36130 Federal Register / Vol. 63, No. 126 /Wednesday, July 1, 1998 / Notices

DEPARTMENT OF HOUSING AND

URBAN DEVELOPMENT

[Docket No. FR–4162–N–03]

Portfolio Reengineering—Fiscal Year

1998 Transition Program Huidelines

AGENCY: Office of Assistant Secretary for

Housing—Federal Housing

Commissioner, HUD.

ACTION: Notice of guidelines.

SUMMARY: HUD is currently

implementing a statutory demonstration

program authorized for fiscal year (FY)

1997. The Demonstration Program is

directed at FHA-insured multifamily

projects that have project-based Section

8 contracts with rents in excess of 120

percent of fair market rents. That

program has been extended by Congress

through FY 1998 with certain

modifications as a transitional program

while HUD develops regulations to

implement the new authority for a nondemonstration FHA-insured mortgage

and rental assistance restructuring

program.

This notice provides guidelines for

the FY 1998 Transition Program. It also

identifies projects that will continue to

proceed under the FY 1997

Demonstration Program unmodified by

these transitional provisions. Finally, it

clarifies HUD policy concerning

delegation of responsibilities to joint

venture designees. This clarification

applies to both the FY 1998 Transition

Program and the FY 1997

Demonstration Program.

FOR FURTHER INFORMATION CONTACT: Dan

Sullivan, Housing Project Manager,

Office of Multifamily Housing,

Department of Housing and Urban

Development, 451 Seventh Street, SW.,

Washington, DC 20410–4000; Room

6106; Telephone (202) 708–2300, ext.

2062. (This is not a toll-free number.)

Hearing or speech-impaired individuals

may call 1–800–877–8399 (Federal

Information Relay Service TTY).

Internet address:

DanlSullivan@hud.gov.

SUPPLEMENTARY INFORMATION:

I. Paperwork Reduction Act Statement

Paperwork Reduction Act Statement

The information collection

requirements contained in this notice

and in the notice published on January

23, 1997, at 62 FR 3566 have been

approved by the Office of Management

and Budget (OMB) in accordance with

the Paperwork Reduction Act of 1995

(44 U.S.C. 3501–3520), and assigned

OMB control number 2502–0519. An

agency may not conduct or sponsor, and

a person is not required to respond to,

a collection of information unless the

collection displays a valid control

number.

II. Background

The FY 1997 Demonstration Program

was authorized by sections 211 and 212

of the Departments of Veterans Affairs

and Housing and Urban Development,

and Independent Agencies

Appropriations Act, 1997 (FY 1997

Appropriations Act) (Pub. L. 104–204;

110 Stat. 2874, 2895–2904; approved

September 26, 1996). HUD is currently

implementing the FY 1997 program

under Guidelines published on January

23, 1997, at 62 FR 3566. (See also FY

1997 Portfolio Reengineering Request

for Qualifications published on July 16,

1997, at 62 FR 38109.)

The Multifamily Assisted Housing

Reform and Affordability Act of 1997

(MAHRA) was enacted in title V of the

Departments of Veterans Affairs and

Housing and Urban Development, and

Independent Agencies Appropriations

Act, 1998 (FY 1998 Appropriations Act)

(Pub. L. 105–65; 111 Stat. 1344, 1384;

approved October 27, 1997). Subtitle A

of MAHRA contains the FHA-Insured

Multifamily Housing Mortgage and

Housing Assistance Restructuring

Program. That program provides

authority to deal with Section 8 contract

expirations occurring in FY 1999 and

later. In accordance with section 522(a)

of MAHRA, the new non-demonstration

program will be initially implemented

by an interim rule to be followed by a

final rule.

Section 522(b) of MAHRA contains

transition provisions for projects with

Section 8 contracts expiring in FY 1998.

For these projects, the transition

provisions direct HUD to apply all the

terms of sections 211 and 212 of the

HUD FY 1997 Appropriations Act

except for two provisions in section 212.

First, the 50,000 unit limitation in

section 212(k) does not apply. Second,

the mortgage restructuring provisions in

section 212(h)(1)(G) do not apply. In

addition, HUD is directed to apply

section 517(a), Mortgage Restructuring,

of MAHRA.

Section 517(a) provides for a new

second mortgage loan program from

HUD that is available to eligible project

owners as part of a prepayment on the

existing unpaid principal balance on the

first mortgage so that the restructured or

new first mortgage is sustainable at rents

determined under section 514(g) of

MAHRA. The amount of the second

mortgage cannot be more than the

difference between the restructured or

new first mortgage and the indebtedness

under the existing insured mortgage.

The second mortgage is further limited

to an amount that can reasonably be

expected to be repaid.

Section 517(a) contains other

requirements for the second mortgage,

including a requirement that at least 75

percent of excess project income be

applied to the second mortgage note.

Section 514(g), which, as noted above,

is used in determining the amount of

the restructured or new first mortgage,

in general, requires the use of market

rents based on at least two comparable

properties, or, if those rents cannot be

determined, on 90 percent of the

applicable fair market rents. Section

514(g) also authorizes budget-based

exception rents. In general, such rents

cannot exceed 120 percent of fair market

rent (FMR). Up to 5 percent of the units

subject to mortgages restructured in a

fiscal year may have rents that exceed

this limit based on a finding of special

need.

Under the transition program there

are two statutory bases for debt

forgiveness and two statutory bases for

providing budget-based rents. Debt

forgiveness can be authorized under

section 212(h)(1)(H) and also under

section 517(a) but only when

application of the ‘‘reasonably be

expected to be repaid’’ limitation results

in a second mortgage that is less than

the amount required to pay down the

first mortgage to a sustainable level.

Budget-based rents are authorized under

section 212(h)(1)(I) and, as discussed

above, under the exception rent

provisions in section 514(g)(2) and (3).

These Guidelines implement all of

these authorities in a manner that is

consistent with overall statutory

requirements, and in particular, with

the requirement in section 522(b) to

apply section 517(a).

III. Projects Continuing Under the FY

1997 Demonstration Program

Any project covered by a

Demonstration HAP Contract that was

executed on or before September 30,

1997 shall continue to be processed

under the provisions of the January 23,

1997 Guidelines unmodified by section

IV. of today’s Federal Register notice.

Certain of these Demonstration HAP

Contracts may be extended for a period

not to exceed 120 days in accordance

with section 212(g)(2) of the FY 1997

Appropriations Act, as added by section

523(f) of MAHRA. Section 212(g)(2)

authorizes these extensions for contracts

originally executed before February 1,

1997 and for contracts originally

executed before October 1, 1997 in

connection with a restructuring under

the joint venture approach, if HUD, in

its sole discretion, determines that the

renewal period needs to exceed one year
Federal Register / Vol. 63, No. 126 /Wednesday, July 1, 1998 / Notices 36131

(i) for the pre-February 1, 1997

contracts, due to the delay in publishing

the January 23, 1997 Guidelines and (ii)

for the pre-October 1, 1997 contracts,

due to a delay in implementation of the

joint venture agreement. The two

categories described involve not more

than 21 and 25 projects, respectively. A

project continuing under the FY 1997

Demonstration Program is not subject to

the FY 1998 Transition Program

Guidelines (see section IV. of this

notice), but is subject to the revision to

joint venture designee policy in section

V. of this notice.

IV. FY 1998 Transition Program

Guidelines

A. Applicability of the January 23, 1997

Guidelines

Because MAHRA applies almost all of

the statutory provisions for the FY 1997

Demonstration Program to the FY 1998

Transition Program, sections IV. through

IX. of the January 23, 1997 Guidelines

(62 FR 3569–3581), as augmented by

this notice, constitute the FY 1998

Transition Program Guidelines. Except

for statutory references, all references in

sections IV. through IX. of the January

23, 1997 Guidelines to ‘‘FY 1997’’ mean

‘‘FY 1998.’’

In section III.B. of the January 23,

1997 Guidelines (62 FR 3568), the

definitions of ‘‘FMR’’ and ‘‘in the

aggregate’’ apply to the FY 1998

Transition Program.

B. General Eligibility

This section IV.B. applies instead of

section IV.B.1., General Eligibility, of

the January 23, 1997 Guidelines (62 FR

3569). For a project to be eligible for the

FY 1998 Demonstration Program, the

owner must agree to participate. The

project must be subject to an FHAinsured mortgage and supported by

project-based Section 8 Housing

Assistance Payments (HAP) contracts

with rent levels which, in the aggregate,

exceed 120 percent of FMR. In

managing its workload, HUD will give

preference to projects with contracts

expiring in FY 1998.

C. Disqualified Owner

The following conforms the

Guidelines to the amendment to section

211(b)(4)(B) of the HUD FY 1997

Appropriations Act made by section

10006 of the 1997 Emergency

Supplemental Appropriations Act, Pub.

L. 105–18; 111 Stat. 158; approved June

12, 1997 which added ‘‘affiliate of the

owner’’ to the definition of ‘‘owner.’’ In

section IV.C.3. of the January 23, 1997

Guidelines (62 FR 3569), Disqualified

Owners, the term owner also means an

affiliate of the owner and the term

purchaser also means an affiliate of the

purchaser. The terms affiliate of the

owner and affiliate of the purchaser

mean any person or entity (including

but not limited to, a general partner or

managing member, or an officer of

either) that controls an owner or

purchaser, is controlled by an owner or

purchaser, or is under common control

with the owner or purchaser. The term

control means the direct or indirect

power (under contract, equity

ownership, the right to vote or

determine a vote, or otherwise) to direct

the financial, legal, beneficial or other

interests of the owner or purchaser.

D. Demonstration Approaches/

Underwriting

1. Mandatory FY 1998 Transition

Program Approaches

This section applies in place of the

guidance in sections IV.E.1., Mandatory

Demonstration Approaches, through

and including section IV.E.1.b., Debt

Forgiveness, of the January 23, 1997

Guidelines (62 FR 3569–3571).

With respect to any eligible project,

HUD must perform an analysis under

section 517(a)(1)(B) of MAHRA. HUD is

obligated to require a new second

mortgage to the extent that it makes a

determination that a new second

mortgage can reasonably be expected to

be repaid.

To the extent that the combination of

the new first mortgage and the new

second mortgage is less than the

outstanding principal balance of the

existing insured mortgage, immediately

before it is restructured or refinanced,

HUD will consider debt forgiveness or

budget basing, or a combination of

these, pursuant to sections 212(h)(1)(H)

and 212(h)(1)(I) and sections 514(g)(2)

and (3) and 517(a).

a. Mortgage Restructuring.

Under the Mortgage Restructuring

approach, the unpaid principal balance

(UPB) on the existing FHA-insured

mortgage loan is paid down to, or

refinanced by a new first mortgage at, an

amount equal to the Supportable Debt.

The reduction in the first mortgage UPB

is effected by an advance of funds from

HUD. This advance is secured, in whole

or in part, by a second mortgage note.

The portion of the advance that is

secured by the second mortgage cannot

exceed the amount that HUD determines

can reasonably be expected to be repaid.

(1) Supportable First Mortgage Loan

The amount of the UPB of the

supportable first mortgage loan after

restructuring is determined by applying

a 1.10 or greater debt service coverage

ratio, at the interest rate and term

approved by HUD, to the adjusted NOI.

The amount may, at HUD’s option, be

adjusted if the security for the existing

FHA-insured loan includes vacant land

or other non-income producing assets

with additional market value. HUD will

require that the restructured or new first

mortgage carry an interest rate and term

that is competitive in the market.

(2) Second Mortgage Loan.

The initial unpaid principal balance

of the second mortgage loan will equal

the lesser of:

(a) The amount required to pay down

the existing FHA-insured mortgage

loans(s) to a sustainable level; or

(b) An amount HUD determines can

reasonably be expected to be repaid.

The second mortgage loan shall bear

interest at a rate less than or equal to the

long term applicable Federal rate, as set

forth pursuant to section 1274(d) of the

Internal Revenue Code of 1986 (26

U.S.C. 1274(d)). The term of the second

mortgage shall be equal to the term of

the restructured or new first mortgage.

The interest rate and payment and

other terms of the loan will be

established by HUD, consistent with

section 517(a) of MAHRA. Principal and

interest on the second mortgage loan

will be payable out of Net Cash Flow

(discussed below), and unpaid interest

will accrue.

(3) Debt Forgiveness.

HUD may forgive a certain portion of

the outstanding balance of an existing

FHA-insured loan to the extent HUD

determines that a second mortgage

cannot reasonably be expected to be

repaid.

(i) Amount of Debt Forgiveness.

The amount of the debt that may be

forgiven is equal to—

(a) If HUD will make a second

mortgage loan, the outstanding UPB of

the existing FHA-insured mortgage

loan(s) at the time of restructuring

minus the sum of UPB of the

restructured or new first mortgage and

the UPB of the second mortgage loan

determined under section IV.D.1.a.(2) of

this notice; or

(b) If there will be no second mortgage

loan from HUD, the outstanding UPB of

the existing FHA-insured mortgage

loan(s) at the time of restructuring

minus the market value. The project’s

‘‘market value’’ will be determined

based upon an appraisal of the project’s

as-is value prepared in accordance with

the Uniform Standards of Professional

Appraisal Practice (USPAP). The

appraisal will take into consideration,

among other factors, the current market

rents for unsubsidized units in the local

market area, the project’s current

operating expenses, any necessary

reserves for long term capital
36132 Federal Register / Vol. 63, No. 126 /Wednesday, July 1, 1998 / Notices

replacements, any necessary

rehabilitation costs (see section

IV.E.2.b.(1)(c), Determining the Level of

Required Physical Improvements, of the

January 23, 1997 Guidelines (62 FR

3572)), and any anticipated costs

relating to the transition of the project

to market rents.

(4) Restructuring Payment.

The amount of the restructuring

payment made by HUD shall equal the

UPB of the existing FHA-insured

mortgage loan(s) minus (i) the

supportable debt, (ii) all contributions

made by the owner (and the owner’s

partners/investors) in connection with

the restructuring, as determined by

HUD, and (iii) all excess funds in the

project’s reserve for replacement

account, and (iv) all funds in the

project’s residual receipts account and

any other escrows and reserves, as

determined by HUD, plus (v)

reasonable, cost effective rehabilitation

costs approved by HUD, and (vi)

reasonable transaction costs approved

by HUD.

(5) Use of Net Cash Flow.

For purposes of the Mortgage

Restructuring approach, ‘‘Net Cash

Flow’’ means that portion of the NOI

that remains after the payment of all

required debt service payments on the

first mortgage loan. Net Cash Flow shall

be applied as follows: first, to payment

to the holder of the first mortgage loan

of any past due principal or interest,

and required escrows and reserves, on

such mortgage loan; second, to the

extent of the remaining Net Cash Flow

to any other expenditures approved by

HUD; and third, to the extent of the

remaining Net Cash Flow, to be

distributed with at least 75 percent to

payment of principal and interest due

on the second mortgage and up to 25

percent to an escrow account for

payment to the owner after the

requirements of section IV.D.2. of this

notice have been met.

(6) Funding of Rehabilitation Costs.

If the FHA-insured mortgage loan will

be refinanced with non-FHA-insured

financing, the HUD-approved

rehabilitation costs will be financed

with funds available in the project’s

residual receipts account and excess

funds in the project’s reserve for

replacements account, as of the date of

the mortgage restructuring. If the

rehabilitation costs exceed the amount

of such funds, the rehabilitation costs

may be funded by (a) a contribution of

cash equity from the owner’s partners/

investors, and/or (b) the proceeds of the

non-FHA-insured refinancing loan, and

(c) to the extent that other sources of

funds are unavailable, and at HUD’s sole

discretion, through a loan or grant from

HUD.

If the FHA-insured mortgage loan is

retained or refinanced with another

FHA-insured loan, the HUD approved

rehabilitation costs will be financed

with funds available in the project’s

residual receipts account and excess

funds in the project’s reserve for

replacements account, as of the date of

the mortgage restructuring. If the

rehabilitation costs exceed the amount

of such funds, the rehabilitation costs

may be funded by (1) a contribution of

cash equity from the owner’s partners/

investors, (2) the proceeds of a nonFHA-insured rehabilitation loan, (3) the

proceeds of an FHA-insured

rehabilitation loan, and/or (4) to the

extent that other sources of funds are

unavailable, through a loan or grant

from HUD.

For owners who want to refinance the

original FHA-insured loan, mortgage

insurance from the following FHA

programs may be provided:

(a) Section 223(f), acquisition and

refinance with limited renovations—

loan to value limit of 85 percent; or

(b) Section 223(a)(7), refinance of an

insured loan to lower the interest rate

and to fund rehabilitation costs—loan

limit is up to the original insured

principal amount.

b. Budget-Based Rents.

The provisions of section IV.E.1.c.,

Budget-Based Rents, of the January 23,

1997 Guidelines (62 FR 3571) apply,

subject to the following. The above

referenced Budget-Based Rents

provisions implement the authority

under section 212(h)(1)(I) of the 1997

Appropriations Acts. Budget-based rents

under that authority may not exceed the

expiring contract rents, and there is no

percentage limitation on the number of

units that may receive budget-based

rents. Sections 514(g) (2) and (3) of

MAHRA also authorize the use of

budget-based rents. Those sections have

a general limit of 120 percent of FMR

but allow up to 5 percent of all units

subject to mortgages restructured within

the fiscal year to exceed that limit.

While there is no express statutory

requirement in section 514(g)(2) or (3)

limiting budget-based rents to no more

than the expiring contracts rents, it is

HUD policy to approve budget-based

rents only at or below expiring contract

rents.

32. Owner’s Distribution From Net Cash

Flow

This section IV.D.2. applies instead of

section IV.E.2.b.(2), Owner’s

Distribution from Net Cash Flow, of the

January 23, 1997 Guidelines (62 FR

3569).

As an incentive to maintain the

property the owner may receive an

annual distribution of up to 25 percent

of Net Cash Flow (‘‘Owner’s

Distribution’’).

The Owner’s Distribution will be held

in an escrow account and paid to the

owner only after HUD or its

representative inspects the project and

finds that all units are in substantial

compliance with maintenance standards

set forth by HUD as part of the

restructuring agreement. Any owner

who fails to deposit all Net Cash Flow

to the escrow account will waive its

rights to future distributions.

E. Project Underwriting—Market Rents

In estimating a project’s net operating

income under section IV.E.2.b. of the

January 23, 1997 Guidelines (62 FR

3572), market rents will be established

through an appraisal of the property that

utilizes at least two comparables. If two

comparables cannot be found, HUD may

authorize the appraiser to use 90

percent of the applicable fair market

rents.

F. HUD Housing Notices

The following sections of the January

23, 1997 Guidelines referred to Housing

Notice H 96–89, issued October 15,

1996: Sections V.F. (62 FR 3574); V.B.2.

(62 FR 3575); VI.D. (62 FR 3576); and

VI.L. (62 FR 3577). Housing Notice H

97–66, issued November 12, 1997,

reinstates H 96–89 with certain

exceptions. The reader should refer to

both Housing Notices. They are

available through HUDCLIPS, which is

on HUD’s web site. The location (URL)

for the HUDCLIPS Database Selection

Screen is http://www.hudclips.org/

subscriber/cgi/legis.cgi?legis. These

notices are in the Handbooks and

Notices—Housing Notices database.

Enter only the number without the letter

prefix (e.g., 97–96) in the ‘‘Document

Number’’ to retrieve the program notice.

G. Obsolete Provisions

Section V.G., Funding and Unit

Limitations, of the January 23, 1997

Guidelines (63 FR 3574) described

limitations as they existed in FY 1997

and does not apply.

Section IX.A., Participation of Projects

with Post-FY 1997 Expirations, of the

January 23, 1997 Guidelines (62 FR

3581) does not apply. (See section IV.B

of today’s notice for guidance on

preference for projects with contracts

expiring in FY 1998.)

H. Sunshine Provision

This section IV.H. applies instead of

section X.B., Sunshine Provision, of the

January 23, 1997 Guidelines (62 FR
Federal Register / Vol. 63, No. 126 /Wednesday, July 1, 1998 / Notices 36133

3581). In order that others may learn

from the experience of the FY 1998

Transition Program, all proposals

accepted by HUD to participate in the

FY 1998 Transition Program may be

posted on HUD’s Web Page

(www.hud.gov/fha/mfh/mfhsec8.html).

The posted information will include,

but not be limited to, the final

restructuring commitment, detailed

financial information regarding the asset

and tenant issues. Owners will be

requested to waive the provisions of the

Privacy Act (5 U.S.C. 552a) and the

Trade Secrets Act (18 U.S.C. 1905).

V. Revision to Joint Venture Designee

Policy for Both the FY 1997

Demonstration Program and the FY

1998 Transition Program

Section VII.A. of the January 23, 1997

Guidelines (62 FR 3578, 2d col.)

contained a statement encouraging

designee applicants to ‘‘develop

partnerships with each other as well as

with other private and public entities

* * * .’’ This inaccurately stated the

policy set out in section 212(d)(3) of the

FY 1997 HUD Appropriations Act.

Rather, designee applicants are

encouraged to develop partnerships

with each other and to contract or

subcontract with other private and

public entities, including the entities

listed in section VII.A. of the January 23,

1997 Guidelines.

Section VII.B.2.a. of the January 23,

1997 Guidelines (62 FR 3580) stated in

part, ‘‘It is possible that HUD would

delegate all of its powers to the

designees including the ability to

authorize full or partial mortgage

prepayment and would rely solely on a

post-restructuring audit to verify that

the interests of the Federal Government

are fairly represented in the

transaction.’’ Section VI.B.2.b. of the

January 23, 1997 Guidelines (62 FR

3580) stated in part, ‘‘The Joint Venture

Designees will be responsible for all

decision making. HUD approvals will be

based on representations and

certifications made by the Designee.’’

These two statements do not apply to

the FY 1998 Transition Program.

A Joint Venture Designee will be

responsible for decision making as set

out in its agreement with HUD. All

other provisions of section VII. continue

to apply to the FY 1997 Demonstration

Program and the FY 1998 Transition

Program.

VI. HUD Findings and Certifications

A. Environmental Impact

A Finding of No Significant Impact

with respect to the environment has

been made in accordance with HUD

regulations at 24 CFR part 50, which

implement section 102(2)(C) of the

National Environmental Policy Act of

1969. The Finding of No Significant

Impact is available for public inspection

between 7:30 a.m. and 5:30 p.m.

weekdays in the Office of the Rules

Docket Clerk at the above address.

B. Executive Order 12612, Federalism

The General Counsel, as the

Designated Official for HUD under

section 6(a) of Executive Order 12612,

Federalism, has determined that the

provisions in this notice are closely

based on statutory requirements and

impose no significant additional

burdens on States or other public

bodies. This notice does not affect the

relationship between the Federal

Government and the States and other

public bodies or the distribution of

power and responsibilities among

various levels of government. Therefore,

the policy is not subject to review under

Executive Order 12612.

Dated: June 22, 1998.

Art Agnos,

Acting General Deputy Assistant Secretary

for Housing—Deputy Federal Housing

Commissioner.

[FR Doc. 98–17457 Filed 6–30–98; 8:45 am]

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