Priority Purchase is received in
          Headquarters.
 
          If, at some later date, the owner requests to switch
          back to an extension transaction, you may permit this
          switch after you review the original POA including the
          Section 241(f) loan commitment to assure the adequacy
          of the Section 8 incentives originally requested.  Once
          you complete the review, you must FAX a new funding
          request to Kerry J. Mulholland, Branch Chief A,
          Existing Products and Preservation, in Headquarters.
          The FAX number is (202) 708-1300.  The project will be
          placed in the funding queue based on the date the new
          funding request is received.
VIII. THE CAPITAL GRANT PROGRAM
 
    Q1.  Is the replacement reserve still included in the
          Capital Grant?
 
     A1.  Yes.  The initial deposit to the replacement reserve
          shortfall can be included in the Capital Grant.
 
    Q2.  Do we have to request credit reports on all board
          members of Nonprofit purchasers?
 
     A2.  No.  Mortgage Credit will order credit reports only on
          the operating officers of a nonprofit sponsor/
          mortgagor, i.e., typically the President, Vice
          President, Secretary and Treasurer.  HUD orders the
          credit reports in the Capital Grant program because
          there is no mortgagee.
 
          NOTE:     The Section 241(f) loan program, the
                    mortgagee supplies the required Credit
                    Reports
 
    Q3.  Are there any instructions to help owners and priority
          purchasers in submitting a POA for a sale with a
          capital grant vs. 241(f) loan?
 
     A3.  Instructions will be sent in a separate Preservation
          Letter.  We are preparing a Prepayment/Termination
          Check Lists that should assist in following the
          prepayment process.
 
IX.  FUNDING PRIORITY PURCHASER SALE PROJECTS.
 
     Nonconversion sales projects with approved POAs may now
     submit the necessary forms for Capital Grants or revised
     funding requests for the Section 241(f) program.  The
     Section 8 needed to support the Section 241(f) loan for a
     priority purchaser, will be capped at 100 percent of the
     FMR.
 
     The shortfall between loan proceeds and levels needed to
     complete the transactions will be made up by a "Carry
     Grant".  There will no longer be a separate equity or gap
     grant, they are now both part of the Carry Grant.
 
     Title II projects involving a sale to a priority purchaser
     may use the Capital Grant Program.
 
     Conversion sale projects must use the Capital Grant Program.
 
     Q1.  Can projects that are conversions from extension to
          sale, use a Section 241(f) loan or a Capital Grant to
          receive funds?
 
     A1.  Projects that are conversions from extension to sale
          are only allowed to receive a Capital Grant.  The
          determination that conversions to sales are not allowed
          to utilize a Section 241(f) loan is made as a matter of
          policy.  This method of funding reduces the exposure to
          the Mortgage Insurance Fund because there is no
          guarantee of future project-based Section 8 subsidies,
          which would be needed to amortize the Section 241(f)
          loan.
 
     Q2.  Will we still have Section 241(f) loans?
 
     A2.  While a Section 241(f) loan will still be an option for
          funding some Preservation projects, a Capital Grant is
          the preferred method of funding sales to priority
          purchasers because it is quicker and easier to process
          and does not expose the Mortgage Insurance Fund to
          potential losses if the Section 8 assistance is no
          longer available.
 
     Q3.  What are the similarities between a Section 241(f) loan
          and a Capital Grant?
 
     A3.  In both a Section 241(f) loan and a Capital Grant:
 
          a.   The owner receives his/her transfer preservation
               equity, and transaction costs to which he/she is
               entitled.  These amounts are no different if a
               Section 241(f) loan or a Capital Grant is used.
 
          b.   The purchaser receives the necessary funds to
               complete the Repairs or Substantial
               Rehabilitation, Repair/Substantial Rehab
               Contingency, Deposit to Reserve for Replacement
               Account (RRA), Neighborhood Networks including
               "for-profit owners", and the allowable Transaction
               Costs.
 
X.   APPRAISALS
 
     Q1.  What marks the beginning of the 30-month appraisal
          period?
 
     A1.  HUD's practice is to start the 30-month clock with the
          issuance of the 9607.  However, 24 CFR 248.111(k)
          states that an appraisal cannot be more than 30 months
          old, unless the failure of the Commissioner to approve
          the POA within the 30-month period was due to
          circumstances beyond the control of the owner.  If the
          owner feels the delay has hurt his/her financial
          position, he/she may pursue the options listed in Q2
          and A2 below.
 
     Q2.  Will HUD require/permit reappraisal of preservation
          projects where the appraisal is or will be more than 30
          months old before the POA approval is issued?
 
     A2.  Yes.  The owner has several options:
 
          a.   HUD and the owner can order new appraisals;
 
          b.   HUD and the owner may update the existing
               appraisals; or
 
          c.   HUD and the owner can agree to go to a third
               binding appraisal.
 
               In the above cases, the Preservation Capital Needs
               Assessment (PCNA) must be updated to reflect
               changes in project's condition.
 
     Q3.  Will PCNA updates be permitted for profit motivated
          owners?
 
     A3.  Yes, but only if the appraisal is redone.
 
XI.  FORM HUD-9607, CALCULATION OF INFORMATION TO BE RETURNED TO
     OWNER
 
    Q1.  Does a State/Area Office just revise and complete the
          Transfer Preservation Equity (TPE) portion of the form?
 
     A1.  Yes.  You complete Section IV of Form HUD-9607.  It
          should reflect an adjustment based on the instructions
          in Section III.B.1. of Preservation Letter No. 1.
 
    Q2.  In adding the cost of additional required repairs as
          approved by HUD to the TPE, does the repair cost
          include Davis Bacon wage rates?
 
     A2.  The additional cost of repairs is not added to the TPE.
          However, when you compute the cost of additional
          repairs, they must reflect Davis Bacon wage rates.
 
          The TPE is adjusted upward to reflect the cost of
          completed required repairs as approved by HUD.  The
          upward adjustment would reflect Davis Bacon wage rates.
 
    Q3.  Does the State/Area Office adjust or change the FMRs
          in relation to the previous completed Form HUD-9607?
          Does the State/Area Office use the current existing
          FMRs for this FY or the ones based on the original Form
          HUD-9607?
 
     A3.  In a conversion from an extension transaction to a sale
          transaction, the priority purchaser must accept a
          Capital Grant.  The Capital Grant program does not
          provide any new rental assistance.  This is a rent
          neutral program.
 
          In a pipeline sales transaction, if the priority
          purchaser wants a Section 241(f) loan, the loan will be
          no more than the amount supportable by 100 percent of
          the existing FMRs to support the loan.
 
    Q4.  Does the State/Area Office adjust or change the
          operating expenses in relation to the previous
          completed Form HUD-9607?  Does the State/Area Office
          update the operating expenses based on the Section
          241(f) processing?
 
     A4.  You should use current operating expenses.  We need to
          assure that the project does not fail once it is sold
          to a priority nonprofit purchaser.
 
          In a pipeline sales transaction, if the priority
          purchaser wants a Section 241(f) loan, you should
          update the operating expenses since the project will
          receive up to 100 percent of the existing FMRs to
          support the operating expenses and the Section 241(f)
          loan.
 
    Q5.  Does the State/Area Office adjust or change the
          interest rate in relation to the previous completed
          Form HUD-9607?  Does the State/Area Office use the
          interest rate based on the original Form HUD-9607 or
          change it based on the Section 241(f) processing?
 
     A5.  If the priority purchaser wants a Section 241(f) loan,
          you need to use the interest rate reflected in Form
          HUD-92013, Application for Multifamily Housing Project.
 
    Q6.  Does the State/Area Office adjust or change the
          rehabilitation loan in relation to the previous
          completed Form HUD-9607?  Does the State/Area Office
          use the loan amount computed in the original Form HUD-
          9607 which was bases on the Capital Needs Assessment or
          the amount based on the Section 241(f) processing which
          includes the shortfall for the Reserve for Replacement
          (RR) as well as the PCNA?
 
     A6.  If the priority purchaser wants a Section 241(f) loan,
          you need to compute the new Section 241(f) loan taking
          into consideration the new interest rate, operating
          expenses etc.
 
    Q7.  Does the State/Area Office adjust or change the utility
          allowances in relation to the previous completed
          Form HUD-9607?  Does the State/Area Office use the
          current and approved allowances for the project or the
          ones used in the original Form HUD-9607?
 
     A7.  If the priority purchaser wants a Section 241(f) loan,
          use the current and approved utility allowances.
 
    Q8.  Does the State/Area Office adjust or change the Reserve
          for Replacement account in relation to the previous
          completed Form HUD-9607?  Does the State/Area Office
          use the current annual amount if it has changed or the
          amount used in the original Form HUD-9607?
 
     A8.  You should look at the possibility of operating
          efficiencies that may provide a source of funds to pay
          for an increased monthly deposit to the Reserve for
          Replacement account in conversion projects.
 
          In a pipeline sales transaction, if the priority
          purchaser wants a Section 241(f) loan, you may, if
          warranted, increase the monthly deposit to the Reserve
          for Replacement account since the project will receive
          Section 8 assistance.
 
    Q9.  The Preservation Letter No. 1 indicates under Section
          III.B.2. that eligibility for the TPE is based on the
          lesser of three criteria.  Criterion "c" is eight times
          the local existing FMRs for each unit.  Does this mean
          that a State/Area Office uses the current existing
          FMRs?
 
               A9.  Yes.
XII. RESERVES FOR REPLACEMENT & RESIDUAL RECEIPTS
 
*    Q1.  Who owns the Residual Receipts and Reserve for
          Replacement Accounts?
 
     A1.  The accounts are established in accordance with the
          program under which the mortgage securing the project
          is insured.  When governed by the Regulatory Agreement,
          upon the sale of the property under the Preservation
          program, the funds in the accounts belong to the
          owner/seller.
 
          The existence of Section 8 in these projects could,
          however, change the disposition of the Reserve for
          Replacement and Residual Receipts Accounts.  Depending
          on the specific Section 8 program involved and the date
          on which the owner entered into the Section 8 contract
          for the project, the accounts are governed by either
          the terms of the project's Regulatory Agreement or the
          Section 8 HAP contract.  Generally, for Section 8 New
          Construction and Substantial Rehabilitation projects
          that entered into Section 8 agreements from 1979 and
          thereafter, these accounts will be governed by the
          Section 8 regulations and HAP contract.
 
          a.   With respect to the Reserve for Replacement
               account, for those projects subject to the Loan
               Management Set Aside Section 8 Existing HAP
               contract requirements, neither the regulations nor
               the contract specify the disposition of the
               account upon termination of the contract.
               Therefore, under the Preservation Program, with
               respect to the Reserve for Replacement account,
               HUD may permit the owner to retain the account
               upon sale of the project.
 
          b.   With respect to the Residual Receipts Account, the
               Section 8 New Construction and Substantial
               Rehabilitation regulations and the Section 8 HAP
               contract specifically provide for the control and
               disposition of the funds by HUD.  The regulations
               and the HAP contract provide that after payment of
               all project expenses and permitted distributions
               to the owner, the remaining project funds must be
               deposited in a Residual Receipts Account.  This
               account is under the control of HUD and may be
               used to reduce housing assistance payments or for
               other project purposes.  Upon termination of the
               contract, any funds remaining in the Residual
               Receipts Account must be remitted to HUD.
               Therefore, in accordance with the terms of the
               contract, HUD, and not the owner, is entitled to
               maintain control of funds in the Residual Receipts
               Account and is entitled to any remaining funds in
               the Residual Receipts Account upon termination of
               the HAP contract.  Also, upon sale of a
               preservation eligible project receiving this type
               of Section 8 assistance, the funds in the Residual
               Receipts Account remain with the project.
 
*    Q2.  In a sales transaction, can the owner keep the Reserve
          for Replacements Account?
 
     A2.  With respect to the Reserve for Replacements Account,
          for those projects subject to the Loan Management Set
          Aside Section 8 Existing HAP contract requirements,
          neither the regulations nor the contract specify the
          disposition of the account upon termination of the
          contract.  Therefore, under the Preservation Program,
          with respect to the Reserve for Replacements account,
          HUD may permit the owner to retain the account upon
          sale of the project.
 
     Q3.  Can Residual Receipts and Reserve for Replacements
          Accounts be used to prepay the mortgage, using a
          netting process?
 
     A3.  Yes.  The accounts may be used to effectuate a
          prepayment, but only if it results in a prepayment in
          full.  The reserves cannot be used to effectuate a
          partial prepayment.  This response is subject to the
          limitations discussed in A1 above.
 
XIII. SECTION 236 EXCESS RENTAL INCOME
 
*    Q1.  May owners and priority purchasers of Preservation
          eligible Section 236 projects keep the Section 236
          Excess Rental Income?
 
     A1.  Yes. The POA may permit the owner or a priority
          purchaser to retain the excess rental income.  Replace
          the paragraph in the Section 236 Use Agreement entitled
          "Calculation and Remittance of Excess Income" with the
          following:
 
          "Retention of Excess Rental Income.  Paragraph
          4(i) of the Regulatory Agreement should be revised
          to read as follows:
 
          'The Owner may retain all rental charges collected
          that exceed the aggregate basic rental charges for
          all occupied units provided the Owner uses the
          excess rental income for only the following
          eligible uses:
 
          (a)  Project operating income shortfalls, including
               repair costs;
 
          (b)  Rental subsidy for very low-income tenants that do
               not receive rental assistance;
 
          (c)  Pay owner's transaction costs (as defined by HUD);
               or
 
          (d)  Priority purchaser education oversight fees (as
               defined by HUD).
 
          The owner shall document in the owner's audited
          annual financial statement in a separate schedule
          the amounts of excess income collected and the
          purposes for which it was used.  If the owner uses
          the excess income for other than one of the
          eligible uses, this fact shall be disclosed by the
          auditor in the Compliance portion of the audit."
 
          NOTE:     The Office of Asset Management will he
                    formalizing in notice form the instructions
                    on how the owner must account for the excess
                    funds received and spent.
 
XIV. STATE AGENCY NON-INSURED SECTION 236 PROJECTS
 
     State or local agency determines eligibility for prepayment
     and loss of any affordable units.  If unassisted income
     burdened units result from the prepayment, tenant protection
     must be provided in the same manner as insured projects.
 
     You must coordinate with any State agency entities in your
     jurisdiction to ensure that they are aware that a prepayment
     may now take place, and that the owner of the project must
     coordinate impacted tenant information with your Office.
 
     The Extension Act and the FY 1996 Appropriations Act add a
     new category of eligible low-income housing where a project
     owner may apply for incentives.  Properties that were
     originally low-income housing as that term is defined in
     Section 229 of LIHPRHA, retain eligibility if the mortgage
     is held by a State Agency as a result of a sale by the
     Secretary without insurance.  If an Owner of such project
     prepays the mortgage, the eligible tenants will receive
     assistance in accordance with Section I of this Letter.
XV.  SHALLOW RENTAL SUBSIDY
 
    Q1.  Is the 90 percent of PSR provision still in effect?
 
     A1.  No, the provision is not still in effect.  This was
          appropriations language specific to projects done in
          FY 1995.  Some of the projects done in FY 1996 under
          the Continuing Resolution had this provision.  If you
          approve a POA on or after March 26, 1996, then the
          language DOES NOT APPLY.  If POA is funded after
          March 26, 1996, Shallow Rental Subsidy does not apply.
 
          NOTE:     OGC will be providing revised model Use
                    Agreements.
XVI. EXISTING SECTION 8 CONTRACTS AFTER PREPAYMENT OF UNDERLYING
     INSURED MORTGAGE
 
     Q1.  What is the impact of the noncitizen rule?
 
     A1.  The issue is being studied very carefully by Asset
          Management and the Office of General Counsel.  You will
          receive more information at a later date.
 
XVII. NEIGHBORHOOD NETWORKS
 
    Q1.  Can the cost of installing a Neighborhood Network be
          included in a POA for funding under the Capital Grant
          Program or the Section 241(f) Loan Program?
 
     A4.  Yes.  Owners may include Neighborhood Networks in their
          POAs.  The cost of the network may be included in the
          Capital Grant or Section 241(f) Loan Program.  Owners
          and priority purchasers are encouraged to include
          Neighborhood Networks in their POAs.
 
                             TABLE OF CONTENTS
                                    FOR
                         PRESERVATION LETTER NO. 6
 
Paragraph                                                              Page
 
I.   TENANT PROTECTIONS. . . . . . . . . . . . . . . . . . . . . . . . .  1
 
II.  PREPAYMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . .  8
 
III. TENANT INFORMATION REQUIRED OF AN OWNER WISHING TO
     PREPAY OR TERMINATE THE MORTGAGE INSURANCE CONTRACT . . . . . . . . 15
 
IV.  FUNDING OF PRESERVATION SECTION 8 CERTIFICATES OR
     VOUCHERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
 
V.   TIME LINE AND TEMPORARY MORATORIUM. . . . . . . . . . . . . . . . . 23
 
VI.  PRIORITY PURCHASERS . . . . . . . . . . . . . . . . . . . . . . . . 27
 
VII. CONVERSION FROM AN EXTENSION TO A SALE TRANSACTION. . . . . . . . . 31
 
VIII. THE CAPITAL GRANT PROGRAM. . . . . . . . . . . . . . . . . . . . . 33
 
IX.  FUNDING PRIORITY PURCHASER SALE PROJECTS. . . . . . . . . . . . . . 34
 
X.   APPRAISALS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
 
XI.  FORM HUD-9607, CALCULATION OF INFORMATION TO BE
     RETURNED TO  OWNER. . . . . . . . . . . . . . . . . . . . . . . . . 37
 
XII. RESERVES FOR REPLACEMENT & RESIDUAL RECEIPTS. . . . . . . . . . . . 40
 
XIII. SECTION 236 EXCESS RENTAL INCOME . . . . . . . . . . . . . . . . . 42
 
XIV. STATE AGENCY NON-INSURED SECTION 236 PROJECTS . . . . . . . . . . . 43
 
XV.  SHALLOW RENTAL SUBSIDY. . . . . . . . . . . . . . . . . . . . . . . 44
 
XVI. EXISTING SECTION 8 CONTRACTS AFTER PREPAYMENT OF
     UNDERLYING INSURED MORTGAGE . . . . . . . . . . . . . . . . . . . . 45
 
XVII. NEIGHBORHOOD NETWORKS. . . . . . . . . . . . . . . . . . . . . . . 46