Fiscal Year 1997 Portfolio Reengineering Demonstration Program Guidelines

SUMMARY: This Notice provides initial guidelines to implement a

Demonstration Program authorized by the Departments of Veterans Affairs

and Housing and Urban Development and Independent Agencies

Appropriations Act, 1997 (Pub. L. No 104-204, 110 Stat. 2874, approved

September 26, 1996) (``HUD FY 1997 Appropriations Act''). The

Demonstration Program is directed at FHA-insured multifamily projects

that have project-based Section 8 contracts with above market rents.

The Demonstration Program is intended to explore various approaches for

restructuring mortgages and taking other related actions in order to

reduce the risk to the FHA insurance fund and lower subsidy costs while

preserving housing affordability and availability.

FOR FURTHER INFORMATION CONTACT: George C. Dipman, Demonstration

Program Coordinator, Office of Multifamily Housing, Department of

Housing and Urban Development, 451 Seventh Street, SW., Washington, DC

20410-4000; Room 6106; Telephone (202) 708-3321. (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:

[email protected]

Supplementary Information:

I. Paperwork Reduction Act Statement

The proposed information collection requirements contained in this

notice have been submitted to the Office of Management and Budget (OMB)

for review in accordance with the Paperwork Reduction Act of 1995 (44

U.S.C. 3501-3520). 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. The Department has

requested emergency clearance of the collection of information

described below:

(1) Title of the Information collection proposal: Fiscal Year 1997

Portfolio Reengineering Demonstration Program.

(2) Summary of the collection of information: Each owner would

submit to HUD, the owner's request to participate. An owner that is not

within the jurisdiction of a Designee also may submit a request to HUD

to proceed under the alternative processing in Section VIII.

Thereafter, each owner would submit to HUD, a Designee, or a lender

(under alternative processing), as appropriate, the following

information: documents necessary to perform the underwriting;

modifications to proposed Restructuring Commitments, and information

relating to any appeal of a Restructuring Commitment, and evidence of

having sent appropriate notices. The owner's must notify tenants, units

of general local government, and, in certain cases, lenders at key

points in the process.

Under Designee Processing, each prospective Designee would submit

to HUD a letter of interest together with evidence of its ability to

meet the selection criteria (see Section VII.A.). If selected the

Designee would submit a management plan detailing how it will carry out

restructurings. If the Designee operates under the fee for service

approach, it must submit to HUD, for each project, a detailed Business

Plan containing the information specified in Section VII.B.1.a.(1)

STAGE I. For a Designee operating under the joint venture approach,

submissions to HUD on specific projects, in general, will be

certifications and representations.

Under Alternative Processing, each lender/servicer would submit to

HUD a Business Plan detailing the terms of the restructuring proposal.

(3) Description of the need for the information and its proposed

use: The owner's request to participate is needed to initiate

processing and to provide information necessary to ensure that the

project meets statutory eligibility requirements to participate in the

Demonstration Program. Notices to tenants, to units of general local

government, and to lenders are intended to comply with statutory

requirement for such notification and to obtain information that may

provide for more informed decision making.

(4) Description of the likely respondents, and proposed frequency

of the response to the collection of information: Respondents will be

(1) certain owners of FHA-insured projects that have expiring project-

based Section 8 contracts; (2) State housing finance agencies, housing

agencies and nonprofits; and (3) FHA-approved lenders and servicers.

The estimated number of respondents and frequency of the response is

set out in the table in paragraph (5), below.

(5) Estimate of the total reporting and recordkeeping burden that

will result from the collection of information:

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Responses Total

Information Collection Number of per Annual Hours per Total Guideline

respondents respondent responses response hours reference

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Owner's request to participate.. 275 1 275 .5 137 VI.A.

Owner's notice to tenants, local 275 3 725 1.0 725 VI.D.

governments, and lenders of

intent to participate.

Owner-supplied information 275 3 725 2.0 1,450 VI.F.

relating to underwriting.

Owner's summary to tenants, 275 3 725 1.5 1,088 V.H.

local governments, and lenders

of Restructuring Commitment.

Owner's request to modify 100 1 100 1.0 100 VI.I.

Restructuring Commitment.

Owner's summary to tenants, 100 3 300 2.75 825 VI.K.

local governments, and lenders

of substantial modifications to

Restructuring Commitment.

Owner's notice to HUD of appeal 100 1 100 1.0 100 V.L.

of Restructuring Commitment.

Owner's summary to tenants, 100 3 300 1.0 300 V.L.

local governments, and lenders

of the appeal of Restructuring

Commitment.

Letter of interest to 25 1 25 1.0 25 V.II.A.

participate as a Designee.

Information to demonstrate 25 1 25 2.0 50 V.II.A.

qualification as Designee.

Designee Management Plan........ 25 1 25 8.0 200 VII.A.

Designee Business Plan.......... 25 1 25 40.0 1,000 VII.B.I.

Lender/Servicer Business Plan... 75 1 75 40.0 3,000 VIII.

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Total annual burden............. ........... ........... ........... ........... 9,000 ...............

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In accordance with 5 CFR 1320.8(d)(1), the Department is soliciting

comments from members of the public and affected agencies concerning

the proposed collection of information to:

(1) Evaluate whether the proposed collection of information is

necessary for the proper performance of the functions of the agency,

including whether the information will have practical utility;

(2) Evaluate the accuracy of the agency's estimate of the burden of

the proposed collection of information;

(3) Enhance the quality, utility, and clarity of the information to

be collected; and

(4) Minimize the burden of the collection of information on those

who are to respond; including through the use of appropriate automated

collection techniques or other forms of information technology, e.g.,

permitting electronic submission of responses.

Interested persons are invited to submit comments regarding the

information collection requirements in this proposal. Comments must be

received within seven (7) days from the date of this proposal. Comments

must refer to the proposal by name and docket number (FR-4162) and must

be sent to: Joseph F. Lackey, Jr., HUD Desk Officer, Office of

Management and Budget, New Executive Office Building, Washington, DC

20503.

II. Introduction

A. Background

Over 800,000 housing units in approximately 8,500 projects have

been financed with FHA-insured loans and supported by project-based

Section 8 housing assistance payment (HAP) contracts. In many cases,

these HAP contracts currently provide for rents which substantially

exceed the rents received by comparable unassisted units in the local

market. Starting in Fiscal Year (``FY'') 1996, those Section 8

contracts began to expire, and Congress and the Administration provided

one-year extensions of expiring contracts at a cost of over $200

million. While annual HAP contract extensions for these projects

maintain an important housing resource, they come at great expense.

Every year more contracts expire, compounding the cost of annual

extensions. In ten years, the annual cost of renewing Section 8

contracts rises to approximately $7 billion, about one-third of HUD's

current budget. If, however, the Section 8 assistance is reduced or

eliminated, there is an increased likelihood that these projects will

be unable to continue to meet their financial obligations including

operating expenses, debt service payments, current and future capital

needs.

The FY 1997 renewal authority limits renewals of most Section 8

project-based assistance contracts expiring in FY 1997 to 120% of Fair

Market Rents and authorizes participation in an optional Demonstration

Program by owners with properties that have FHA-insured mortgages whose

rents are subject to the required reduction. The Demonstration Program

will explore approaches to restructuring the debt secured by these

properties while minimizing adverse impacts on tenants, owners and

communities.

These Program Guidelines describe the authority given to HUD under

the Demonstration Program and explain how HUD plans to implement the

Program. As the Department works with owners on restructuring project

loans and as questions arise from affected parties, HUD may

periodically provide additions and clarifications to these Guidelines.

B. Legislative Authority

The Section 8 Contract Renewal Authority and this Portfolio

Reengineering Demonstration Program are authorized by sections 211 and

212, respectively, of the Departments of Veterans Affairs and Housing

and Urban Development, and Independent Agencies Appropriations Act,

1997 (Pub. L. 104-204, 110 Stat. 2874, approved September 26, 1996)

(``HUD FY 1997 Appropriations Act'').

Section 212 also repealed the demonstration program authorized by

section 210 of Departments of Veteran Affairs and Housing and Urban

Development, and Independent Agencies Appropriations Act, 1996 (110

Stat. 1321) (``HUD FY 96 Appropriations Act''). Amounts made available

under section 210, however, remain available through FY 1997 and the FY

1997 Demonstration Program does not nullify any agreements or proposals

that have been considered under the FY 1996 Demonstration Program.

Proposals submitted under the FY 1996 Demonstration Program that were

received by the Department prior to September 25, 1996 will continue to

be processed by HUD. The Department is implementing the FY 1996

Demonstration Program under notices published at 61 FR 34664, July 2,

1996 and 61 FR 28757, July 25, 1996.

C. Outline of Notice

The remaining sections of the Guidelines provide the following

information:

Section III. explains section 211 of the HUD FY 1997 Appropriations

Act regarding renewals of up to one year for Section 8 contracts

expiring during FY 1997 as they relate to the Demonstration Program.

Section IV. provides an overview of the goals of the Demonstration

Program provided for in section 212 of the HUD FY 1997 Appropriations

Act, clarifies eligible and ineligible projects and gives specific

substantive guidance on restructuring.

Section V. discusses additional Demonstration Matters, such as,

required consents, additional restructuring tools, and others.

Section VI. sets forth the procedures which owners seeking to

participate in the Demonstration Program will be required to follow and

explains HUD processing.

Section VII. provides guidance relating to the anticipated use of

Designees in the Demonstration Program.

Section VIII. provides guidance on Alternative Processing by

lenders making new loans and by mortgagees or loan servicers where the

existing FHA-insured loan is retained.

Section IX. addresses other provisions of the Demonstration Program

legislation such as participation of projects with post-FY 1997

expirations and sunshine provisions.

Section X. contains HUD's findings and certifications.

The following is a table of contents for these Program Guidelines:

Table of Contents

I. PAPERWORK REDUCTION ACT STATEMENT

II. INTRODUCTION

A. BACKGROUND

B. LEGISLATIVE AUTHORITY

C. OUTLINE OF NOTICE

III. SECTION 8 RENEWAL AUTHORITY

[[Page 3568]]

A. SUMMARY OF SECTION 211 AS IT RELATES TO THE DEMONSTRATION

PROGRAM

B. RENEWALS OF SECTION 8 CONTRACTS WITH RENTS CURRENTLY ABOVE

120% OF FAIR MARKET RENTS (FMR)

IV. DEMONSTRATION PROGRAM

A. PURPOSE/GOALS

B. ELIGIBLE PROJECTS

1. General Eligibility

2. Projects with Mix of Assisted and Unassisted Units

3. Projects with Multiple Section 8 Contracts

4. Projects with Public Financing

C. INELIGIBLE PROJECTS

1. Projects without FHA-Insured Loans

2. Projects that Fail to Meet HQS Standards

3. Disqualified Owners

D. TRANSFER OF PROJECTS DISQUALIFIED FROM THE DEMONSTRATION

PROGRAM

E. DEMONSTRATION APPROACHES/UNDERWRITING

1. Mandatory Demonstration Approaches

a. Mortgage Restructuring

(1) Supportable First Mortgage Loan

(2) Second Mortgage Loan

(3) Use of Net Cash Flow

(4) Funding Rehabilitation Costs

b. Debt Forgiveness

(1) Amount of Debt Forgiveness

(a) Statutory Maximum Amount of Debt Forgiveness

(b) Formula for Computation of Debt Forgiveness Subject to

Statutory Maximum

(2) Use of Net Cash Flow

(3) Funding of Rehabilitation Costs

c. Budget-Based Rents

(1) Application of Budget-Basing

(2) Preference for Unique Projects

(3) Calculation of Budget-Based Rents

(4) Funding of Rehabilitation Costs

2. Project Underwriting

a. Purpose

b. Method

(1) Determination of Adjusted Net Operating Income

(a) Estimation of Income

(b) Estimation of Expenses

(c) Determining the Level of Required Physical Improvements

(d) Determination of Net Operating Income

(2) Owner's Distribution from Net Cash Flow

V. ADDITIONAL DEMONSTRATION PROGRAM MATTERS

A. REQUIRED CONSENTS

B. ADDITIONAL RESTRUCTURING TOOLS

1. Full or Partial Prepayment

2. Sale or Transfer of HUD's Economic Interest

3. Credit Enhancement

4. Tenant-Based Section 8

5. Removal of Restrictions

6. Use of Accumulated Residual Receipts

7. Payments by HUD

C. STRUCTURES TO ADDRESS TAX LIABILITY

D. SOURCES AND USES OF FUNDS UNDER THE DEMONSTRATION PROGRAM

1. Sources of Funds

2. Uses of Funds

E. AFFORDABILITY REQUIREMENTS.

1. Projects with Renewed or New HAP Contracts.

2. Projects without Renewed or New HAP Contracts

3. Long-Term Project Affordability

4. Affordability Waiver Authority for Designees

F. TENANT PROTECTIONS

G. FUNDING AND UNIT LIMITATIONS

H. TRANSFER OF PROJECTS

VI. DEMONSTRATION PROCESS

A. OWNER'S REQUEST TO PARTICIPATE

B. DEMONSTRATION AGREEMENT

C. EXECUTION OF DEMONSTRATION AGREEMENT

D. DELIVERY OF NOTICE TO PROJECT TENANTS, AFFECTED UNIT OF LOCAL

GOVERNMENT AND LENDER(S)

E. ASSIGNMENT OF RESTRUCTURING RESPONSIBILITY

F. DUE DILIGENCE PERIOD

1. Pre-Restructuring Conference with Owner

2. Pre-Inspection Meeting at Project

3. Due Diligence/Underwriting

G. PREPARATION OF HUD'S RESTRUCTURING COMMITMENT

H. NOTIFICATION OF PROJECT TENANTS, AFFECTED UNIT OF LOCAL

GOVERNMENT AND PROJECT LENDER(S)

I. OWNER RESPONSE TO HUD'S RESTRUCTURING COMMITMENT

J. MODIFICATION OF RESTRUCTURING COMMITMENT

K. ISSUANCE OF RESTRUCTURING COMMITMENT AFTER MODIFICATION

L. OWNER APPEAL OF RESTRUCTURING COMMITMENT (IF APPLICABLE)

M. CLOSING THE RESTRUCTURING TRANSACTION

VII. DESIGNEE SELECTION AND PROCESSING

A. SELECTION CRITERIA TO DETERMINE QUALIFIED DESIGNEES

B. ALTERNATIVE APPROACHES FOR DESIGNEE PARTICIPATION IN THE

DEMONSTRATION PROGRAM

1. Fee for Service With Performance Incentive

a. Compensation Structure

(1) Base Fee

(2) Bonus Fee

b. Processing

2. Joint Venture Approach

a. Compensation Structure

b. Process

VIII. ALTERNATIVE PROCESSING

IX. OTHER PROVISIONS OF DEMONSTRATION PROGRAM LEGISLATION

A. PARTICIPATION OF PROJECTS WITH POST-FY 1997 EXPIRATIONS

B. SUNSHINE PROVISION

X. HUD FINDINGS AND CERTIFICATIONS

A. ENVIRONMENTAL IMPACT

B. EXECUTIVE ORDER 12612, FEDERALISM

C. EXECUTIVE ORDER 12606, THE FAMILY

III. Section 8 Renewal Authority

A. Summary of Section 211 as It Relates to the Demonstration Program

The Section 8 renewal authority and its implementation are fully

described in Housing Notice H 96-89, dated October 15, 1996. The

renewal authority, as it relates to the Demonstration Program, is

summarized below.

The FY 1997 renewal authority limits HAP contract renewals of most

Section 8 project-based assistance contracts expiring in FY 1997 to

120% of Fair Market Rents and authorizes participation in an optional

Demonstration Program by owners with properties that have FHA-insured

mortgages whose rents are subject to the required reduction. The

Demonstration Program will explore approaches to restructuring the debt

secured by these properties while creating the least disruption to

tenants, owners and communities.

B. Renewals of Section 8 Contracts With Rents Currently Above 120% of

Fair Market Rents (FMR)

In general, owners of FHA-insured multifamily projects with Section

8 contracts that expire in FY 1997 and whose rents in the aggregate

exceed 120% of FMR, have two options for continuing in the Section 8

program:

(1) They can request that the contract be renewed for one year at

gross rents, in the aggregate, not to exceed 120% of FMR; or

(2) They can participate in the Demonstration Program.

``FMR'' are the Fair Market Rents (FMR) for the Section 8 Housing

Assistance Payments Program. They are provided for specific geographic

areas of the country, for dwelling units of varying sizes and are

published in the Federal Register at least annually.

``In the aggregate'' means that the comparison of Section 8 rent to

FMR is examined not unit-by-unit but for the Section 8-assisted units

for the project as a whole. Specifically, the total rent revenue at

100% occupancy for the Section 8-assisted units in the project using

current gross rents (contract rents plus the utility allowance, if

applicable) must exceed the total rent revenue at 100% occupancy for

the Section 8-assisted units in the project using 120% of the FMR for

each unit.

Owners who choose Option (1) should refer to Housing Notice H 96-89

dated October 15, 1996, which describes in detail the terms under which

HUD will provide one-year extensions for expiring Section 8 contracts

and to the memorandum from Assistant Secretary

[[Page 3569]]

for Housing--Federal Housing Commissioner dated November 1, 1996,

entitled ``Clarifications of Procedures for Project-Based Section 8

Contracts Expiring in Fiscal Year 1997.''

Owners who select Option (2) should refer to the discussion in

Sections IV. to IX. for further guidance.

IV. Demonstration Program

A. Purpose/Goals

The purpose of the Demonstration Program is to test approaches that

retain the critical affordable housing resource represented by the

supply of FHA-insured Section 8 assisted housing and maintain it in

good physical and financial condition, while at the same time reducing

the cost of the ongoing Federal subsidy. In carrying out the

Demonstration Program, HUD will work with willing owners and lenders to

reduce both Section 8 rents and operating expenses to true market

levels, and also provide for the project's capital improvement needs.

The Demonstration Program will attempt to minimize involuntary

displacement of tenants, adverse tax consequences to owners, and

adverse effects on neighborhoods and communities, to maintain existing

affordable housing stock in a decent, safe, and sanitary condition, and

to encourage responsible ownership and management of property, in the

least costly fashion. In determining how best to restructure a project,

HUD and the owner will look for ways to balance these competing goals.

B. Eligible Projects

1. General Eligibility

For a project to be eligible for the Demonstration Program, the

owners must agree to participate. The projects must be subject to an

FHA-insured mortgage and supported by project-based Section 8 HAP

contracts with rent levels which, in the aggregate, exceed 120% of FMR.

Preference will be given to projects with contracts expiring in FY

1997.

2. Projects with Mix of Assisted and Unassisted Units

A project will be eligible for the Demonstration Program regardless

of whether all or only some of the units in the project are covered by

a project-based Section 8 HAP contract.

3. Projects with Multiple Section 8 Contracts

A project with multiple Section 8 contracts, one or more of which

expires in FY 1997 and meets the requirements for the Demonstration

Program, is eligible to participate in the Demonstration Program, and

will also be given preference over other projects whose contracts

expire after FY 1997.

4. Projects with Public Financing

A project with primary financing that was provided by a public

agency and is FHA-insured and that has a HAP contract expiring in FY

1997 is eligible to participate in the Demonstration Program with the

consent of the appropriate Housing Finance Agency and the owner.

C. Ineligible Projects

1. Projects without FHA-Insured Loans

A project that does not have an FHA-insured loan will not be

eligible to participate in the Demonstration Program. Some examples

include: (i) A project whose FHA-insured loan has been assigned to HUD

(ii) a project that is HUD-owned, (iii) a project financed solely with

conventional financing, or (iv) a project with a direct HUD loan.

2. Projects that Fail to Meet HQS Standards

A project that is otherwise eligible to participate in the

Demonstration Program will be deemed ineligible if the project contains

units which fail to meet Housing Quality Standards (HQS) at contract

expiration and the owner has received adequate notice thereof and has

been given the opportunity to cure HQS deficiencies in accordance with

Chapter 6 of HUD Handbook 4350.1, Multifamily Asset Management and

Project Servicing.

3. Disqualified Owners

HUD also will not permit the owner to participate in the

Demonstration Program if HUD determines that the owner of the

multifamily housing project has engaged in materially adverse financial

or managerial actions or omissions with regard to the project (or with

regard to other similar projects if HUD determines that such actions or

omissions constitute a pattern of mismanagement that would warrant

suspension or debarment by HUD). Material adverse financial actions or

omissions are any action or omission which lead to either owner default

(monetary or technical), or a violation of one or more of the

contractual obligations under the project's Regulatory Agreement or

Section 8 HAP Contract. Violations may include, but are not limited to,

submission of false statements or certifications to HUD, diversion of

project funds, unauthorized distributions, and documented project

mismanagement. HUD may renew the contract of a disqualified owner if

the project is sold to a qualified purchaser.

D. Transfer of Projects Disqualified From the Demonstration Program

When an owner or purchaser that is ineligible for the Demonstration

Program for reasons described in Section IV.C. 2. and 3. wishes to

voluntarily sell or transfer the property, the procedures that should

be followed to facilitate the voluntary sale or transfer are described

in Section V.H. To facilitate a transfer to a qualified purchaser, HUD

may renew and transfer assistance that has not been renewed in the case

of disqualified projects.

E. Demonstration Approaches/Underwriting

This section sets forth the approaches by which projects in the

Demonstration Program will be restructured and describes the

underwriting procedures to be employed.

1. Mandatory Demonstration Approaches

Under the Demonstration Program, HUD must utilize one or more of

the following demonstration approaches (the ``Mandatory Demonstration

Approaches'') with respect to each eligible project: (a) Mortgage

Restructuring, (b) Debt Forgiveness, or (c) Budget-Based Rents. Other

demonstration actions may be used with one or more of the Mandatory

Demonstration Approaches.

HUD will determine which of the Mandatory Demonstration Approaches

is appropriate based upon, among other things, a calculation of the

adjusted, i.e., market-based, net operating income (``NOI'') generated

by the applicable project. In those cases in which the NOI is positive,

the Mortgage Restructuring or Debt Forgiveness approaches generally

will be used. If the NOI is negative, the Budget-Based Rents approach

generally will be used.

Further, HUD will determine what constitutes the Supportable Debt

by applying a 1.10 or greater debt service coverage ratio, at the

interest rate and term approved by HUD, to the adjusted NOI. HUD may

require that the term and/or interest rate on the first mortgage loan

be modified, subject to the consent of the mortgagee.

The Supportable Debt may be adjusted, as necessary, to provide the

minimum Owner's Distribution, as described in Sections IV.E.1.a.(3) and

IV.E.1.b.(2), and/or to accommodate the payment of debt service on a

rehabilitation loan. The Supportable Debt may, at HUD's option, also be

adjusted if the security for the existing

[[Page 3570]]

FHA-insured loan includes vacant land or other non-income producing

assets with additional market value.

a. Mortgage Restructuring. Under the Mortgage Restructuring

approach, the existing FHA-insured mortgage loan is divided into two

parts: (i) A performing first mortgage loan, and (ii) a second mortgage

loan payable out of Net Cash Flow.

In most instances, the Mortgage Restructuring shall be accomplished

by a partial or full prepayment of the existing FHA-insured mortgage

loan.

(1) Supportable First Mortgage Loan. The amount of the unpaid

principal balance (``UPB'') of the supportable first mortgage loan

after restructuring shall equal the Supportable Debt. The term

Restructured First Mortgage as defined in this section is meant to be

used only as a means of sizing the Second Mortgage Loan. It is not to

be confused with the Supportable Debt, which is the amount of the

adjusted, performing first mortgage loan. The Restructured First

Mortgage Loan shall equal the Supportable Debt plus (i) All

contributions made by the owner (and the owner's partners/investors) in

connection with the restructuring, as determined by HUD, and (ii) all

excess funds in the project's reserve for replacement account, and

(iii) all funds in the project's residual receipts account and any

other escrows and reserves, as determined by HUD, minus (ii) the

rehabilitation costs approved by HUD, and (iii) the transaction costs

approved by HUD.

(2) Second Mortgage Loan. Unless otherwise required by HUD, the

initial unpaid principal balance of the second mortgage loan will

equal:

(a) The outstanding balance of the existing FHA-insured mortgage

loans(s); minus

(b) The amount of the Restructured First Mortgage. Unless otherwise

required by HUD, the second mortgage loan will bear interest at a rate

not to exceed 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)). Principal and interest on the second mortgage loan

will be payable out of Net Cash Flow (discussed below), and unpaid

interest will accrue. The second mortgage loan will be due upon the

sale of the project or the refinancing of the first mortgage loan.

Other terms and conditions of the second mortgage loan will be

established in the restructuring process. HUD may, at its option,

forgive, extend, or allow the assumption of all or a part of the second

mortgage loan.

(3) 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 and

after the owner has met the maintenance standards required by HUD, to

payment to the owner of an annual owner's distribution of up to $25 per

unit per month (the ``Owner's Distribution'') and, if applicable, to

payment of an additional equity distribution to the owner equal to a

cumulative 10% on any new cash equity invested by the owner in the

project (the ``New Equity Distribution'') (Note: the proceeds from the

sale of low-income housing tax credits (``LIHTCs''), and the balances

of any residual receipts accounts and capital reserves, are excluded

from consideration for purposes of determining the amount of the New

Equity Distribution); and third, to the extent of the remaining Net

Cash Flow, to be distributed equally between the owner and HUD. In the

event of new equity investment by the owner in connection with a

restructuring, HUD may waive some or all of the distribution of cash

flow to HUD.

(4) Funding Rehabilitation Costs. 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. (Use of excess

funds in the reserve account will be determined by the Demonstration

Manager and will be net of funds required for the initial deposit to

that account.) If rehabilitation costs exceed the amount of such

available 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 non-FHA-insured rehabilitation loan, and/or (3) to

the extent that other sources of funds are unavailable, through a loan

or grant from HUD.

b. Debt Forgiveness. The Debt Forgiveness approach will be used,

for good cause and upon request by the owner, to forgive a certain

portion of the outstanding balance of an existing FHA-insured loan.

This approach shall be accomplished through a partial or full

prepayment of the existing FHA-insured mortgage loan. Under this

approach, the owner may choose to keep the reduced FHA-insured mortgage

loan in place, or refinance such loan with new debt and/or new equity.

HUD will consider the owner's proposals that address how the forgiven

debt shall be treated.

(1) Amount of Debt Forgiveness. The amount of the debt that will be

forgiven pursuant to the Debt Forgiveness Approach is equal to the

lesser of (a) the maximum amount of debt forgiveness authorized under

the 1997 Appropriations Act, as described in Section IV.E.1.b.(1) (a),

and (b) the amount of debt forgiveness computed under the formula

described in paragraph (b), below, of this Section IV.E.1.b.(1).

(a) Statutory Maximum Amount of Debt Forgiveness. Under the HUD FY

1997 Appropriations Act, the maximum amount of debt forgiveness is

limited to that portion of the existing FHA-insured debt that exceeds

the ``market value'' of the applicable project. 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

replacements, any necessary rehabilitation costs (see Section

IV.E.2.b.(1)(c)), and any anticipated costs relating to the transition

of the project to market rents.

(b) Formula for Computation of Debt Forgiveness Subject to

Statutory Maximum. (i) If the FHA-insured mortgage loan will be

refinanced with non-FHA-insured financing, the amount of debt

forgiveness under this formula, unless otherwise required by HUD, will

be:

(1) The sum of (a) the outstanding balance of the existing FHA-

insured mortgage loan(s), (b) the rehabilitation costs approved by HUD,

and (c) the transaction costs approved by HUD; minus.

(2) The sum of (a) the UPB of any new financing(s) approved by HUD,

(b) all contributions made by the owner (and the owner's partners/

investors) in connection with the restructuring, as determined by HUD,

and (c) all excess funds in the project's reserve for replacement

account, all funds in the project's residual receipts account, and any

other escrows and reserves, as determined by HUD.

(ii) If the FHA-insured mortgage loan is retained or refinanced

with another FHA-insured loan, the amount of debt forgiveness under

this formula, unless otherwise required by HUD, will equal:

[[Page 3571]]

(1) The sum of (a) the outstanding balance of the existing FHA-

insured mortgage loan(s), (b) the rehabilitation costs approved by HUD,

and (c) the transaction costs approved by HUD; minus

(2) The sum of (a) the Supportable Debt (if the existing FHA-

insured loan is retained) or the UPB of the new FHA-insured

financing(s), (b) all contributions made by the owner (and the owner's

partners/investors) in connection with the restructuring, as determined

by HUD, and (c) all excess funds in the project's reserve for

replacement account, all funds in the project's residual receipts

account, and any other escrows and reserves, as determined by HUD.

The formula for computing the amount of debt forgiveness may be

further adjusted, at HUD's option, if the security for the existing

FHA-insured loan includes vacant land or other non-income producing

assets with additional market value.

(2) Use of Net Cash Flow. For purposes of the Debt Forgiveness

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 and on the subordinate loan(s), if any. Net Cash Flow

shall be applied as follows: First, to payment to the holder of the

first mortgage loan and of any subordinate loans 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 and

after the owner has met the maintenance standards required by HUD, to

payment to the owner of an annual owner's distribution of up to $25 per

unit per month (the ``Owner's Distribution'') and, if applicable, to

payment of an additional equity distribution to the owner equal to a

cumulative 10% on any new cash equity invested by the owner in the

project (the ``New Equity Distribution'') (Note: the proceeds from the

sale of low-income housing tax credits (``LIHTCs''), and the balances

of any residual receipts accounts and capital reserves, are excluded

from consideration for purposes of determining the amount of the New

Equity Distribution); and third, to the extent of the remaining Net

Cash Flow, to be distributed equally between the owner and HUD. In the

event of new equity investment by the owner in connection with a

restructuring, HUD may waive some or all of the distribution of cash

flow to HUD.

(3) 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 Debt

Forgiveness. 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, 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 Debt Forgiveness. 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 non-FHA-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.

c. Budget-Based Rents. The Budget-Based Rents approach will be

used, in limited circumstances, to renew HAP contracts expiring in FY

1997 for a period of up to one year at budget-based rents not to exceed

the rent levels in the expiring HAP contract.

(1) Application of Budget-Basing. The Budget-Based Rents approach

is intended for projects in which the application of Mortgage

Restructuring or Debt Forgiveness alone is infeasible. It is

anticipated that the Budget-Based Rents approach will be used for the

following types of projects:

(a) If the project has a negative adjusted NOI, that is, the

adjustment of rents to market levels would not enable the project to

pay its reasonable and necessary operating expenses. Reasonable

operating expenses, for these purposes, will not include the Owner's

Distribution or New Equity Distribution.

(b) If the project's market rents are higher than both 120% of the

applicable FMRs and the gross rents (HAP contract rents plus any

applicable utility allowance amounts), and restructuring may result in

the displacement of tenants.

(2) Preference for Unique Projects. HUD may give a preference to

processing under the Budget-Based Rents approach to certain unique

projects, such as those designated for occupancy by elderly families

and those located in rural areas.

(3) Calculation of Budget-Based Rents. Under the Budget-Based Rents

approach, rents will be set at a level sufficient to support the

aggregate amount of the applicable project's reasonable operating

expenses, provided that such rents do not exceed the rents under the

expiring HAP contract.

For purposes of the Budget-Based Rents approach, a project's

reasonable operating expenses shall include:

(a) Reasonable and necessary operating expenses, including adequate

annual contributions to the reserve for replacements account;

(b) A reasonable return to the owner, based on the Owner's

Distribution; and

(c) Debt service payments that remain on the existing FHA-insured

mortgage loan after principal reduction, if any.

The amount of the reasonable operating expenses (and contributions

to the reserve for replacements account) will be determined based upon

an appraisal of the project prepared in accordance with the USPAP and a

physical needs assessment.

The rents set under the Budget-Based Rents Approach will be

reevaluated each year prior to any further renewal of the HAP contract.

Each annual HAP contract renewal is subject to Congressional

appropriations.

(4) Funding of Rehabilitation Costs. Under the Budget-Based Rents

approach, 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

the Budget-Based Rents are implemented. If the rehabilitation costs

exceed the amount of such funds, the rehabilitation costs may be funded

by a contribution of cash equity from the owner's partners/investors.

For projects with a negative NOI at market rents, HUD may supplement

the funds available for rehabilitation with a grant of up to $5,000 per

unit, which amount may be

[[Page 3572]]

increased in extraordinary circumstances.

2. Project Underwriting

a. Purpose. The purpose of demonstration project loan underwriting

is to reduce annual section 8 contract renewal costs that result from

subsidizing rents at above market levels. Projects in the Demonstration

Program will be analyzed and restructured to bring their rents and

expenses in line with the rents and expenses that are comparable to

unassisted units in the local market area. The majority of projects

will continue to receive project-based section 8 assistance at those

market levels through one-year contract renewals, subject to annual

appropriations. At the same time, FHA-insured first mortgages will be

reduced to reflect changed project income.

b. Method. HUD will first estimate a project's net operating income

(NOI) by deducting operating costs, including reserves for replacement,

from market rents. The NOI will be used to determine the Supportable

Debt; that debt may be adjusted downward to accommodate the cost of

scheduled repairs and to provide the minimum Owner's Distribution. HUD

will determine the amount of first mortgage principal reduction by

subtracting the supportable mortgage and other sources of funds from

the unpaid principal balance of the original mortgage.

For project loans restructured by HUD, project underwriting

necessary for restructuring will be the responsibility of the

Demonstration Manager, operating most often from selected HUD field

offices and assisted by a Due Diligence Contractor. The Due Diligence

Contractor will contract for appraisals, Physical Needs Assessments and

any other reports as may be required by HUD.

Appraisals must meet the standards and procedures of the Uniform

Standards of Professional Appraisal Practice (USPAP), published by the

Appraisal Standards Board of The Appraisal Foundation, as modified by

HUD. The appraisal will be the basis for determining market income and

expenses.

(1) Determination of Adjusted Net Operating Income. The adjusted

Net Operating Income (NOI) will be used to help determine which

Demonstration Approach should be employed with respect to a particular

project and to determine the size of the Supportable Debt. Computation

of the adjusted Net Operating Income will require an analysis of the

estimated income and expenses of each project after adjustment to

market levels.

(a) Estimation of Income. To estimate the total income of a

project, HUD will analyze: (a) The expected rental revenues to be

generated from operation of the project at market rents; (b) the

anticipated vacancy rate for the project; and (c) any other income

(e.g., income from laundry and parking facilities) that is expected to

be generated by the project. The determination of market rent will

assume the project has been rehabilitated to meet the requirements of

the Physical Needs Assessment as described in Section IV.E.2.b.(1)(c).

Market rents, for the purpose of underwriting, are the rents achievable

in the immediate vicinity for comparable unassisted units in good

condition.

(b) Estimation of Expenses. For the purposes of project

underwriting, total expenses will include: (1) Reasonable operating

expenses; and (2) contributions to the reserve for replacement account.

(i) Operating Expenses. It is the intent of this Demonstration

Program that project operations be reevaluated in order to reduce

operating costs where possible. HUD will analyze ordinary and necessary

operating expenses for the project. The analysis will consider, among

other factors, historical operating statements, owner input, and

standard expenses by type and market. Project expenses will be compared

to FHA-insured mortgage portfolio averages, other market data and

industry standards published regularly by entities, including, but not

limited to, the Institute for Real Estate Management (IREM).

(ii) Reserves for Replacement. An allowance for scheduled

contributions to the reserve for replacement account to fund ongoing

capital needs will be included under gross expenses. The amount will be

based on an inspection of the building and a schedule of improvements

included in the Physical Needs Assessment.

(c) Determining the Level of Required Physical Improvements. In

determining the level of physical improvements a property requires, HUD

will direct a Due Diligence Contractor to inspect the project and

complete a Physical Needs Assessment.

Participation in the Demonstration Program will not affect the

responsibility of owners who undertake a rehabilitation program to

comply with the accessibility requirements described at 24 CFR 8.23,

Alterations of existing housing facilities, and 8.24, Existing housing

programs, as applicable.

The Physical Needs Assessment will be done in accordance with the

Fannie Mae (FNMA) Physical Needs Assessment Guidance to the Property

Evaluator for the Delegated Underwriting and Servicing (DUS) Program,

as may be modified by HUD. This guide instructs the property evaluator

to examine the condition of the building, including all its systems and

components, and provide (1) a description of significant repair and

replacement needs, both immediate and long-term, and (2) a description

of any significant issues affecting tenants' health and safety.

In addition, the Demonstration Manager will direct the Due

Diligence Contractor to estimate the cost of any improvements necessary

to enable the project to compete with similar but unsubsidized projects

in its local market. The intent of physical improvement is not to

reposition the property in the market place, but to create a product

that is consistent with its original position in the market. In

determining the amount of rehabilitation to be done, the Demonstration

Manager will balance the need to enable the project to compete with

similar but unassisted projects in its local market with the need to

keep the rents as affordable as possible. The result should be a

marketable project that competes on rents rather than on amenities.

(d) Determination of Net Operating Income. Net Operating Income

(NOI) is the amount of project income that remains after all operating

expenses, including the contribution to the replacement reserve, have

been estimated. It is calculated by deducting total expenses from total

income.

(2) Owner's Distribution from Net Cash Flow. In exchange for the

payment it makes to reduce principal on the original mortgage, HUD will

require owners to share Net Cash Flow dollar-for-dollar with HUD. As an

incentive to maintain the property, however, the owner may receive an

annual distribution of 100% of Net Cash Flow up to a ceiling equal to

$25 per unit per month (``Owner's Distribution''); and also, where

appropriate, a New Equity Distribution.

The Owner's Distribution, in all cases, will be subordinate to the

first mortgage and will be paid only to the extent that the cash flow

to pay it is available. Any unpaid distributions will not accrue.

Further, 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

[[Page 3573]]

to the retention account will waive its rights to future distributions.

In sizing the amount of supportable debt, HUD will make an

adjustment so that Net Cash Flow on a pro forma basis is not less than

$25 per unit per month. The adjustment will be made as follows:

If Net Cash Flow is equal to or greater than or equal to $25

dollars per unit per month, the distribution will not be deducted from

debt service for the purpose of sizing the mortgage.

If Net Cash Flow is less than the distribution of $25 per unit per

month, the difference between the distribution and Net Cash Flow will

be deducted from the amount of projected debt service, thus reducing

the size of the supportable loan and insuring the availability of the

Owner's Distribution.

The Owner's Distribution must be earned and maintained thorough

efficient management. It is not a guarantee. Adjustments to debt

service and cash flow will be made only at initial underwriting; future

adjustments to Owner's Distribution to offset rising operating costs

will not be allowed by HUD. HUD, however, may make future adjustments

to the $25 per unit per month ceiling to respond to inflation.

V. Additional Demonstration Program Matters

A. Required Consents

The implementation of one or more of the Mandatory Demonstration

Approaches shall be subject to receipt of all necessary third party

consents. The owner and/or HUD as appropriate, shall be responsible for

obtaining the consents from necessary parties. Guidance on projects

with Ginnie Mae Mortgage Backed Securities will be provided in the

future.

B. Additional Restructuring Tools

In addition to the mandatory demonstration approaches described

above, HUD has authority to take any of the following actions with

respect to each project in the Demonstration Program:

1. Full or Partial Prepayment

With the prior consent of the insured mortgagee, HUD may choose to

make a full or partial prepayment to the holder of the FHA-insured loan

prior to the date of any defaults.

2. Sale or Transfer of HUD's Economic Interest

HUD may enter into contracts either to purchase reinsurance or to

transfer to third parties HUD's economic interest in contracts of

insurance or insurance premiums paid. HUD may not elect to do this for

more than 5,000 units in the Demonstration Program during FY 1997. Any

contract HUD executes under this paragraph shall require that

associated units be maintained as low-income units for the life of the

mortgage(s), unless HUD has waived this provision for good cause.

3. Credit Enhancement

HUD may provide new FHA multifamily mortgage insurance, contract

for reinsurance or provide other credit enhancement alternatives. HUD

may also retain the existing FHA insurance on a restructured

supportable first mortgage loan, or permit the use of the multifamily

risk-sharing mortgage programs, as provided under section 542 (b) and

(c) of the Housing and Community Development Act of 1992 (Pub. L. No.

102-550; 106 Stat. 3794; 12 U.S.C. 1707 note), to the extent that

appropriations or housing units are available. Unless otherwise agreed

to by the project owner, not more than 25% of the units with expiring

Section 8 contracts, in the aggregate, may be restructured during FY

1997 without FHA insurance.

4. Tenant-Based Section 8

With the consent of the owner of the project, and after consulting

with tenants, HUD may substitute tenant-based Section 8 assistance for

some or all of the units covered by a project's Section 8 rental

assistance contract. This Section 8 tenant-based assistance, however,

can be provided only where HUD has determined and certified that there

is adequate, available, and affordable housing within the local area

and that tenants will be able to use the Section 8 tenant-based

assistance successfully.

HUD may make this substitution for not more than 10% of the

aggregate number of units in projects restructured during any one

fiscal year.

5. Removal of Restrictions

HUD, with the owner's consent and other parties' consent, as

necessary, and after consulting with the tenants, may remove, modify or

agree to the removal of any mortgage, regulatory agreement, project-

based assistance contract, use agreement, or restriction that had

previously been imposed or required by HUD which would interfere with

the ability of the project to operate without above-market rents. HUD

may also remove any limitations previously imposed by HUD with respect

to the distribution of a project's Net Cash Flow. It is HUD's intention

after restructuring to eliminate the limited dividend distribution

requirements, should they be currently required, and associated

collection of residual receipts.

6. Use of Accumulated Residual Receipts

HUD may require the owner to apply any accumulated residual

receipts towards effecting the purposes of the Demonstration Program.

7. Payments by HUD

HUD may enter into such agreements, provide such concessions, incur

such costs, make such grants (including grants to finance approved

rehabilitation costs) and other payments, and provide other valuable

consideration, as HUD determines are reasonably necessary in order to

enable owners, lenders, servicers, third parties and other entities to

participate in the Demonstration Program.

C. Structures to Address Tax Liability

Owners of projects undergoing restructuring may be exposed to tax

consequences associated with cancellation of debt, and taxation of

capital gains or ordinary income. It is the expressed desire of

Congress that the Demonstration Program minimize, if possible, tax

consequences to owners. Absent specific legislative relief, HUD will

accept proposals from owners which include any tax motivated structure

deemed by the owner to be acceptable to the Department of the Treasury

that will limit or defer tax liability and which will not adversely

affect a project's financial integrity or management.

D. Sources and Uses of Funds Under the Demonstration Program

1. Sources of Funds

The funds which HUD anticipates using in connection with an owner's

participation in the Demonstration Program may include the following:

a. Funds in the project's residual receipts account;

b. Excess funds in the project's reserve for replacements fund;

c. New project financing, either FHA-insured or non-FHA-insured

obtained by the owner;

d. New equity to be contributed by new or existing owners and

partners/investors (including additional capital contributions);

e. New equity raised from a proposed sale or other disposition of

the project (100% of the purchase price relating to any sale or other

disposition must be supported by a third party USPAP appraisal);

f. New equity raised from the sale of low-income housing tax

credits;

[[Page 3574]]

g. To the extent other sources of funds are not available, full or

partial mortgage prepayments from HUD;

h. To the extent required, as determined by HUD, direct loans or

grants from HUD; and

i. With respect to projects with Section 8 contracts expiring after

FY 1997, the capitalized value of Section 8 project-based assistance in

excess of market rents.

2. Uses of Funds

Subject to the approval of HUD and, where required, to mortgagee

approval, the permitted uses of such funds will include the following:

a. Reduction or cancellation of existing FHA-insured debt and,

where appropriate, other debt on the property approved by HUD,

including a payment to an escrow account to be used for such purposes;

b. Payment of delinquent taxes, insurance premiums and/or other

amounts owing with respect to the project, including amounts necessary

to remove liens or judgments;

c. Payment of reasonable rehabilitation, renovation, maintenance or

construction expenses necessary to meet the requirements of the

Physical Needs Assessment;

d. Payment of reasonable legal and other transactional costs

(including title, survey, appraisals, etc.);

e. Payment of reasonable fees and costs associated with obtaining

new financing (including prepayment penalties, discounts, etc.);

f. Payments of reasonable oversight fees for nonprofits to cover

reasonable pre-development costs; and

g. Relocation costs.

E. Affordability Requirements

1. Projects with Renewed or New HAP Contracts

Unless otherwise waived by HUD for good cause, each project owner

participating in the Demonstration Program that is provided with a new

or renewed HAP contract (other than any temporary renewal provided

during the Demonstration Program processing period) will be required

for a period of up to 20 years from the date of closing of the

Demonstration Restructuring, to accept each offer by HUD to renew the

project's HAP contract. The terms and conditions of the HAP contract

renewals shall be set forth in: (a) The Restructuring Commitment (as

described in Section VI.G.) between HUD and the owner, and/or (b) an

amendment to the renewed HAP contract. All such renewals shall be

subject to annual Congressional appropriations.

2. Projects without Renewed or New HAP Contracts

Unless otherwise waived by HUD for good cause, with respect to any

project participating in the Demonstration Program that is not provided

with a new or renewed HAP contract, the owner and HUD shall execute a

Use Agreement in the same form as that described in Section V.E.1.;

provided, however, that such Use Agreement shall also require the owner

to accept Section 8 tenant-based certificates or vouchers from the

project's existing tenants, to the extent such tenants choose to remain

in the project, for a period, in the aggregate, of up to 20 years after

the Demonstration Restructuring closing for the project occurs.

3. Long-Term Project Affordability

When the Mortgage Restructuring or Debt Forgiveness approaches are

used, the project will be required to comply with affordability

requirements established by HUD. Unless otherwise agreed to by HUD, the

affordability requirements shall remain in effect for a minimum of 20

years from the date the Mortgage Restructuring or Debt Forgiveness is

made effective. Affordability requirements shall be incorporated into a

recorded Use Agreement.

If statutorily permitted by the section of the National Housing Act

under which the mortgage is insured, the affordability requirements

will be the same as those of the Low-Income Housing Tax Credit program,

namely, the project shall be required to maintain: (a) At least 20% of

the units in the project with families whose adjusted income does not

exceed 50% of the area median income, or (b) at least 40% of the units

in the project with families whose adjusted income does not exceed 60%

of the area median income. Affordability requirements may be waived by

HUD for good cause.

4. Affordability Waiver Authority for Designees

None of the affordability requirements in this Section V.E. may be

waived by a Designee, except with express prior written approval of

HUD.

F. Tenant Protections

If the owner has provided the required notice, any eligible family

residing in a project-based Section 8 assisted unit that is covered by

an expiring contract that is not renewed will be offered tenant-based

assistance as provided in Housing Notice H 96-89 prior to the date on

which the project-based HAP contract expires. If the owner chooses not

to request a renewal and if proper notice was not given, the owner must

permit the tenants assisted by the expiring Demonstration Agreement to

remain in their units for the full notice period without increasing the

tenant portion of the rent under the Demonstration Agreement. Public

housing authorities will be allocated additional HAP contract authority

on an annual basis in order to assure that families so affected will be

provided tenant-based Section 8 contracts. Public housing authorities

will be responsible for administering the issuance of these tenant-

based Section 8 contracts.

G. Funding and Unit Limitations

The funding limitation for the Demonstration Program is set at

$40,000,000. This amount is comprised of $30,000,000 made available

under section 210 of the Departments of Veterans Affairs and Housing

and Urban Development and Independent Agencies Appropriations Act,

1996, appropriated to remain available through September 30, 1997 and

$10,000,000 appropriated under section 212 of the FHA Multifamily

Demonstration Authority HUD 1997 Appropriations Act, appropriated to

remain available until September 30, 1998. Total funds available are

net of commitments made in the implementation of the FY 1996 Portfolio

Reengineering Demonstration Program.

The $40,000,000 shall include any credit subsidy costs associated

with providing direct loans or mortgage insurance as well as costs of

modifying and restructuring loans held or guaranteed by the Federal

Housing Administration.

H. Transfer of Projects

When the owner of a project in the Demonstration Program

voluntarily transfers the property, HUD shall facilitate the transfer

to tenant organizations, tenant-endorsed nonprofit organizations or

public agency purchasers which are qualified to own and manage

multifamily properties. HUD will give final approval to the selected

purchaser upon the completion of the following selection process by the

owner, and certification by the owner that this process has been

followed. To facilitate a transfer to a qualified purchaser, HUD may

transfer existing Section 8 project-based assistance to the purchaser

or transferee. In the transfer of physical assets, demonstration

project owners must follow the process below:

1. The owner shall notify potential qualified tenant organizations

and experienced tenant-endorsed nonprofit organizations or public

agency

[[Page 3575]]

purchasers of the availability of the project for sale by:

a. Mailing notices to eligible organizations;

b. Placing notices in the major local newspaper(s) in the

jurisdiction in which the project is located;

c. Mailing notices to clearinghouse networks; or

d. Using any other means of notification which HUD determines would

be effective to notify potential qualified purchasers of the sale of

the property.

2. For the 90-day period beginning on the date of receipt by HUD of

a notice of intent to transfer physical assets, the owner may accept a

bona fide offer only from:

a. A resident council intending to purchase the project and retain

it as rental housing, certifying that it has the support of a majority

of tenants;

b. A tax-exempt nonprofit organization that has a record of service

over at least five years of providing quality low-income housing and

which has the support of a majority of tenants; or

c. A qualified public agency.

3. During this 90-day period, although offers may be made by other

prospective purchasers, these offers may not be accepted by the owner

until the expiration of the 90-day period. If no bona fide offer to

purchase the project is made by any of these groups and accepted by the

owner at the end of the 90-day period, which period may be extended by

HUD for good cause, the owner may accept an offer to purchase the

project from any qualified purchaser.

VI. Demonstration Process

This section explains the Demonstration Program process that will

be followed by HUD and project owners for eligible project loans. The

Demonstration Program provides for both Designee Processing and

Alternate Processing as well as direct HUD processing of Demonstration

project loans.

In the case of Designee processing, initial intake and referral to

the appropriate Designee is the responsibility of HUD and thereafter

the Designee is responsible for project management. (See Section VII.

for further information on Designee Processing.)

Owners seeking new first mortgage financing may bypass the majority

of the HUD restructuring process and have the qualified lender perform

the necessary underwriting and due diligence activities. In cases where

the FHA loan is being retained, HUD may request the mortgagor or loan

servicer to perform certain due diligence and underwriting of

activities under certain conditions. (See Section VIII.)

The following describes the restructuring process to be implemented

directly by HUD.

A. Owner's Request to Participate

To participate in the Demonstration Program, owners with Section 8

contracts due to expire in FY 1997 must complete, execute and return to

HUD, no later than 45 days prior to the expiration of their Section 8

contract, a Request to Participate in the Demonstration Program (the

Request to Participate). The Request to Participate should be in the

form of a letter of interest which includes the name and address of the

project and the date the Section 8 contract expires.

Owners with contracts expiring within 45 days of the date of

publication of these Guidelines who, therefore, cannot provide the full

45 days of notice, must provide notice to HUD as soon as possible but

not later than 45 days from the publication of these Guidelines. If the

project has more than one Section 8 contract, the 45 days will be

measured from the expiration date of the contract with the earliest

expiration.

Owners who do not submit the above Request to Participate on or

before the required deadlines will not be eligible to participate in

the Demonstration Program, unless compliance with the deadlines is

waived by HUD for good cause. This Request to Participate should be

addressed to the Director of Multifamily Housing in the HUD field

office with jurisdiction over the project.

B. Demonstration Agreement

Within ten business days of HUD's receipt of the owner's Request to

Participate in the Demonstration Program, the field office Director of

Multifamily Housing will prepare and send to the owner the following:

1. A Demonstration Agreement which: (a) Sets forth the Owner's

obligation to proceed in good faith to negotiate a Restructuring

Commitment with HUD within 180 calendar days after execution of the

Demonstration Agreement; (b) sets forth the Owner's obligation to

provide all documents and information reasonably requested by HUD in

order to enable the project to participate in the Demonstration

Program; and (c) requires the owner to certify that it has provided the

notice to the tenants, the Affected Unit of Local Government and the

lender(s), as required in Section VI.D.;

2. An Addendum to the Demonstration Agreement in the form of a

Housing Assistance Payments Demonstration Renewal Contract, the form of

which is included as Attachment 3(c) of the Housing Notice H 96-89

dated October 15, 1996 (the HAP Renewal Contract),

3. An attachment containing the name and address of the project,

the Section 8 and FHA project numbers, the section of the National

Housing Act under which the mortgage is insured, an owner or owner

agent contact name, address and telephone and fax numbers, and unit

type and rental information, consisting of contract rents, utility

allowances, if any, and FMR's.

C. Execution of Demonstration Agreement

In order to participate in the Demonstration Program, the owner

will be required to execute and deliver the Demonstration Agreement to

the Director of Multifamily Housing in the HUD field office with

jurisdiction, no later than 10 business days prior to the Section 8

contract expiration date. This deadline may be extended by the

Demonstration Program Coordinator for good cause. HUD will execute the

HAP Renewal Contract and Demonstration Agreement only after receipt of

owner's evidence that proper notification to project tenants, the

Affected Unit of Local Government and project lender(s) has been

provided in accordance with Section VI.D.

HUD will assign a Demonstration Program Tracking Number to the

project after execution of the Demonstration Agreement.

D. Delivery of Notice to Project Tenants, Affected Unit of Local

Government and Lender(s)

Simultaneously with the delivery of the Request to Participate to

HUD, the owner shall deliver notice of the owner's intention to

participate in the Demonstration Program to: (a) The tenants residing

in the project, (b) the chief official of the Affected Unit of Local

Government having jurisdiction over the project, and (c) the mortgagee

of the project's FHA-insured loan. The ``Affected Unit of Local

Government'' is the smallest unit of general local government with

jurisdiction in which the project is located.

Notification to project tenants must be accomplished by delivery of

notices to each project tenant and by posting the notice in at least

two conspicuous public places in each building for a minimum of three

(3) consecutive calendar days. If a tenant organization of project

tenants exists which officially represents all tenants, notice may be

provided to the tenants' organization

[[Page 3576]]

rather than to each tenant individually, but notice must still be

posted in all project buildings as described in this paragraph.

The notice to project tenants required under the Demonstration

Program shall be in addition to the required one-year notice of Section

8 contract expiration required under the section 8(c)(9) of the United

States Housing Act of 1937 and HUD Notice H 96-89.

The notice must also include:

1. A copy of the ``Request to Participate'' provided by the owner

to HUD, including the date of the Section 8 contract expiration;

2. An explanation of tenant protections afforded.

3. A statement that project tenants, the Affected Unit of Local

Government and lender(s) have the opportunity to provide written

comment. They are particularly encouraged to provide written comments

on the project's physical needs and property management.

4. A statement that comments should be sent to the Director of

Multifamily Housing in the HUD field office with jurisdiction over the

project and that written comments will be accepted for up to 45 days

after the date of execution of the Demonstration Agreement.

5. A statement that prior to the start of preparation of the

Physical Needs Assessment for the project by a Due Diligence

Contractor, a preinspection meeting will be held on site and that up to

3 representatives each, of both project tenants and the Affected Unit

of Local Government, and their technical consultants, if any, will be

invited to this meeting. It should further indicate that the owner will

provide a separate written 10 day notice of this meeting to the project

lender(s), project tenants and to the chief official of the Affected

Unit of Local Government. Any written comments received by the time of

this meeting will be provided to the Due Diligence Contractor

responsible for preparing the Physical Needs Assessment. The notice

should advise that upon completion of the Physical Needs Assessment,

one copy of the Assessment will be provided to the insured lender,

project tenants and one copy to the chief official of the Affected Unit

of Local Government.

6. A statement that the owner will provide the project lender(s),

project tenants and the chief official of the Affected Unit of Local

Government with a brief summary of HUD's Restructuring Commitment.

7. A statement that if the owner chooses to appeal the terms of a

Restructuring Commitment, the owner will notify the project lender(s),

project tenants and the chief official of the Affected Unit of Local

Government in writing concurrently with its submission of the appeal to

HUD. It will further advise these parties that they will have 20 days

from the date of the appeal submission to provide written comments to

HUD.

8. In instances where lender consent is needed, a request that the

lender state its willingness to participate in the Demonstration

Program.

9. A statement that the Affected Unit of Local Government is

encouraged to apprise representatives of the local community and

neighborhood of this notice.

Evidence that proper notice was provided must be sent to the

Demonstration Manager.

E. Assignment of Restructuring Responsibility

Within 10 business days following HUD's receipt of the executed

Demonstration Agreement from the owner, HUD will assign responsibility

for the project either to a qualified Designee, whenever possible or,

if there is no available Designee for the project location, to a HUD

Demonstration Manager. (See Section VII. for Designee Processing.)

In the case of HUD processing, the Demonstration Manager will

operate most often out of selected field offices and will be assisted

by a Due Diligence Contractor who will contract for appraisals,

Physical Needs Assessments and any other reports as may be required by

HUD. The Demonstration Manager will be responsible for:

1. Working with the owner, a Due Diligence Contractor, project

tenants, project Lender(s), the Affected Unit of Local Government, and

others as necessary to accomplish the restructuring;

2. Determining which of the demonstration approaches are

appropriate for restructuring the project loan;

3. Negotiating the terms and conditions of a Restructuring

Commitment and related documents with the owner; and

4. Coordinating the preparation, processing and closing of the

Restructuring Commitment and the related documents.

F. Due Diligence Period

Once the Demonstration Manager or the Designee is selected, the Due

Diligence period will commence.

1. Pre-Restructuring Conference with Owner

Promptly following the execution of the Demonstration Agreement by

HUD and the owner, the Demonstration Manager will meet with the owner

to discuss the owner's views with respect to the appropriate level of

debt, market rents, operating costs, capital needs, preference for debt

forgiveness, any of the additional restructuring tools listed in

Section V.B., and any other related matters. At this conference, the

owner's restructuring proposal, if any, may be presented and given

initial review.

2. Pre-Inspection Meeting at Project

Prior to the inspection of the property by a Due Diligence

Contractor responsible for preparation of the Physical Needs

Assessment, a pre-inspection meeting must be held on site. Participants

will include, at a minimum, the HUD Demonstration Manager and Due

Diligence Contractor, the owner or owner's representative, up to three

representatives of the project tenants or their technical consultants,

if any, and up to three representatives of the Affected Unit of Local

Government. Local HUD field office representatives will also be invited

to attend. The owner must provide a minimum of 10 days written notice

of the meeting to project tenants, project lender(s), and the Affected

Unit of Local Government.

3. Due Diligence/Underwriting

Promptly following the execution of the Demonstration Agreement by

HUD, the Demonstration Manager and Due Diligence Contractor will work

closely with the owner to obtain the required information and perform

the underwriting necessary to negotiate a restructuring commitment. The

Demonstration Manager and Due Diligence Contractor will analyze the

project's market rents and expenses, determine Net Operating Income,

estimate the project's market value, and obtain any other information

regarding the financial, physical, environmental, or other condition of

the property he/she needs to negotiate a restructuring commitment with

the owner.

The owner must cooperate fully with the Demonstration Manager and

Due Diligence Contractor during this process and must provide timely

access to the property and to project documents as requested. In

addition, within 14 calendar days of executing the Demonstration

Agreement, the owner may submit to the Demonstration Manager a detailed

estimate of project operating costs after restructuring is completed.

Failure to cooperate is

[[Page 3577]]

grounds for terminating the Demonstration Agreement.

HUD intends to develop additional administrative guidance for

determining market rents, operating expenses, the level of

rehabilitation required, the use of replacement reserve account

balances, and other such matters.

G. Preparation of HUD'S Restructuring Commitment

The Demonstration Manager, using the information produced during

the Due Diligence phase of the Demonstration Process, will develop a

Restructuring Commitment that utilizes one or more of the mortgage

restructuring, forgiveness of debt, or budget-based rents approaches.

The Restructuring Commitment will be presented in writing to the

owner and the owner will be provided 30 calendar days to accept the

Commitment or to submit a counter proposal to the Demonstration

Manager.

Any project rehabilitation or capital improvements financially

supported or required by HUD must be processed in accordance with HUD's

environmental review requirements in 24 CFR part 50, prior to HUD's

presentation of the Restructuring Commitment. All projects must be in

conformance with flood insurance purchase requirements, as applicable,

in accordance with 24 CFR 50.4(b)(1).

H. Notification of Project Tenants, Affected Unit of Local Government

and Project Lender(s)

Upon receipt of the Restructuring Commitment, the owner shall

deliver by mail a brief summary of the document to project tenants, the

chief official of the Affected Unit of Local Government, and the

lender(s), and submit evidence to the Demonstration Manager that proper

notification was provided. If an organization of project tenants

exists, which officially represents all tenants, notice may be provided

to the tenants' organization rather than to each tenant individually.

The Affected Unit of Local Government shall be requested to provide

this notification to any representatives of local communities and

neighborhoods that it chooses to inform.

I. Owner Response to HUD'S Restructuring Commitment

Within 30 calendar days following the owner's receipt of HUD's

Restructuring Commitment, the owner must either (i) execute the

Restructuring Commitment (without modification) and return it to the

Demonstration Manager; or (ii) notify the Demonstration Manager in

writing of any modifications to the Restructuring Commitment that it

requests prior to its execution. Should the owner accept the

Restructuring Commitment, the execution of the commitment must be

accompanied by any required third party consents. For example, these

include the consent of the insured mortgagee and the consent of limited

partners, if required under the terms of a limited partnership

agreement.

J. Modification of Restructuring Commitment

The Demonstration Manager shall, promptly following its receipt

from the owner of any modifications to the Restructuring Commitment,

work closely with the owner to review and evaluate all such

modifications, resolve any issues, and prepare and deliver to the owner

a revised Restructuring Commitment which reflects those modifications

acceptable to HUD. Final negotiation of a Restructuring Commitment

shall occur during a period not to exceed 40 calendar days after the

Demonstration Manager's receipt of the owner's modifications, unless

extended by HUD for good cause.

K. Issuance of Restructuring Commitment After Modification

Upon receipt of the modified Restructuring Commitment, the owner,

only if the changes are substantive and substantial, shall deliver a

brief summary of the document to project tenants, the chief official of

the Affected Unit of Local Government, and the lender(s) by mail and

shall submit evidence to the Demonstration Manager that proper

notification was provided. If a tenant organization of project tenants

exists, which officially represents all tenants, notice may be provided

to the tenants' organization rather than to each tenant individually.

The Affected Unit of Local Government shall be requested to provide

this notification to any representatives of local communities and

neighborhoods that it chooses to inform.

The owner will have 30 days from the date the Restructuring

Commitment is delivered by HUD in which to execute that document and

return it to HUD. This 30 day period may be extended by the Department.

L. Owner Appeal of Restructuring Commitment (if applicable)

If, for any reason, an owner desires to appeal the modified

Restructuring Commitment issued by HUD, an appeal must be submitted in

writing to the Director of Multifamily Housing or Director of Housing,

in the local field office, within 10 calendar days of the issuance date

of the modified Restructuring Commitment.

The written notice of appeal shall specifically state, in

reasonable detail, the issues and bases upon which the owner seeks

review. The Department will issue a written determination within thirty

(30) calendar days of the date of the appeal.

The owner must notify the project lender(s), project tenants and

the chief official of the Affected Unit of Local Government in writing

concurrently with its submission of the appeal to HUD. It will further

advise that these parties will have 20 days from the date of the appeal

submission to provide written comment to HUD. If an organization of

project tenants exists, which officially represents all tenants, notice

may be provided to the tenants' organization rather than to each tenant

individually.

If the appeal process results in a mutually satisfactory

conclusion, HUD and the owner will execute a final version of the

revised Restructuring Commitment. If HUD denies the owner's appeal, HUD

will so notify the owner in writing. Upon such notification, the owner

may execute the Restructuring Commitment as last revised by HUD, or may

choose not to participate in the Demonstration Program.

In cases where no restructuring agreement is reached and the

Demonstration Agreement expires, the owner may request a one-year

Contract renewal in accordance with section 211(b) of the HUD FY 1997

Appropriations Act, as implemented by Housing Notice H 96-89. In most

cases, the rents under the one-year renewal Contract will be set at

120% of the applicable FMR. Section 211(b) (2) and (3) contain

exemptions to the 120% limitation; if the project qualifies for one of

these exemptions, rents would be maintained at current levels.

If the owner chooses not to request a renewal, and if the

appropriate notice has been provided, HUD will provide tenant-based

assistance to all eligible families in accordance with Housing Notice H

96-89.

If the owner chooses not to request a renewal and if proper notice

was not given, the owner must permit the tenants assisted by the

expiring Demonstration Agreement to remain in their units for the full

notice period without increasing the tenant portion of the rent under

the Demonstration Agreement.

M. Closing the Restructuring Transaction

Loan closing must occur within 60 days of execution of the

Restructuring

[[Page 3578]]

Commitment. If necessary for closing, HUD will extend the HAP Renewal

Contract by up to 60 calendar days. An additional extension period may

be granted by HUD, if closing is delayed due to circumstances beyond

the control of the owner. In no case may the HAP Contract be extended

for more than 6 months if the Restructuring Commitment has not been

executed.

The Demonstration Manager will be responsible for coordinating the

closing. Where the restructuring involves new FHA-insured financing,

the closing must be completed in accordance with FHA processing

requirements.

VII. Designee Selection and Processing

HUD will provide qualified Designees the opportunity to enter into

arrangements with HUD for restructuring Demonstration Program projects

in their jurisdiction or service area. HUD will select qualified state

housing finance agencies, housing agencies or nonprofit entities

(Designees) to take responsibility for processing project restructuring

under the Demonstration Program.

A. Selection Criteria to Determine Qualified Designees

HUD's selection of qualified Designees will be made based on the

criteria listed in the following paragraph. Interested state and local

housing participants must submit letters of interest to HUD on or

before February 15, 1997, and should include the potential Designee's

geographic area of jurisdiction and its qualifications. Applicants who

are already approved as FHA risk sharing lenders are not required to

submit qualifications. Letters of interest must be accompanied by a

letter of support from the Chief Elected Official of the area(s) of

jurisdiction. Credentials will be screened and applicants will be

selected on or before April 1, 1997. HUD may resolicit public entity

applicants on or about April 15, and make selections on or about May

31. HUD will accept late submissions only for areas that have not been

assigned a Designee. However, for projects with Section 8 contracts

that expire prior to February 15, 1997, on a case by case basis, HUD

will assign these projects to Designees who have submitted Letters of

Interest prior to February 15, 1997, for specific projects.

Nonprofit Designees will be selected through a formal Request for

Qualification (RFQ) process. The RFQ will be published in early 1997.

The selection criteria on which the applicants will be rated are as

follows:

1. Demonstrated experience with multifamily loan restructurings;

2. Demonstrated experience in multifamily financing, and asset/

property management experience relating to affordable multifamily

housing;

3. Demonstrated staff experience and capacity for managing a

restructuring process for multifamily projects; and

4. A history of stable, financially sound, and responsible

administrative performance.

These selection qualifications may be demonstrated either by the

Designee applicant alone or in partnership with other entities with

proven experience and capacity in this area. If a team approach is

chosen, the Designee applicant must provide evidence of its ability to

manage this type of team. Designee applicants are encouraged to develop

partnerships with each other as well as with other private and public

entities, including: (i) Financial institutions, (ii) mortgage

servicers, (iii) the Federal National Mortgage Association, (iv) the

Federal Home Loan Mortgage Corporation, (v) Federal Home Loan Banks,

(vi) other state or local mortgage insurance companies or bank lending

consortia, (vii) nonprofit and for-profit housing organizations.

In its selection, HUD will give preference to qualified Designees

that have had positive previous association with specific projects that

may seek restructuring.

Once a Designee is selected, it will then be responsible for

processing all projects in the Demonstration Program in its area of

jurisdiction, although in some circumstances, HUD and the Designee may

agree to a more limited initial engagement. The Designee may choose to

reject certain projects that represent extraordinary risk, which by

mutual agreement can be retained by HUD. In the event the Designee

rejects a project, responsibility for that project will be given to the

Demonstration Manager. Until and unless a Designee is selected for an

area, HUD will act as Designee.

The management plan setting forth the manner in which the Designee

will carry out the restructuring must be approved by HUD and will be

attached as a provision of the contract to be entered into by the

Designee and HUD.

In the event that potential Designees with overlapping

jurisdictions express interest and are determined to be qualified, they

must first attempt to enter into an agreement as to how projects to be

restructured will be allocated. This agreement must be executed by the

Chief Elected Official of each jurisdiction. Until such time as

agreement is reached, HUD will be responsible for processing

demonstration projects in the affected service area.

In the event qualified nonprofit entities desire to operate in

areas where state or local agencies are acting as Designees, the

nonprofit will be required to enter into a cooperation agreement with

the relevant Designee with jurisdiction prior to participating in

restructuring in that jurisdiction. Where more than one nonprofit

desires to operate in a single geographic area, HUD will allocate

projects based on their qualifications and familiarity with the local

market area.

Until such time as qualified Designees are selected for specific

areas, HUD will be responsible for Demonstration Program

implementation.

B. Alternative Approaches for Designee Participation in the

Demonstration Program

Designees may contract with HUD under one of two approaches:

1. Fee for Service With Performance Incentive

a. Compensation Structure. Under this approach, the Designee will

be paid on a uniform fee structure, to be established by HUD, which

will include both a Base Fee and an incentive fee, called a Bonus Fee,

as defined in the contract to be negotiated between HUD and the

Designee.

(1) Base Fee. The Base Fee will be earned and paid based on

achievement of certain stages of performance as indicated below.

Stages of Performance Criteria on which Base Fee will be earned:

Stage I: Submission of Detailed Business Plan

Submission to HUD of a detailed Business Plan to include:

(i) An outline of the ownership entity, loan documents (and bond

documents, if applicable);

(ii) Required third party approvals;

(iii) A completed appraisal meeting the requirements of the Uniform

Standards of Professional Appraisal Practice (USPAP), published by the

Appraisal Standards Board of the Appraisal Foundation, as modified by

HUD, incorporating data on operating expenses available from FHA and

entities such as IREM;

(iv) Underwriting analysis including assessment of market rents and

operating expenses based on the appraisal, historical operating

expenses, and determination of Net Operating Income, supportable

financing, proposed principal reduction, rehabilitation financing, and

owner input;

[[Page 3579]]

(v) Assessment of rehabilitation needs;

(vi) Description and rationale for the mandatory demonstration

approach being selected;

(vii) Evidence of proper notification to tenants, Affected Unit of

Local Government and lender(s);

(viii) Summary of comments received in the process and how they

were addressed;

(ix) Environmental issues;

(x) Litigation issues;

(xi) Tax issues;

(xii) Public policy issues;

(xiii) Written record of inquiries from public officials regarding

the restructuring; and

(xiv) Other issues as provided more specifically in further

guidance to be provided by HUD. All information in the Business Plan is

to be supported by the findings of the due diligence activities.

Stage II: Executed Restructuring Commitment

Reach agreement on a post-appeal Restructuring Commitment or

aggregate Commitments in the case of multiple project restructurings,

executed by the Designee and owner within 180 days of the date of the

contract between HUD and the Designee that:

(i) Meets or exceeds net savings to government anticipated by the

HUD cost saving model as adjusted and agreed to by HUD to accommodate

project financing and public policy needs; and

(ii) Achieves HUD's public policy objectives to be defined jointly

by the Designee and HUD.

Stage III: Closing of the Transaction

Close transaction based on a Restructuring Commitment within 60

days of the execution of the Restructuring Commitment.

(2) Bonus Fee. In addition to the Base Fee for Service, a Bonus Fee

would be earned based on the following Bonus Objectives being achieved:

(a) Amount of Savings to the Federal Government, based on the HUD

model for credit scoring;

(b) Timeliness. Closing the transaction in a period shorter than

the projected 60 days after execution of the Restructuring Commitment;

and

(c) Achieving HUD and local Public Policy Objectives. Providing an

exceptional solution to meeting HUD's public policy objectives, in

HUD's sole estimation.

b. Processing. Once a project in the Demonstration Program has been

assigned by HUD to the Designee, the Designee will be responsible for

accomplishing the restructuring of the project in a period of 180 days

from the date of the Demonstration Agreement and closing in a period

not to exceed 60 days from the execution of the Restructuring

Commitment. The Designee's process for restructuring must be consistent

with the authorizing legislation for the Demonstration Program and must

meet mandatory Demonstration Program objectives including statutory

notification requirements.

The Designee will be required to seek HUD approval and the approval

of the insured mortgagee and other necessary third parties at the three

Stages described above in Section VII.B.1.a.(1). The Business Plan and

the Final Restructuring Commitment will require HUD approval.

As in direct HUD processing, the owner will have 10 calendar days

from the issuance of the Restructuring Commitment to appeal, in

writing, to the Director of Multifamily Housing in the HUD field office

with jurisdiction, the terms Restructuring Commitment. The written

notice of appeal shall specifically state, in reasonable detail, the

issues and bases upon which the owner seeks review. Following the

appeal, a modified Commitment may be issued by HUD. If needed, after

signing a modified Commitment, the owner will qualify for an extension

of the Demonstration HAP Contract. Failure to sign a Restructuring

Commitment will result in the termination of the Demonstration

Agreement and a reduction of project rents to 120% of FMR.

Any project rehabilitation or capital improvements supported or

required by HUD must be processed in accordance with HUD's

environmental review requirements in 24 CFR part 50, prior to HUD's

approval of a Designee's Detailed Business Plan. All projects must be

in conformance with flood insurance purchase requirements, as

applicable, in accordance with 24 CFR 50.4(b)(1). HUD will also execute

the closing documents. Where full or partial mortgage prepayment from

the FHA Insurance Fund or new FHA-insured financing is included in the

restructuring, new regulatory agreements must be entered into.

The Demonstration Program limits the number of units for which HUD

may permit assignment of its insured position, enter into contracts to

purchase reinsurance or otherwise transfer economic interest in the

contracts of insurance to 5,000 units. HUD will approve requests from

Designees to receive such assignment in the order in which they are

received and subject to HUD's assessment of the benefit to the Federal

Government and the timeliness of implementation. In the absence of

designees for any geographic area, HUD may assume the role of designee

and sub-contract the assignment of economic interest.

The Demonstration Program also limits the number of units for which

HUD may substitute tenant-based Section 8 assistance for project-based

assistance to 10% of the aggregate number of units in projects

restructured in any one fiscal year. HUD will approve requests for

tenant-based assistance for projects that demonstrate new and

innovative approaches to restructuring, subject to availability, given

the 10% limitation.

In the Designee's restructuring process, HUD will be the initial

point of contact with owners and will be responsible for allocating

projects to the selected Designee.

2. Joint Venture Approach

a. Compensation Structure. HUD seeks joint venture arrangements in

which nonprofit or public entity Designees assume some or all of HUD's

risk of restructuring in exchange for a share of the savings to the

Federal Government resulting from restructuring. In most cases, savings

to the Government will be measured by comparing the cost to the

Government that would occur if the project were not restructured and

the first mortgage defaulted with the cost to the Government of the

restructuring by the joint venture.

The objective of the joint venture approach is to explore ways to

significantly reduce HUD's administrative role while simultaneously

advancing the interest of the Federal Government (taxpayers) in the

restructurings. The risk of restructuring assumed by designees could

include originating a new uninsured or partially insured loan, making a

cash payment for the assignment of HUD's economic interest in insurance

in force, or other form as designed and proposed by the Designee.

In joint venture arrangements, the Designee investment can take

the form of money, time, or credit exposure. The investment may be made

directly by the Designee or by a partner of the Designee, such as those

public and private entities listed in Section VII.A. The freedom of the

Designee to control the transaction will be commensurate with the level

of investment. HUD seeks to transfer sufficient risk and reward to the

Designee to insure that HUD's objectives will be met with substantially

reduced HUD monitoring and involvement. Ideally, HUD would not review

interim

[[Page 3580]]

stages of the restructuring process and would accept the Designees'

warranties, certifications and representations. It is possible that HUD

would delegate all 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 were fairly represented in the transaction.

Payments to Designees for fees, return on investment and, if

applicable, administration of Section 8 will be funded from transaction

proceeds, Section 8 appropriations and other funds as HUD may

determine.

b. Process. The Joint Venture Designees will be responsible for all

decision making. HUD approvals will be based on representations and

certifications made by the Designee. The Designee's process for

restructuring must be consistent with the authorizing legislation for

the Demonstration Program and must meet mandatory Demonstration Program

objectives including statutory notification requirements and

affordability requirements.

Joint Venture Designees will indicate in their letter of interest

or RFQ that they desire to handle, on a joint venture basis, some or

all of the projects in their service areas whose owners opt to

participate in the Demonstration Program. Once the joint venture is in

place, HUD will assign the Designee demonstration projects. In its

selection, HUD will give preference to qualified Designees that have

had positive previous association with specific projects that may seek

restructuring.

After being selected by HUD, the Designees will meet with the

Demonstration Program Coordinator and HUD financial advisors to develop

a joint venture approach that is mutually satisfactory to HUD and the

Designees. The approach with each Designee will be formally described

in a joint venture agreement that will set forth Designee risk and

authority, HUD oversight, a cost to government calculation model and a

method of sharing savings to government with HUD and the Designee. The

joint venture agreement shall provide that HUD shall complete its

environmental review requirements under 24 CFR part 50, as applicable,

prior to the entry of any restructuring commitment by HUD or binding

HUD. The agreement shall also provide that all projects must be in

conformance with flood insurance purchase requirements, as applicable,

in accordance with 24 CFR 50.4(b)(1).

The Demonstration Program limits the number of units for which HUD

may permit assignment of its insured position, enter into contracts to

purchase reinsurance or otherwise transfer economic interest in the

contracts of insurance to 5,000 units. HUD will approve requests from

Designees to receive such assignment in the order in which they are

received and subject to HUD's assessment of the benefit to the Federal

Government and the timeliness of implementation. In the absence of

Designees for any geographic area, HUD may assume the role of Designee

and sub-contract the assignment of economic interest.

The Demonstration Program also limits the number of units for which

HUD may substitute tenant-based Section 8 assistance for project-based

assistance to 10% of the aggregate number of units in projects

restructured in any one fiscal year. HUD will approve requests for

tenant-based assistance for projects that demonstrate new and

innovative approaches to restructuring, subject to availability, given

the 10% limitation.

VIII. Alternative Processing

The following alternative processing may also be used for projects

that are not within the jurisdiction of a Designee.

Within 10 days of execution of the Demonstration Agreement in the

case of FY 1997 contract expirations, or upon submission of a

restructuring proposal in the case of post-1997 contract expirations,

and where the FHA loan is refinanced by a new loan with or without FHA

insurance, owners may elect to engage an FHA approved lender or

servicer to undertake some or all of the due diligence and underwriting

described in these guidelines, subject to review and approval by the

Demonstration Manager or the field office Multifamily Director. The

lender/servicer shall submit to HUD a detailed Business Plan signed by

the owner to include:

A. An outline of the ownership entity and loan documents required

for the restructuring proposal (and bond documents, if necessary);

B. Third party approvals required;

C. Completed appraisal meeting the requirements of the Uniform

Standards of Professional Appraisal Practice (USPAP), published by the

Appraisal Standards Board of the Appraisal Foundation, as modified by

HUD, incorporating data on operating expenses available from FHA and

entities such as IREM;

D. Underwriting analysis including assessment of market rents and

operating expenses based on the appraisal, proposed operating expenses,

determination of NOI, supportable financing, proposed principal

reduction, rehabilitation financing, owner input;

E. Assessment of rehabilitation needs;

F. Description and rationale for the mandatory demonstration

approach to restructuring being selected;

G. Evidence and certification of proper notification of tenants,

Affected Unit of Local Government and lender(s) of the owner's intent

to participate in the Demonstration Program, and a summary of comments

received in the process and how they were addressed. The same process

that HUD requires owners to follow for notification, outlined in

Section VI.D., must be followed;

H. Description of environmental issues, if any;

I. Description of litigation issues and tax issues;

J. Description of public policy issues;

K. Written record of inquiries from public officials regarding the

restructuring; and

L. Other issues as provided more specifically in further guidance

to be provided by HUD.

All information in the Business Plan is to be supported by the

findings of the due diligence activities.

The restructuring Business Plan will be submitted to the

Demonstration Manager and or Field Office Multifamily Director for

approval. Any project rehabilitation or capital improvements supported

or required by HUD must be processed in accordance with HUD

environmental review requirements in 24 CFR part 50, prior to HUD's

approval of the restructuring Business Plan. All projects must be in

conformance with Flood Insurance purchase requirements, as applicable,

in accordance with 24 CFR 50.4(b)(1). HUD will respond to the Business

Plan in 30 days, after negotiating with the owner and lender, with a

Restructuring Commitment. As in direct HUD processing, the owner will

have 10 calendar days from the issuance of the Restructuring Commitment

to appeal, in writing, to the Director of Multifamily Housing in the

HUD field office with jurisdiction, the terms Restructuring Commitment.

The written notice of appeal shall specifically state, in reasonable

detail, the issues and bases upon which the owner seeks review.

Following the appeal, a modified Commitment may be issued by HUD. If

needed, after signing a modified Commitment, the owner will qualify for

an extension of the Demonstration HAP Contract. Failure to sign a

Restructuring Commitment will result in the termination of the

Demonstration Agreement and a reduction of project rents to 120% of

FMR.

[[Page 3581]]

In cases where the FHA loan is being retained, HUD may request the

mortgagee or loan servicer to perform due diligence activities and

underwriting, in coordination with the Demonstration Manager, as

currently permitted for certain mortgagees and servicers under FHA

policies.

IX. Other Provisions of Demonstration Program Legislation

A. Participation of Projects With Post-FY 1997 Expirations

In the allocation of Demonstration Program funding resources,

priority will be given to projects with Section 8 contracts expiring in

FY 1997. Demonstration projects with contracts expiring after FY 1997

will not be processed until (i) all projects with contracts expiring in

FY 1997 have either closed on a Restructuring Commitment or the

Demonstration Agreement has expired; or (ii) HUD determines that the

proposed restructuring imposes no cost to the Federal Government as

calculated using the rules established for implementation of the Budget

Enforcement Act of 1990. In general, the determination of cost to

government will compare the loss to the Government (cost to FHA) that

would occur if the demonstration candidate were to have rents set in

accordance with section 211(b) of the HUD FY 1997 Appropriations Act,

to the cost to FHA of the proposed restructuring. If the restructuring

of a project costs less, on a discounted basis, than the total costs if

the project goes all the way through the default process (assuming

project rents are reduced to 120% of FMR), then that project will be

included in the Demonstration Program.

Post-FY 1997 project owners may enter the Demonstration Program by

submitting a letter of interest to the Demonstration Program

Coordinator. The letter of interest must include the following:

a. Project Name and Address;

b. FHA Project Number;

c. FHA Insurance Program;

d. Unit Rental Information: Gross rent (contract rent plus utility

allowance, if applicable) by unit type, number of total units and

assisted units by unit type, owner estimate of market rents by unit

type, gross rent as a percentage of FMR;

e. HAP Expiration Date and a copy of the HAP contract and Section 8

Identification Number;

f. Loan Information: Unpaid Principal Balance of the FHA-insured

mortgage(s), original principal amount, loan maturity date;

g. Owner contact name, address, telephone number and fax number;

and

h. Management agent name, address, telephone number and fax number.

Within 30 calendar days after HUD's receipt of letters of interest,

HUD will respond to the owner with a calculation of probable cost or

savings to government, based on the comparison described above. If the

proposed restructuring appears to generate savings, it will be referred

to a Designee or to a HUD Demonstration Manager for processing. At the

same time, project tenants, Lender(s) and the Affected Unit of Local

Government will be notified in the same manner as required for projects

with Section 8 contracts expiring in FY 1997. This notice must be

coordinated with the Field Office having program jurisdiction. HUD's

restructuring processing for projects with post-FY 1997 expirations

follows the same process the projects with FY 1997 expirations.

Designee processing is discussed in Section VII of these Guidelines and

Alternate processing is discussed in Section VIII.

B. Sunshine Provision

In order that others may learn from the experience of the

Demonstration Program, all proposals accepted by HUD to participate in

the 1997 Demonstration Program may be posted on the Department'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).

X. 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.

C. Executive Order 12606, The Family

The General Counsel, as the Designated Official under Executive

Order 12606, The Family, has determined that this notice does not have

potential for significant impact on family formation, maintenance, and

general well-being, and, thus, is not subject to review under the

order. The notice implements a statutorily authorized demonstration

program and is intended to find ways of reducing the impact on families

that might otherwise be caused by the nonrenewal of Section 8 project-

based rental assistance.

Dated: January 14, 1997.

Stephanie A. Smith,

General Deputy Assistant Secretary for Housing--Federal Housing

Commissioner.

[FR Doc. 97-1557 Filed 1-22-97; 8:45 am]

BILLING CODE 4210-27-P