CHAPTER 5 

FINANCIAL INFEASIBILITY REQUESTS 

The AHP properties were sold at a price discounted from market value to 

reflect the requirement that owners provide a portion of the units at restricted 

rents. Under most circumstances, that reduction in acquisition cost is expected 

to be sufficient for properties to remain economically viable for the compliance 

period. However, occasionally, market conditions may change over time, 

rendering a property unable to meet its Set-Aside obligations and remain 

economically viable. 

Under the provisions of a property's LURA, monitoring agencies have the 

authority to temporarily reduce the occupancy requirements for Low and Very 

Low Income tenants in situations where it is no longer financially feasible for an 

owner to meet these requirements. 

These waivers are not granted to relieve owners who failed to understand 

their Set-Aside obligations at purchase, or to relieve owners who have failed to 

make substantial efforts to market the set-aside units. Nor is the waiver a 

mechanism for owners to seek relief from self-induced financial distress, neglect, 

mismanagement, over-improvement or any other financial actions designed to 

create distress. The waivers provide temporary relief when market factors or 

other factors beyond the control of the owner render the project unable to 

maintain viability within Set-Aside requirements. 

To obtain such a reduction, owners must submit an application to the 

monitoring agency requesting a temporary waiver of the property's occupancy 

requirements. This chapter describes guidelines monitoring agencies should 

use in reviewing owner requests for financial infeasibility waivers, including: 

0 the types of waivers agencies may issue; 

0 acceptable conditions for receiving a waiver; 

0 guidelines for reviewing waiver applications; and 

0 special procedures for monitoring properties with waivers. 

5.1 FINANCIAL INFEASIBILITY WAIVERS 

The purpose of giving owners a waiver of the property's occupancy 

requirements is to help prevent the loss of the property through default. A 

waiver enables an owner to increase income to the property by allowing the 

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owner to temporarily rent some or all of the units set aside for VLI and LI 

households to tenants with higher incomes. 

A. Types of Troubled Properties 

Financially troubled properties vary both in the nature and extent of the 

problems facing the owner. As noted in the introduction, not all properties 

experiencing financial problems should receive waivers. Properties where a 

waiver may be appropriate can be divided into two groups: 

1. properties with insufficient income due to QU vacancies; and 

2. properties with insufficient revenue to cover operating expenses. 

Both conditions can leave the owner with insufficient income to cover operating 

expenses and debt service. Property owners may encounter other 

circumstances that weaken the financial position of the property, but agencies 

should carefully consider whether a waiver will enable the owner to address the 

problem. 

Insufficient Income Due to Vacant Units 

Properties that experience unusually high and prolonged vacancies in 

QUs may be unable to meet their operating expenses and debt service due to 

revenue deficiencies. In addition to the evidence of financial distress, owners 

requesting this waiver must be able to document substantial efforts at targeted 

marketing to VLI or LI households, beyond traditional marketing. Owners must 

also be able to demonstrate that only reasonable screening and tenancy 

requirements are imposed on all applicants. 

Where the owner has high vacancies among both QUs and unrestricted 

units resulting from general market problems, the property's income may not be 

sufficient to cover operating expenses and debt services. Because the 

marketability problem exists for unrestricted units as well, agencies should 

determine that waivers of QUs will enhance the viability of the property. 

Insufficient Revenue to Cover Operating Expenses 

Over time, operating expenses for a property may rise faster than rents to 

the point where rental revenue is insufficient to cover costs. The AHP rent limits 

for QUs may prevent owners from increasing rents to cover operating expenses 

and debt service. These circumstances are likely to occur only in areas where 

the AHP rent limits are well below the rents for similar unrestricted units in the 

property, and median incomes (as the basis for rent limits) have not increased 

significantly over several years. Owners must be able to demonstrate 

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reasonable operating expenses and debt service as part of the evidence of 

financial distress. 

However, general market conditions may prevent owners from generating 

sufficient income, even if the owner could charge market rents for every unit in 

the property. In such cases, the property is no longer financially viable, a waiver 

will not address the problem, and a financial workout involving the lenders is 

necessary. The FDIC should be notified of such cases. 

B. Necessary Conditions for Granting Waivers 

FDIC has established the following items as necessary conditions for 

receiving a financial infeasibility waiver. When evaluating requests for waivers, 

monitoring agencies should consider whether a property meets these conditions. 

¤	 The Property Is In Financial Distress. A property should be experiencing 

serious financial problems to receive a waiver. Properties where profits are 

lower than anticipated and those that encounter occasional monthly losses 

are not experiencing serious problems. One indicator of financial distress 

that monitoring agencies may use is the number of months a property has 

experienced negative cash flow.13 FDIC has determined that when a 

property has experienced 24 months of negative cash flow, the property may 

be considered financially distressed. At least 3 years of property financial 

statements, preferably independently prepared, should be reviewed. 

Monitoring agencies may choose to use other indicators of financial distress 

they believe appropriate. Section 5.2.B provides further guidance on 

assessing financial distress. 

¤	 The Conditions Are Beyond The Control of Owner. The conditions 

leading to the property's financial problems should be beyond the owner's 

control. Agencies should avoid giving waivers where the problems are due to 

the owner's neglect, mismanagement or deliberate expansion of debt 

(for improvements or equity takeout). For example, if the owner discovers 

the presence of a toxic waste on the property and the expense of removing 

and disposing of the waste has seriously weakened the property's financial 

position, this is a condition beyond the owner's control. However, if the 

property is experiencing a sharp rise in maintenance costs because the 

owner failed to perform preventive maintenance on the major systems, the 

owner should not receive a waiver unless the owner performance issues are 

addressed. 

¤	 A Waiver Enables The Owner to Address The Problem. The waiver must 

clearly provide the increased income necessary to help preserve the 

13 A property is experiencing negative cash flow when income after expenses is less than the debt service for a 

property. 

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property. For example, in areas where the market rents are less than the 

AHP rent limits for the property, reducing the number of QUs will not help 

raise the property's income because the rents collected from unrestricted 

units would be the same as the rents for QUs. 

¤	 The Owner Attempted to Strengthen The Property's Condition. The 

owner must have taken all reasonable steps to address the problem and 

improve the property's financial condition. For example, if the problem is 

high vacancy rates, the owner must show that he or she actively marketed 

available units. If the problem is caused by a sharp rise in operating 

expenses, owners should have taken steps to control expenses, drawn on 

the property's reserves, and invested their own funds in efforts to address the 

problem. The owner also should have attempted to obtain other types of 

assistance for the property. For example, if some of the units need 

rehabilitation, the owner should have attempted to obtain public or private 

financing to make needed repairs. 

¤	 A Waiver Is Compatible with Other Assistance to the Property. It may 

not be possible to waive the occupancy requirements for a property if it also 

has Low Income Housing Tax Credits or tax exempt bond financing. 

C. Types of Waivers 

There are two types of waivers agencies may consider giving an owner 

when financial infeasibility exists. 

TYPES OF INFEASIBILITY WAIVERS

 Type A: Reduce the number of required VLI-QUs

 Type B: Reduce the number of required QUs (LI and VLI) 

The following limitations apply to waivers: 

0 While agencies may grant temporary waivers reducing the number of QUs, 

agencies may not issue a waiver to change the rent limits for remaining QUs. 

0 Waivers may only be granted on a year to year basis. 

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0 A waiver may not be used to remove the QU designation from an eligible 

household. When the number of occupied QUs in the property exceeds the 

reduced number of QUs under a waiver, the owner may not raise the rent for 

occupied QUs may not be raised above the applicable rent limit until and 

unless a Qualifying Tenant moves out. 

0 A waiver does not relieve an owner of the obligation to correct a prior 

violation under which a QU was rented to an ineligible household. 

Type A: Reduce Required VLI-QUs 

In granting a Type A waiver, a monitoring agency is giving the owner a 

temporary reduction in the VLI Set-Aside, but not the total number of QUs. 

Under this type of waiver, only the portion of the Total Set-Aside that must be 

reserved for VLI households changes. For VLI units to which a Type A waiver 

applies, the LI occupancy and rent limits apply for the duration of the waiver. 

For example, a Type A waiver might be granted to a property with a Total 

Set-Aside of 35 units and a VLI Set-Aside of 20 units to reduce temporarily the 

required number of VLI-QUs from 20 units to five units. However, the owner 

would still be required to maintain a total of 35 QUs. 

Type B: Reduce Required QUs 

When an owner receives a Type B waiver, the monitoring agency is 

reducing the total number of units designated for occupancy by VLI and LI 

households. Under this type of waiver, agencies will generally reduce both the 

Total Set-Aside and the VLI Set-Aside. 

Using the same example presented above, an agency giving a Type B 

waiver might choose to reduce the required number of QUs from 35 units to 20 

units and the required number of VLI-QUs from 20 units to 10 units. 

D. Determining the Size of the Waiver 

Agencies must determine the type of waiver and the size of any reduction 

in the number of VLI-QUs or total QUs. In granting a waiver, the agency needs 

to decide whether a waiver will address the problem and restore viability, and 

what number of QUs are necessary to be covered by the waiver. 

Agencies should avoid a complete waiver of the occupancy requirements 

wherever possible. FDIC strongly recommends that not all units in the SetAside be granted waivers, but that owners be required to continue to rent some 

units to VLI tenants. 

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Agencies should base the size of the reduction on the amount of 

additional income an owner needs to stabilize the property's financial position. 

Monitoring staff should decide on the number of units by comparing the 

additional income generated by waivers of different sizes to the amount of 

additional income needed by the owner. For example, if an owner needs an 

additional $1,000 per month to help pay off a short-term loan taken out to cover 

the cost of replacing the boiler for the building, the size of the reduction should 

reflect $1,000 additional income each month. 

In some cases, a waiver alone will not be sufficient to address a 

property's financial problems. The FDIC should be notified of such cases where 

a broader financial workout is indicated. 

5.2 REVIEWING APPLICATIONS FOR WAIVERS 

A. Basic Contents of Waiver Applications 

Applications for waivers should provide sufficient information to enable 

the monitoring agency to evaluate the property's financial condition as well as a 

description of the relief the owner is requesting and how the relief will help 

strengthen the property's financial condition. Several years of property financial 

statements are recommended. The owner should also provide a narrative and 

supporting documentation to show what the owner has done to address the 

conditions contributing to the property's financial problems and the fee for 

processing the request. 

Every application should contain the following items: 

1)	 Description of the conditions that contributed to the financial distress 

2)	 Property's financial statements for the past three years 

3)	 Monthly income and expenses for the past year 

4)	 Listing of other types of assistance received by property (e.g., tax 

credits, or bond financing) 

5)	 Documentation showing market rate rents for the project area 

6)	 Description of actions owner is taking to strengthen the property's 

financial position 

7)	 Amount of additional monthly income needed to address problems 

and for what period of time 

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8)	 The type of relief the owner is requesting and a description of how it 

will be used to correct the problem 

9)	 Processing fee of not more than $500, or as otherwise approved by 

FDIC14 

If the owner indicates that vacancies are a significant problem 

contributing to the property's financial deterioration, the application should also 

provide the following information: 

a) Documentation showing the property's vacancies over the past 12 month 

period; 

b) Description of marketing efforts to attract LI and VLI tenants and 

documentation of these efforts; and 

c)	 The total number of rental applications and the number of applications from 

potentially eligible tenants received during the past six months as well as an 

explanation of why potentially eligible applicants were turned down or 

decided not to accept units. 

If the owner indicates that increased expenses are a significant problem 

contributing to the financial deterioration of the property, the application should 

also include the following information: 

a) Evidence that the owner has taken steps to control operating expenses and 

has invested funds to correct the problem; 

b) Sufficient documentation to show that the property's expenses do not include 

payments to the owner for non-essential services; and 

c)	 Documentation showing that increased expenses are reasonable for the area 

or beyond the control of the owner. 

Owners are responsible for submitting all materials necessary to support 

their request for a waiver. Agencies may make waiver determinations on the 

basis of the materials presented in the application. Applications with inadequate 

documentation may be denied on grounds of insufficient evidence. 

B. Reviewing Applications 

Monitoring agencies should use the following procedures when reviewing 

applications to assess whether a waiver is warranted. Agencies should: 

14 This fee may be adjusted annually to reflect increased costs due to inflation. In making such adjustments, 

agencies must apply the same method used to adjust the annual monitoring fee. 

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0 assess whether the property is receiving other types of assistance that 

preclude reducing the number of Low Income units; 

0 determine whether the property is financially distressed; 

0 assess the source of the property's financial problems (vacancies, increased 

operating expenses, etc.); 

0	 determine whether the waiver requested will enable the owner to improve the 

property's financial position; 

0	 evaluate whether the conditions causing the problem are beyond the control 

of the owner; and 

0	 assess whether the owner has taken steps to strengthen the property's 

financial position. 

Agencies should complete their review of an owner's request for a waiver within 

60 days from the date of the application. 

Waiver Compatibility with Other Assistance 

Monitoring staff should examine the other forms of public assistance 

received by the property to determine if there are restrictions that preclude 

reducing the number of Low Income units. For example, if a property also 

receives Low Income Housing Tax Credits, a waiver of the AHP occupancy 

requirements may have no effect because the tax credit occupancy requirements 

would still apply. If the agency determines that a waiver is not compatible with 

the requirements of other programs, the owner's request for a waiver should be 

denied, unless compatible waivers are granted by the other regulatory entities. 

Presence of Financial Distress 

Next, monitoring staff should examine the financial information provided 

with the application to assess whether the property is experiencing serious 

financial problems. 

In evaluating financial distress, staff should use commonly accepted 

indicators financial hardship. As discussed above, one indicator of financial 

distress is when a property has experienced an extended period of negative 

cash flow. If a property has experienced 24 months of negative cash flow, the 

agency may consider the property financially distressed. If the property has 

experienced large losses over a shorter period, the monitoring agency may 

determine that a property is in financial distress due to the severity of the 

negative cash flow. 

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Monitoring agencies may use other accepted indicators of financial 

distress in evaluating a waiver request. However, monitoring staff should 

document the method used to assess financial distress and show that it is an 

adequate indicator of distress. 

The Source of Financial Distress 

Monitoring staff also should examine the financial information to 

determine the source of the property's financial distress. As discussed in 

Section 5.1.A, monitoring staff need to evaluate whether the problem is due to: 

0	 insufficient income due to QU vacancies; 

0	 QU rents insufficient to meet operating expenses; or 

0	 other conditions. 

If the owner's application reports that QU vacancies is the problem 

causing the property's distress, monitoring staff must determine whether 

improving the property's occupancy rate would be sufficient to eliminate the 

financial distress. To make this determination, staff should compare the 

property's income15 at an appropriate effective maximum occupancy level16 (e.g., 

95 percent) to operating expenses and debt service to see if the property 

generates sufficient income at full occupancy to cover its costs:17 

0	 If the property's income at effective maximum occupancy is sufficient to 

create a positive cash flow, it is reasonable to conclude that the property has 

insufficient income due to QU vacancies. 

0	 If a property's income at full occupancy is insufficient to cover operating 

expenses and debt service, the property's QU rent structure may be 

inadequate to meet the increased cost of operating the property. As 

discussed earlier, this condition can occur when operating expenses increase 

faster than the rents charged to tenants. 

Monitoring staff should determine whether the property's negative cash 

flow could be remedied if the owner were allowed to charge market rents for 100 

percent of the units. If the property still has a negative cash flow when the 

property's rents are left unrestricted, a waiver alone will not address the 

15	 Calculate income with the property's set-asides and AHP rent limits in place. 

16 Effective maximum occupancy is defined as the maximum occupancy an owner is likely to obtain given the 

level of unit turnover in the local market. 

17 Monitoring staff should confirm that the rents for unrestricted units are comparable to the market rents for 

similar units. Staff can refer to the market rents provided by the owner in the application. 

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property's financial distress. In such a case the owner needs to obtain 

additional assistance from other sources to overcome the property's cash flow 

problem. 

To determine if reducing the required number of QUs would enable the 

owner to overcome the property's negative cash flow, monitoring staff should 

compare the income the property would receive if the owner charges market 

rents for all units (95 percent occupancy) to the operating expenses and debt 

service for the property. If income to the property at effective maximum 

occupancy results in a positive cash flow to the property, then QU rents for the 

property may be determined to be insufficient to meet operating costs. 

In determining the source of a property's financial distress, monitoring 

staff should assess whether other problems, such as vacancies among 

unrestricted units and/or inadequate control of expenses, are contributing to a 

property's negative cash flow. This information will be important in determining 

whether a waiver will enable an owner to remedy the property's financial 

difficulties. 

Can a Waiver Address the Problem? 

After determining the source of a property's financial distress, monitoring 

staff next should assess whether a waiver will increase income to the property 

and whether the additional income will enable the owner to stabilize its financial 

condition. For example, if an owner is experiencing vacancy problems among 

unrestricted units as well as restricted units in the property, it is not clear that 

reducing the required number of LI or VLI units will improve the owner's ability to 

obtain additional tenants. An owner's application must explain how the waiver 

will aid in leasing additional units. If the application does not provide convincing 

evidence that the waiver will improve the property's occupancy, the agency 

should deny the owner's request. 

Monitoring staff also should consider whether the increased income 

produced by the waiver will provide is sufficient to address the property's 

financial problems. If the agency's analysis of the property's financial condition 

reveals that the owner would need almost a complete waiver of the occupancy 

requirements to generate a positive cash flow, a waiver alone may not be 

adequate to preserve the property. In such a case, the agency may want to 

require a condition of the waiver that the owner obtain additional financial 

assistance for the property. For example, the agency might inform the owner 

that a waiver could be granted if the owner worked with his or her lender to 

provide additional relief by restructuring the property's financing. 

Problem Conditions Beyond Owner's Control 

Next, monitoring staff should review the owner's description of the 

conditions that led to the property's financial deterioration to determine if the 

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problem could have been avoided. As discussed above, FDIC has determined 

that if an owner could have prevented the property's decline, a waiver should not 

be given. 

If the owner is experiencing high vacancies among QUs, the application 

must document the owner has actively marketed the units to LI and VLI 

households, including special outreach efforts. Agencies may consider failure to 

actively market the property to LI and VLI households as grounds to deny an 

owner's request for a waiver. 

Applications also should include an explanation of why LI and VLI tenants 

have not responded to the marketing efforts. For example, an owner may have 

difficulty renting QU units if a nearby employer has moved and the property's 

neighborhood no longer provides sufficient employment opportunities. If the 

local rental market is soft, tenants may be able to find comparable units in other 

areas of the community more conveniently located to jobs and basic services 

such as public transportation. 

If the property is experiencing financial distress because operating 

expenses have risen faster than rents, the owner's application should show that 

the increased expenses are beyond the owner's control. Sharp increases in 

property taxes or insurance are examples of conditions beyond an owner's 

control. However, if the property's expenses for maintenance and repair have 

risen sharply because the owner failed to perform preventive maintenance, the 

property's financial problems could have been prevented. 

Agencies also should confirm that the increase in operating expenses is 

not the result of the owner taking payments from the property for non-essential 

services. Waivers should be given only when the property's income is 

insufficient to cover costs for necessary operating expenses and debt service. 

Agencies may consider payments for expenses other than reasonable 

management fees, maintenance and repair, taxes, utilities, and insurance, as 

unnecessary operating expenses. 

Owner Action to Address Financial Distress 

Finally, monitoring staff should review the materials in the application 

describing the actions the owner has taken to address the property's financial 

distress. To receive a waiver, owners should demonstrate that they have taken 

steps to slow the property's decline and attempted to obtain assistance from 

other sources. 

0 If the owner is having difficulty attracting LI and/or VLI tenants, the owner 

should have made special outreach efforts, such as contacting the local 

housing agency for referrals of Section 8 certificate holders as well as service 

agencies and other organizations serving the low income community. 

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0 If a property's negative cash flow is due to increased operating expenses, the 

owner must demonstrate efforts to address or control rising costs, such as 

energy conservation to address rising utility costs or bidding out insurance to 

respond to rising insurance costs. Documentation of additional owner 

investments in the property is evidence of action to strengthen the property's 

financial position. 

0 If the property is in need of rehabilitation, applications for low interest 

rehabilitation loans from the city or state would also demonstrate owner 

action to address the property's financial problems. 

C. Granting Waivers 

If an agency determines that a waiver should be granted, monitoring staff 

should inform the owner of the agency's decision and send a written notice 

describing the conditions of the waiver. 

Agencies may establish conditions for receiving a waiver as needed to 

ensure that the owner makes a good-faith effort to restore the financial health of 

the property. Agencies may also require owners to submit monthly or quarterly 

compliance reports as a condition of the waiver to ensure the owner complies 

with the requirements that continue to apply to the property. 

Waivers should be granted only for one year, subject to extensions upon 

determination by the monitoring agency that the conditions justifying the waiver 

still exist. 

Monitoring agencies should send a copy of the notice granting the waiver 

to FDIC or its successor. 

D. Denying Waiver Requests 

If the monitoring agency decides to deny an owner's request for a waiver, 

the monitoring agency should send the owner a written notice informing the 

owner that the application was denied and stating the reasons the waiver was 

not granted. This notice should be sent to the owner within 60 days of the date 

of application. A copy of the waiver denial should be sent to FDIC. 

If the application failed to provide sufficient documentation to grant the 

waiver, the agency should indicate the areas where the owner did not provide 

adequate information. 

Owners should also be informed that they may submit a revised 

application which addresses the deficiencies found in the original submission. 

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Owners may be required to pay another processing fee when submitting revised 

applications. 

5.3 MONITORING PROPERTIES WITH WAIVERS 

When an agency grants a waiver, the owner must continue to comply 

with all applicable provisions of the LURA. The agency's level of monitoring 

activity will vary depending on the extent of the waiver. 

A. Partial vs. Full Waivers 

For properties where the waiver reduces, but does not completely waive, 

the occupancy requirements for the property, the owner must continue to comply 

with the occupancy requirements that remain in effect and all other applicable 

provisions of the LURA. Monitoring agencies must continue to monitor these 

properties to assure continued compliance by the owner and should supplement 

the applicable monitoring procedures presented in Chapter 3 with those 

described in the following sections. 

In some cases, waiver of fees may be part of the response by the 

monitoring agency. However, because a partial waiver may contain conditions 

that require additional monitoring activities, agencies also may charge an 

additional administrative fee to cover the cost of this effort. The amount of the 

additional administrative fee for monitoring properties with waivers may not 

exceed the amount of the annual monitoring fee. 

In cases where an agency grants an owner a full waiver of the occupancy 

requirements for the property, the agency need only monitor occupancy at the 

property as long as existing tenants continue to occupy QUs. Once the QUs 

have been replaced, the agency need only make annual assessments of the 

owner's ongoing need for the waiver and monitor any resale of the property. 

B. On-Site Reviews 

Monitoring staff conducting on-site reviews of properties with partial 

waivers should follow the standard procedures (see Chapter 3). Agencies 

should continue to perform on-site reviews of properties with full waivers as long 

as tenants of QUs remain in their units. After all QUs have been vacated and 

rented as unrestricted units, the agency may discontinue on-site reviews, unless 

it is necessary to visit a property to assess the need to extend the waiver. 

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C. Review of Owner Reports 

If the conditions of the waiver established by the agency require the 

owner to submit compliance reports more than annually, monitoring staff should 

establish a schedule for receiving and reviewing these reports and inform the 

owner of this schedule. 

Owners receiving a partial waiver must continue to submit an annual 

compliance report documenting compliance with requirements of the LURA that 

continue to apply to the property. Owners with a full waiver must also submit 

annual compliance reports as long as qualifying tenants continue to QUs. 

Each year, at the time annual compliance reports are due, an owner with 

waivers must indicate to the agency whether there is a continuing need for the 

waiver, and submit materials documenting that the need still exists. If the owner 

fails to submit materials to the agency, the agency may terminate the waiver. 

In reviewing an owner's submission, monitoring staff should assess 

whether all conditions of the waiver established by the agency have been met, 

and whether the property will experience a negative cash flow without the waiver. 

0	 If the conditions of the waiver have been met and the property must have the 

waiver to maintain a positive cash flow, the agency may extend the waiver. 

0	 If the documents show that the property's financial position has improved, the 

agency should consider reducing the size of the waiver and requiring the 

owner to restore some of the QUs. 

0	 If the property's financial condition has not improved since the application or 

the previous waiver report, the agency may, if appropriate, require the owner 

to seek additional assistance to strengthen the property's financial position. 

0	 If an owner has not met the conditions for receiving the waiver established by 

the monitoring agency, monitoring staff may discontinue the waiver. 

D. Failure to Comply with Waiver 

If an agency's review of owner compliance reports or the results of an onsite visit reveal that an owner is out of compliance with the continuing 

requirements of the LURA, monitoring staff should follow the procedures in 

Chapter 4 to compel the owner to restore compliance. 

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