Regulatory Agreement MF projects

When a § 50 person/entity changes, an amendment to the regulatory agreement will be required. However, if the change will also trigger a TPA, then all attendant requirements will need to be complied with as well.

2. What language should now be put in the organizational documents in light of the change in §50 of the Regulatory Agreement?

No explicit language will be required in connection with §50 per se, but HUD will continue to require the language currently required in the MAP Guide. Please see the sample language in the Closing Guide.

3. Who will be signing the Regulatory Agreement; referenced in non-recourse paragraph? Can an entity sign §50 or only individuals?

The persons/entities will be clearly identified in the firm commitment as noted in the text of §50. Entities and individuals may sign §50, depending on what was provided in the text of the firm commitment.

4. Annual reports are audited reports?

Section 18 states that ‘within 90 days, or such period established in writing by HUD, following the end of each fiscal year, borrower shall furnish HUD and Lender with a complete annual financial report based upon an examination of the books and records of borrower prepared in accordance with GAAP, audited in accordance with generally accepted auditing standards (“GAAS”) and government auditing standards (“GAS”)….’ The requested change is not necessary in light of the specific auditing language cited.

5. Key principals sign names in Section 50?

The individual or entity identified in the firm commitment as the responsible party must sign. The name(s) and title(s) should be typed. A live signature in paragraph 50 is evidence of their responsibility.

6. For those instances not requiring a TPA, will OGC and/or the Office of Housing be establishing a standardized procedure and format for accomplishing amendments to the Regulatory Agreement when the names in Section 50 are changed?

Yes, the Office of Housing will be developing uniform procedures for accomplishing amendments to change the names identified in Section 50 of the Regulatory Agreement.

7. Do we require signatures in Section 50 of the Regulatory Agreement or just typed names? If we require signatures, do they need to be notarized, since this is a recorded document?

If state or local law requires these signatures to be notarized in order for Section 50 to be enforceable, or for the document to be recorded, then yes, the signatures should be notarized; otherwise, no.

8. What are the "unpaid obligations" referenced in §3?

The vast majority of a Borrower's unpaid obligations are typically set forth in a disbursement statement or other closing statement or within the other diligence submitted to HUD in connection with underwriting and review of the transaction. To the extent that a Borrower has actually entered into or assumed outstanding financial obligations not otherwise disclosed to HUD, such obligations should be discussed.

9. Will the parties who are required to sign the Regulatory Agreement be identified in the Firm Commitment?

Yes.

10. What is a "minor alteration" for purposes of §36(g)?

Section 36(g) of the Regulatory Agreement states that Borrower may not, "Remodel, add to, subtract from, construct, reconstruct or demolish any part of the Mortgaged Property . . . except that Borrower may . . . make minor alterations that do not impair the security." In such context, "minor alterations" are alterations to the improvements that do not decrease their value or otherwise require HUD's consent because of Program Obligations. For example, if the alterations in question would require additional subordinate financing in order to be carried out, such alterations, and such financing, would of course be subject to HUD consent. Likewise, if such alterations required building permits, plans and specifications, zoning changes, or other such items reviewed by HUD in accordance with Program Obligations, HUD consent is required.

11. Apparently there is some confusion in the public concerning the answer posted in connection with a question about whether Section 50 merely contains typed names of certain parties or whether the parties also must sign. Please confirm for all that the parties named in Section 50 must sign Section 50 or a counterpart signature page referring to Section 50.

Individuals or entities identified in the firm commitment as responsible parties must sign Section 50. Names and titles should be typed. Counterpart signature pages may be used. A live signature in Section 50 evidences their responsibility. If state or local law requires these signatures to be notarized in order for Section 50 to be enforceable or for recordation purposes, then signatures should be notarized. Otherwise, notarization is not necessary.

12. Will tax credit investors be considered key principals and required to sign Section 50 of the Regulatory Agreement? Will all officers and directors of nonprofit entities be required to sign be listed and sign as key principals or is just the nonprofit entity itself considered the key principal?

No, tax credit investors will not be required to sign Section 50. No, all officers and directors of nonprofits will not need to be listed and sign as key principals. Who will sign Section 50 is determined by HUD upon a recommendation by the Lender, using credit review analysis. Such parties (whether individuals or entities), in Lender's professional opinion, are to (1) exercise control over the Borrower, so as to be in a position to commit or protect against the malfeasance set forth in Section 50, and (2) have the financial capacity to compensate for damages arising from such malfeasance. HUD will review the Lender's recommendation. If Lender has not made such identification, field offices should contact the Lender and request they identify the principals. For nonprofit entities, HUD will likely select the parent/sponsor of the nonprofit, or if there is no parent/sponsor, HUD will likely select the nonprofit itself.

13. Are the riders (HUD-92466 R-1 thru R4) for New Market Tax Credits/Historic Tax Credits compatible with the new Regulatory Agreement?

We are in the process of revising the riders to make them compatible with the new documents. If you have a master lease and you are using the new documents, please contact Mark Abraham.

14. Section 14.d of the Regulatory Agreement seems to say that for-profit borrowers must take Distributions out of the appropriate Project account as specified by HUD within the accounting period immediately following the computation of Surplus Cash, and if not taken within the identified period, those funds remain as Mortgaged Property and can only be used as permitted by the Regulatory Agreement. Is that to say that if Surplus Cash is not taken out in the accounting period immediately following, that amount cannot be taken out sometime later? If so would it have to be applied to another purpose and what would those purposes be? Additional deposits to replacement reserves?

If Surplus Cash is not taken out in the accounting period immediately following the computation of Surplus Cash, it cannot be taken out at a later date and such surplus cash will revert to project income until the next accounting period in which Surplus Cash is computed.

15. A lender has raised concerns about the effect of Section 36a which requires HUD approval of transfers of interest in a borrower if the transfer would add or eliminate a principal as defined in the 2530 regs. Could the appointment of a new board member or officer in a 2nd or 3rd tier entity be construed to require HUD approval? Is lender correct to interpret 36a to be subject to TPA requirements (4350.1, Ch 13) thus requiring HUD approval only if the change met the thresholds set forth requiring a full or modified TPA, or met the thresholds set forth in the HUD required language in the organizational documents? 24 C.F.R. 200.211 relating to the times for filing previous participation forms, requires a filing with a TPA [24 C.F.R.200.217(a)(4)] and with a substitution of a principal such as a management agent or partners [(24 C.F.R. 200.117(a)(6)]. Lender's interpretation is that the substitution of a board member or officer of a 2d or 3rd tier entity would not require HUD approval nor the filing of previous participation certs under any of these provisions. Is this correct?

Yes, Lender’s interpretation of Section 36(a) of the Regulatory Agreement is correct that, typically, the substitution of a board member or officer of a 2nd or 3rd tier entity (for example, of the entity that owns or controls the general partner of the owner) would not require HUD approval nor the filing of a previous participation certificate (absent the transfer meeting the other threshold requirements for 2530 clearance or a TPA). Section 36(a) of the Regulatory Agreement states that “Borrower shall not… transfer…any interest in Borrower (if the effect of such … transfer is the creation or elimination of a Principal).” The term “Principal” is defined in the Regulatory Agreement as the definition set forth in 24 CFR 200.215. The definition of Principal in 24 CFR 200.215 is “…[an] entity proposing to participate…in a project as sponsor, owner…”

16. In Section 50 of the Regulatory Agreement, there is a colon after the definition of Firm Commitment, which seems to suggest that the names of the principals should be listed within the body of the paragraph. Is that correct?

Yes, the names of the identified parties should be printed in the text of Section 50 and those individuals should sign below the text, where indicated.

17. From: Sullivan, Daniel J.
Sent: Wednesday, January 11, 2012 4:54 PM
To: MF HUB DIRECTORS; MF HUB PC DIRECTORS; MF OPERATIONS OFFICERS
Subject: Guidance for Mortgage Credit review in identifying principals for Regulatory Agreement Provision #50

As we have rolled out the new closing documents, there have been on-going discussions and consideration of this provision. Guidance for the Mortgage Credit review and indemnification of key principals has been evolving with experience. Based on our discussions internally, and further consideration of industry practice, we are amending the mortgage credit guidance contained in my email of 12/20/11, specifically with respect to some privately held entities. The content described below is being drafted into the next MAP Guide Revision, and will bring us into closer conformity to industry and GSE best-practices in this area. Please apply the following guidance to any Firm Commitments in processing, and if necessary to requests for amendments to Firm Commitments but not yet closed:
For privately held entities: The provision generally requires two signatures for project sponsors. In most cases, HUD, upon the Lender's recommendation, shall select one individual signatory to sign in his or her individual capacity and the project parent/sponsor entity to sign in a corporate capacity. In any specific deal, underwriting may point to a different entity with the requisite control and involvement or interest in the Project, positive credit history, and adequate financial strength relative to the size of the loan to serve in the capacity required by section 50. In some circumstances, particularly in circumstances involving very large, capitalized, and experienced corporate entities with complex corporate organizational structures, the underwriting may not reveal an apparent individual with the requisite control, positive credit history, and adequate financial strength, to reasonably serve in the required capacity, whereas the parent/sponsor entity itself may possess such necessary characteristics to act as the sole necessary signatory. In considering whether or not such an entity may serve as the sole signatory to Section 50, HUD and the Lender shall take into consideration whether such an entity has been deemed by a GSE as an appropriate signatory to provisions similar to Section 50 in a recent GSE transaction. Provided that such an entity is determined to hold the requisite positive credit history and adequate financial strength required by Section 50, the GSE-approved entity may be deemed an appropriate sole signatory for Section 50 and HUD program staff need not identify additional signatories for Section 50. A copy of relevant excerpts from the recently-closed transactions may provide adequate evidence of such GSE approval.
For publicly traded corporations or REITS, or Non-profit organizations: The parent/sponsor entity itself is acceptable as the sole signatory. For such entities, any individual signing on behalf of the corporate entity does not sign in an individual capacity, but to bind the parent/sponsor, and no personal liability will be claimed against the individuals signing in such a capacity.
For any corporate entities required to execute Section 50: Every corporate officer is not required to sign. Whomever the corporation entity has authorized to bind the company in connection with the proposed transaction may sign, provided that Mortgage Credit review has discretion to require additional signatories if warranted in a specific (exception) situation.

Please note the following prohibitions related to Section 50:
Insertions of "or successors" language to the identification of signatories is not allowed. The Regulatory Agreement can and should be amended when there is a new individual who is responsible for the provisions of Section 50.
Riders to the Regulatory Agreement that attempt to limit a signatory's liability are NOT allowed.
Section 50 may not be omitted because a project has been processed as an a7 versus another section of the Act.
If the Firm Commitment fails to specify signatories to Section 50: The lender should request a letter amendment to the Firm Commitment. It is the lender's responsibility to perform the mortgage credit review of the parent/sponsor entity and to identify and justify who has been proposed to sign Section 50 of the Regulatory Agreement.
Please contact me, or Linda Albro or Wendy Carver if you have any questions about this guidance.

Thank you.
Dan Sullivan
Acting Director
Office of MF Development

18. For provision 14d (page 15), if the borrower is "not a limited distribution borrower" should they put n/a in the percentage blank or strike the sentence?

The drafter should insert n/a.

19. Was form HUD-92466M drafted in such a way as to be used without modification for projects that are in the Mark-to-Market program, or may a rider be attached to the Regulatory Agreement?

No, HUD Form 92466M was not drafted to be used without modification for Mark-to-Market transactions. A Rider, which OGC has revised to be consistent with the provisions of HUD 92466M, should be attached to HUD 92466M in Mark-to-Market transactions.

20. We have been asked if Regulatory Agreement, HUD-92466M rather than FHA3225 should be used in the new construction of a cooperative insured under section 213. The lender's counsel, who is considered an expert in the area of cooperatives, states: "The new form expressly states that it is for use under sections 207, 220, 221(d)(3), 223(a)(7), 223(f), and 231 of the National Housing Act . . . . The new regulatory agreement does not contain all of the provisions unique to housing cooperatives as set forth in FHA3225. . . . by way of example, maintenance of a general operating reserve . . . and prohibiting occupancy . . . except by members of the cooperative." Please advise.

For Section 213 transactions, continue using form FHA 3225 found in Appendix 2 of Handbook 4550.2.

21. I received a 223(f) closing package from Counsel who modified provision 7 by striking out a portion of the text that clearly relates to new construction only. Is this change permissible? I advised them that no changes to the form documents were permissible, but the latter portion of provision 7 seems clearly not applicable to a refinance. Is it permitted to modify the form by striking the following language: "The licenses and permits that are in effect as of the date hereof are sufficient to allow any construction of the improvements to proceed to completion in the ordinary course. As the construction of the Project progresses, unless otherwise required by the Construction Contract, the Borrower will procure and submit all necessary building and other permits required by Governmental Authorities. The Mortgaged Property shall not be available for occupancy by any tenant without the prior written approval of HUD and of all other legal authorities having jurisdiction of the Mortgaged Property."

In a refinance transaction, lender's counsel is permitted to strike through provisions that clearly relate to construction. However, HUD counsel will be responsible for reviewing and approving those modifications. Because HUD counsel must conduct this review, lender's counsel may strike through language but may not delete it. In a refinance, the Borrower must certify that it "has obtained all necessary certificates, permits, licenses,qualifications, authorizations, consents, and approvals from all necessary Governmental Authorities to own and operate the Project and to carry out all of the transactions required by the Loan Documents and to comply with all applicable federal statutes and regulations of HUD in effect on the date of the Firm Commitment."
[NOTE: see also posting of 12/5/12 “How must changes to loan documents be shown?” in the General Questions Category for additional guidance.]

22. (3/7/2012)
I see from an answer to a previous question that when the borrower is a non-profit entity, only the borrower-entity itself should be listed in Section 50. In a for-profit situation, HUD will identify the Key Principal(s) in the Firm Commitment. Should the borrower in a for-profit situation automatically also be cited as a Key Principal, in addition to the other party or parties, or would the borrower be required to sign in Section 50 only in non-profit situations? Also, in for-profit situations, must at least one Key Principal be a warm body?

The Office of Multifamily Development guidance on how to identify the persons and/or entities who are to sign Section 50 of the Regulatory Agreement (and whose names are also included in Section 8 of the Note) is set forth in the MAP Guide at 11.2(d) and in instructions issued by the Office of Multifamily Development. Further guidance is also posted on this site and will be included in the next revision of the MAP Guide. Please refer to the Office of Multifamily Development guidance directly. However, in response to requests for elaboration on such guidance, please also see below.
1) For Borrowers that are privately held entities, Section 50 generally will require two signatures: one an individual signing in his or her individual capacity and the other a parent/sponsor entity. Therefore, yes, in almost all cases, HUD, upon the Lender’s recommendation, shall require an individual signatory (warm body) to sign in his or her individual capacity. In addition, almost always, another signatory, a corporate entity, will also be required. This second signatory will usually be the parent/sponsor entity, rather than the Borrower. However, in some situations, underwriting by HUD or the Lender may point to a different entity, other than the parent/sponsor, with the requisite control, involvement or interest in the Project, positive credit history and adequate financial strength relative to the size of the loan to serve as signatory of Section 50. Please note that for corporate signatories, Section 50 does not require all officers, members or equivalents of the identified entity to sign, only whomever that entity has authorized to bind that entity for purposes of Section 50. Note that whoever signs Section 50 on behalf of a corporate entity (rather than the signatory identified in his or her individual capacity) is signing in order to bind the corporate entity, and not on his or her own behalf. Whomever the entity has authorized to bind the entity may sign,provided that Mortgage Credit review has discretion to require additional signatories if warranted in a specific (exceptional) situation. No personal liability for liability incurred by the corporate entity will be claimed against those signing on behalf of the entity, provided however that nothing prohibits HUD from prosecuting any and all individuals and entities committing the malfeasance set forth in Section 50 or otherwise committing fraud.
2) In a few circumstances, particularly in situations involving very large, capitalized and experienced (but privately held) corporate entities with complex organizational structures, the Lender’s underwriting may not reveal an apparent individual with the requisite control, positive credit history and adequate financial strength to reasonably serve in the required capacity for personal liability. In such few, limited and exceptional circumstances, the Lender may recommend to HUD that only one signatory, a corporate entity, be required to sign Section 50. In considering whether or not such entity may serve as the sole signatory to Section 50, among other considerations, HUD and the Lender shall consider whether such entity has been deemed by a GSE as an appropriate signatory to provisions similar to Section 50 in a recent GSE transaction. Provided that such GSE-approved entity is determined by the Lender and HUD to hold the positive credit history and adequate financial strength required by Section 50, HUD may deem the entity to be an appropriate sole signatory for Section 50, and, if so, HUD program staff will not identify any additional signatories for Section 50. A copy of relevant excerpts from the recently-closed transaction may provide adequate evidence of the GSE approval.
3) For Borrowers that are publicly traded corporations or REITS or non-profit organizations, the parent/sponsor entity is acceptable as the sole identified entity and signatory for Section 50. No individual signatory signing in his or her individual capacity must be listed in Section 50 for Borrowers that are publicly traded corporations or REITS or non-profit organizations. Whomever the publicly traded corporation/REIT/non-profit entity authorizes to sign on its behalf shall be signing, not in his or her individual capacity, but to bind the parent/sponsor, and no personal liability for liability owed by the parent/sponsor entity will be claimed against those signing on behalf of the parent/sponsor. In a few unusual cases where a nonprofit has no parent/sponsor, the single-asset, non-profit borrower will be asked to sign Section 50.
4) In addition, it is not permissible to make any of the following changes to Section 50: a) insertion of “or successors” language to the identification of signatories. The Regulatory Agreement must be amended when there is a new individual who is responsible for the provisions of Section 50; b) riders to the Regulatory Agreement that attempt to limit a signatory’s liability and c) omission of Section 50 because a project has been processed as an (a)(7).

23. 3/15/2012
With regard to borrower financial statements, Section 15(d) of the Security Instrument provides: "Within 120 days after the end of the fiscal year of Borrower, Borrower shall furnish to Lender a statement of income and expenses of Borrower's operation of the Mortgaged Property for that fiscal year." Whereas, Section 18 of the Regulatory Agreement provides: "Within ninety (90) days, or such period established in writing by HUD, following the end of each fiscal year, Borrower shall furnish HUD and Lender with a complete annual financial report based upon an examination of the books and records of Borrower prepared in accordance with GAAP, audited in accordance with Generally Accepted Auditing Standards ("GASS") and the Government Auditing Standards ("G S") and any additional requirements of HUD unless the report is waived in writing by HUD". The two sections appear to contradict each other with regard to the delivery deadline for financial statements. Should the Security Instrument be revised to 90 days?

No. Section 18 of the Regulatory Agreement sets forth the financial reporting requirements for projects with a HUD-insured or HUD-held Loan. The 120 day reporting requirements of Section 15(d) of the Security Instrument only apply when HUD no longer insures or holds the Loan. This may occur, for example, if HUD sells the Note. The last sentence of Section 15(d) states: "Notwithstanding the foregoing, however, so long as the Loan is insured or held by HUD, Borrower's obligation under this subsection (d) shall be satisfied by delivery to Lender, concurrently with its delivery to HUD, of a copy of the annual financial statement required to be delivered to HUD in accordance with the Regulatory Agreement." This language informs a Borrower that has either a HUD-insured and HUD-held Loan that its obligations under Section 15(d) are satisfied by delivering to Lender, concurrently with its delivery to HUD, a financial report that complies with Section 18 of the Regulatory Agreement. Once the Loan is no longer HUD-insured or HUD-held and the Security Instrument still governs the Loan, the reporting requirements of Section 15(d) apply.

24. 3/15/2012
What projects should be identified as Elderly on the first page of the Regulatory Agreement?

The line for Elderly on page one of the Regulatory Agreement should be checked for all projects that are processed by Multifamily under either Section 231 or Section 221(d)(4) age restricted.

25. 3/28/2012
I have an upcoming 202 – 223F refi. With the old documents we would revise the Regulatory Agreement for such a transaction to include the following revisions. Are such revisions to the NEW Regulatory Agreement required under the new closing documents? Here are the modifications: The following sentence must be added as a Rider to the Agreement: "Until __, the maturity date of the original 202 direct loan associated with this project, in the case of a conflict between a provision in this Regulatory Agreement and a provision in the „Use Agreement For Section 202 and 202/8 Projects that require HUD.s approval to prepay their direct loan. dated _, the provision in the Use Agreement will control."Subparagraph 2(c) must be added to read as follows: "Owners shall establish and maintain, in addition to the reserve fund for replacements, a residual receipts fund by depositing thereto, with the mortgagee, the residual receipts, as defined herein, within 60 days after the end of the semiannual or annual fiscal period within which such receipts are realized. Residual receipts shall be under the control of the Commissioner, and shall be disbursed only on the direction of the Commissioner, who shall have the power and authority to direct that the residual receipts, or any part thereof, be used for such purposes as he may determine." Subparagraph 6(e)(1) must be revised to read as follows: "All distributions shall be made only as of and after the end of a semiannual or annual fiscal period, and only as permitted by the law of the applicable jurisdiction; all such distributions in any fiscal year shall be limited to six percentum on the initial equity investment, which shall be determined by the Commissioner; the right to such distribution shall be cumulative." Subparagraph 13(l) must be added to read as follows: "Residual Receipts means any cash remaining at the end of a semiannual or annual fiscal period after deducting from surplus cash the amount of all distributions as that terms is defined below and as limited by Paragraph 6(e) hereof.”

The other changes that were previously made to the multifamily Regulatory Agreement are not necessary. The requirements to create a residual receipts account and place restrictions on distributions are Section 8 requirements and may not to be included in the multifamily Regulatory Agreement. The conflict provision is addressed by (1) Section 48 of the Regulatory Agreement and (2) the recordation of the 202 Use Agreement before the FHA-insured mortgage or deed of trust.

26. 3/28/2012
When preparing Regulatory Agreements for refinancings of Section 202 projects with loans insured by FHA under the National Housing Act, what changes are permitted/required to be made to the form of Regulatory Agreement? Specifically: (1) Should the project be identified in the Regulatory Agreement as Elderly or Non-Elderly; (2) Should the Borrower be identified in the Regulatory Agreement as Profit-Motivated, Limited Dividend, or Non-Profit; (3) Should the definition of "Residual Receipts" in the Regulatory Agreement be modified as: “ee. “Residual Receipts” is a term that applies to certain funds held by Non-Profit, Public Body and Limited Dividend Borrowers (i) whose Notes are insured or held by HUD pursuant to Section 220, Section 221(d)(3) and 231 of the National Housing Act, as amended or (ii) who, in connection with the closing of the Loan, are prepaying one or more existing loans made by HUD under Section 202 of the Housing Act of 1959. Residual Receipts are calculated by determining an amount of Surplus Cash (defined below)”; (4) Should the blank in the second sentence of Section 14.d of the Regulatory Agreement be completed by inserting "six" (“All such Distributions to Limited Dividend Borrowers in any one fiscal year shall be limited to six percent of initial equity, . . . .”); (5) Should the following language be added to Section 48: “Notwithstanding the foregoing, until _____, the maturity date of the loan made by HUD under Section 202 of the Housing Act of 1959 associated with this Project, in the case of a conflict between a provision in this Agreement and a provision in the Use Agreement between the Borrowers and HUD dated as of even date herewith, the provision in the Use Agreement will control”. Prior guidance, and the practice followed with respect to the prior form of Regulatory Agreement, do not address question (1) above, but would support the changes suggested in questions (2) through (5) above. For example, Section IV of Notice H04-21 provides for a limitation on distributions of 6.0%.

The other changes that were previously made to the multifamily Regulatory Agreement are not
necessary. The requirements to create a residual receipts account and place restrictions on
distributions are Section 8 requirements and may not to be included in the multifamily Regulatory
Agreement. The conflict provision is addressed by (1) Section 48 of the Regulatory Agreement and (2)
the recordation of the 202 Use Agreement before the FHA-insured mortgage or deed of trust.

27. 4/13/2012
With regard to Regulatory Agreement Section III, paragraph 10b: There are 3 ways for reserves to come into a project (1) monthly, (2) an initial deposit; and (3) a transfer from existing project. In some deals, reserve requirements utilize all 3 of these forms. Are all 3 of these scenarios contemplated by and expected to be inserted into 10(b)? The first sentence to 10(b) looks like the blanks are creating an "either/or" scenario. Clarification has been requested for which numbers are expected to be inserted into these blanks.

If the Multifamily Office requires funds to be deposited into reserve accounts utilizing two or three of the methods identified, then the paragraph may be modified to meet the deal specific requirements of the transaction.

28. 5/17/2012
Editorial correction to Regulatory Agreement, Section IX, Paragraph 50, first sentence of (c).

The first sentence of paragraph (c) now reads as follows: "for its own acts and deeds, or acts and
deeds of others, which it has authorized in violation of the provisions of this Section 50."

29. 6/13/2012
With regard to your recent advice that the elderly box on the cover of the Regulatory Agreement should only be checked if the project is a 231 or 221(d)(4) age restricted, please clarify the case of a 223(f) which may be age restricted because of business/marketing reasons unrelated to the insurance program. The underwriting presumably only looked at the last 3 years of financial history without respect to elderly nature of the project. In this case, and in the case of, say a tax credit project required by the state HFA to be elderly, borrowers feel uncomfortable checking "non-elderly" because they are not a 231 or 221(d)(4) age restricted. Are borrowers permitted to leave both boxes blank if the project is elderly, but not a 231 or 2211(d)(4) age restricted?

MAP Borrowers are not permitted to leave both the "Elderly" and "Non-Elderly" boxes on the first page of the Regulatory Agreement blank--one or the other must be checked. The "Elderly" box must be checked when the project is underwritten and will operate as age restricted under the National Housing Act and implementing eligibility criteria, which for age restricted elderly housing is set forth in the MAP Guide (see sections 3.4.S. for New Construction/Sub Rehab and 3.9.D. for section 223(f) refinances). The "Non-Elderly" box must be checked in all other instances, as HUD does not permit any types of age restricted elderly housing in its Multifamily rental programs that are inconsistent with the MAP Guide, e.g., projects with occupancy restricted to persons age 55 and older (see MG section 3.2.L.). Consistent with this answer, there should be no age restrictions in MAP projects due to "reasons unrelated to the insurance program."
Note as a reminder that MAP Guide section 3.4.S. provides, in part, "MAP projects (except for those financed under Section 231) may be age restricted (i.e., head of household 62 years of age or order) but cannot prohibit occupancy, based exclusively on age by other family members less than age 62 including children under age 18.

30. 6/27/2012
We are preparing loan documents for a 207/223f loan of a 202 project. Under the old loan documents, we would modify the Regulatory Agreement form to add provisions that (i) the mortgagor would receive a 6% return on its equity and (ii) the remaining net cash would be deposited annually to the residual receipts account. These are
intended to capture the requirements imposed on the prior 202 mortgagor as part of a 223f refinancing. Also, we would add a provision that provided that in the event of conflict between the Regulatory Agreement and the Use Agreement (required as part of the financing), the Use Agreement controlled. Are we permitted to modify the new Regulatory Agreement to make similar changes?

The only permitted change to the Regulatory Agreement for a 202 refinance project is the selection
of "Elderly' on the first page. Because the projects are not processed, for multifamily purposes, as nonprofits, the projects should be labeled as "Profit-Motivated" in the Regulatory Agreement. This selection is consistent with previous direction provided on the subject of entity type.
The other changes that were previously made to the multifamily Regulatory Agreement are not
necessary. The requirements to create a residual receipts account and place restrictions on
distributions are Section 8 requirements and may not to be included in the multifamily Regulatory
Agreement. The conflict provision is addressed by (1) Section 48 of the Regulatory Agreement and (2)
the recordation of the 202 Use Agreement before the FHA-insured mortgage or deed of trust.

31. 8/01/2012
Is the personal, contingent liability of individual Key Principals intended to extend to the estate of such Key Principals? The provisions of Section 50 do not include the Key Principal “and its successor, heirs and assigns” (I know that the addition of “or its successors" is prohibited). However, the Regulatory Agreement indicates twice that it binds the Borrower, its successors, heirs and assigns, but does not do so for Key Principals.

Yes, the liability extends to the key principal’s estate by operation of state law similar to other debts or personal obligations.
The purpose of the successors and assigns language in paragraph 41 of the Regulatory Agreement binds future Borrower’s into compliance with the Regulatory Agreement. The key principal itself is liable for the matters stated in paragraph 50 regardless of the Borrower’s successors and assigns. This liability survives any action pursuant to the Mortgage or Regulatory
Agreement

32. 9/19/2012
In Regulatory Agreement paragraph 46a, Lender's counsel has made a correction to the word "Term" where it appears before "Business Day" to read "term" (lower case t). This may be a scrivener's error that you may wish to correct. The capitalization of "Term" suggests a defined term and also suggests the Term of the loan to me.

You are correct that the capitalization of "Term" suggests a defined term, but it is not a defined word in the documents. It is used in paragraph 46(a) merely as the lead-in word to the defined term "Business Day." This is a scrivener's error that will be corrected in the next iteration of the
documents.

33. 9/27/2012
This question is regarding TPAs and the Regulatory Agreement, and refers to the 07/20/11 Q&A [posted in General Questions category] and the Closing Guide. Part 3.1 of the Closing Guide appears to apply to all TPAs (even if closed under the old documents) and requires the organizational documents of the new TPA entity to comply with 3.1 and 5.2. 3.1.E states that Notice 95-66 is no longer in effect; the Notice had required an LLC Rider to the Regulatory Agreement. 3.1.E then goes on to state that there may be Section 50 liability. The question is: If Closing Guide 3.1 and 5.2 apply to TPAs of projects closed under the old documents, then how is "Section 50" liability enforced, if the old Regulatory Agreement is used and Notice 95-66 is not in effect? If the Closing Guide does not apply, what guidance should be followed?

The statement in section 3.1 of the Closing Guide that imposes the Borrower organizational requirements of that section on “all entities that become the FHA-insured Borrower by a Transfer of Physical Assets . . .” was intended to only apply to TPAs involving projects closed under the “new” documents. The language will be clarified in the next revision to the Closing Guide. Further, as noted in the previously issued Q&A referenced in the incoming question, (General Questions no. 1, 7/20/11), projects closed under the “old” documents will use the old documents to close a transfer of physical assets; consequently, Section 50 would not be applicable. Field counsel, outside counsel and program participants should continue to look to existing Housing Asset Management guidance to process TPA’s involving the old documents.

34.11/15/2012
When a TPA is required, what is the procedure for reflecting the new principals in Section 50? Should a new Regulatory Agreement be entered into or is an amendment to the existing Regulatory Agreement appropriate? If it is an amendment, what parties should execute the amendment? Is there any specific language that the amendment should include?

The following answer applies to projects that were closed under the recently revised
Multifamily Closing Documents and are undergoing a transfer of physical assets (TPA). In
such cases, existing TPA guidance will determine the documentation that is required for the
transaction. The existence of Section 50 does not change the requisite thresholds. Note that
a previous Multifamily Document Reform Implementation FAQ (General Questions no. 1,
7/20/11) response indicates that projects closed under the “old” documents will continue to
use the old documents to close a TPA.

“Subject To” TPAs

In those situations involving a project previously closed under the recently revised Multifamily
documents and requiring execution and recordation of a new (as opposed to an amendment
to the existing) Regulatory Agreement, e.g., “subject to” TPAs, the new Regulatory
Agreement will include the new principals in Section 50.

Assumptions and Modified TPAs

For TPAs where a new Regulatory Agreement is not executed (e.g., when there is an
assumption of the existing Note and Security Instrument by the purchaser, or a Modified
Review involving changes in the Borrower entity), there needs to be an appropriate executed
and recorded amendment to the existing Regulatory Agreement which modifies Section 50 to
reflect the names and signatures of the new principals. Borrower’s counsel should contact the
assigned HUD closing attorney as they normally would for the necessary forms to effect the
amendment to the existing Regulatory Agreement, which must include Section 50 and the
names and signatures of the new principals. The Borrower and HUD are parties to the
amendment.

Identifying Section 50 Signatories

In the case of a “subject to” TPA where Lender approval is not provided, the Hub/Program
Center managerial staff will indicate as a condition in the Preliminary Approval Letter which
parties must sign Section 50 of the new Regulatory Agreement. The Hub/Program Center
managerial staff will also identify the Section 50 signatories for the amendment to the
existing Regulatory Agreement for TPAs involving a Modified Review.

Whenever a Lender provides their consent to a TPA and charges the Borrower a fee pursuant
to Section 21(a) of the Security Instrument, the Lender must, pursuant to existing Section 50
guidance, inform HUD of the appropriate parties that will sign in Section 50.

35.1/2/2013
Section 35 of the Regulatory Agreement (Security Deposits) limits the amount that may be collected as a security deposit or other fees. The Section 8 rules, however, require a tenant to pay a security deposit of $50 or Total Tenant Payment, whichever is greater. In the case of a $0 income tenant, they would have a minimum rent of $25 and a security deposit of %50 , which would violate the Regulatory Agreement, because the Security Deposit would be greater than the first month's rent. In addition, the Section 8 program does not allow the Borrower to charge certain application processing fees, which would be permitted by the Regulatory Agreement. Does the Regulatory Agreement need to be modified?

In the event of a conflict between the Regulatory Agreement and the Section 8 program, it is
intended that the requirements of the Section 8 program control. Section 48 of the Regulatory
Agreement, entitled "Conflicts Provision" states that Borrower shall comply with the requirements of
the Regulatory Agreement and any other agreement that the Borrower enters into with HUD. If there
is a conflict between the Regulatory Agreement and any other HUD agreement, the "agreement which imposes the more restrictive requirements on Borrower shall control." In this question, the Section 8 rules are more restrictive and would control. No modifications to the Regulatory Agreement need to be made.

36.1/17/2013
For age restricted projects, Housing HQ wants assurance of two things: 1) head of household is 62 and older and that they don't discriminate if they have families and 2) that when we close all head of households are 62 and older. What document would ensure this would be true? And do we need a document recorded? This is coming up on three 221(d)(4) sub rehabs. Should we create a Use Agreement, or add something to the Regulatory Agreement, or do something else?

Paragraph 31(a) of the Regulatory Agreement prohibits discrimination against elderly families (age
62 and over) with children in its multifamily insured properties unless the property is insured under
Section 231 and designed exclusively for the elderly (age 62 and over) or if permitted under the Fair
Housing Act and approved in writing by HUD. The MAP Guide clearly states that HUD does not permit
occupancy restricted to age 55 and older in any of its MAP Guide programs and that this provision shall not be waived except the the Headquarters' Office of Multifamily Development (paragraph 3.2.L).

This reference to age 55 addresses those Borrowers who may want to rely on the Housing for Older
Persons exceptions to the Fair Housing Act. The MAP Guide also clearly states that MAP projects
(except for those financed under Section 231) may be age restricted (i.e., head of household 62 years
of age or older) but the Borrower cannot prohibit occupancy based exclusively on the age of other
family members who may be less than 62, including children under the age of 18 (paragraph
3.4.S). Since this requirement is included in the Regulatory Agreement, no use agreement is needed
and should not be used.

37. 2/21/2013
Prior to new loan documents, I had understood that a TPA was required for transfers of interests in the project owner that result in (i) changes in managerial interests, such as general partners or managers, or (ii) changes in beneficial interests exceeding 50%, such as transfers of limited partner of membership interests. However, Section 36a of Regulatory Agreement and 21 of Security Instrument regulate any direct or indirect change in ownership of the project which would result in a change in a "Principal", which term is defined in 24 CFR 200.215. Under the Reg Agmt, direct or indirect transfers of ownership interests in the project that result in a change in a principal can be made without HUD consent if permitted by Program Obligations, which would seem to mean that 2530 requirements and handbook 4350.1 requirements would apply. However, Section 21 seems to contradict the Reg Agmt in stating any such change requires HUD prior written approval. Take, for example, a transfer of 10% limited partnership interest in a borrower. The 10% limited partner would seem to be a "Principal" because it is an individual or entity participating in a project as an owner or sponsor (especially if the 10% limited partner is an attorney having a partnership interest). The transfer of this 10% interest would automatically be permitted under the Reg Amt, because 2530 and 4350.1 would permit the transfer without HUD consent. The Security Instrument contradicts this and requires HUD approval whether or not the transfer is permitted under Program Obligations. Which is correct? Also, if any change in a Principal does require HUD's prior written approval as per the Sec Instr, what process governs HUD's approval? 2530 and 4350.1 TPA requirements may not apply to some transfers of "Principal Interest" which are non-managerial and less than 25%. Is there a process other than 2530 or the 4350.1 TPA approvals? Thank you for any clarification that you can provide.

Section 21 of the Security Instrument does not conflict with Section 36 of the Regulatory Agreement.

Both sections contain an exception to obtaining HUD approval when the transfer is permitted by Program Obligations.

Section 36 of the Regulatory Agreement contains a prohibition against the “transfer of any interest in Borrower (if the effect of such conveyance, assignment or transfer is the creation or elimination of a Principal) unless permitted by Program Obligations”

Similarly, Section 21 of the Security Instrument provides that with regard to an “assignment or transfer of any interest in Borrower (if the effect of such conveyance, assignment or transfer is the creation or elimination of a Principal),” borrower “does not need to obtain the prior written approval of HUD … as permitted in Program Obligations.”

For information concerning HUD’s approval process, if any, look to Program Obligations.

38. 3/21/2013
Definition of " Surplus Cash" in Regulatory Agreement has changed.

Definition of "Surplus Cash" in Regulatory Agreement at Section I. Definitions, paragraph gg has been changed to read as follows: "Surplus Cash" means any cash plus amounts receivable under Section 8 project-based subsidy payments (earned in the applicable fiscal period) remaining after:"

39. 3/21/2013
There seems to be conflictive instructions with regards to non profits and who is supposed to be listed in Section 50. Below I've copied the three sources available. Can you confirm which one is correct? It doesn't seem correct to have the borrower entity itself be the one responsible for its own bad acts.
Source 1: The Dan Sullivan email from 1-11-12, posted on the sharepoint site on 2-1-12 provides the following: "For publicly traded corporations or REITS, or Non-profit organizations; the parent/sponsor entity itself is acceptable as the sole signatory. For such entities, any individual signing on behalf of the corporate entity does not sign in an individual capacity, but to bind the parent/sponsor, and no personal liability will be claimed against the individuals signing in such a capacity.
Source 2: The OGC MF Document Reform Implementation: Regulatory Agreement Section 50 (June 2012) shows: (i) Publicly traded corporations or REITS-OR-Non-profit organizations: The parent or sponsor entity itself is acceptable as the sole signatory. For such entities, any individual signing on behalf of the corporate entity signs only to bind the parent or sponsor, and no personal liability will attach to an individual signing in the capacity of an officer or director of the entity, or in another official capacity; (ii) Requirements for non-profit entities versus for-profit entities: For projects having a for-profit entity as the Borrower, typically both an entity and an individual meeting the criteria described herein (regarding control and financial status) would be named in Section 50. For projects having a non-profit entity as the Borrower, only the Borrower entity must be named in Section 50, but no board members, officers or other individuals need be named.
Source 3: Chapter 8 of the MAP Guide (8.3.A.5.g) reads: In the case of non-profit sponsors or borrowers, the principal to be listed in Section 50 of the Regulatory Agreement is the non-profit corporation itself.

Yes, thank you for bringing this discrepancy to our attention. The MAP Guide and the June 2012 guidance will be revised to reflect that for non-profit Borrowers, the parent/sponsor entity should be named. Only in limited circumstances on a fact-specific, case-by-case basis, such as when there is no parent/sponsor entity of a non-profit, would Housing select the Borrower entity to be named in Section 50. In almost all cases, except in such extraordinary circumstances, the Borrower should not be named in Section 50.

40. 4/5/2013
New Regulatory Agreement in TPA context: Previously, we were directed to use the old Regulatory Agreement on deals with old loan documents and the new Regulatory Agreement on deals with the new loan documents. My simple question is why. Is there an incompatibility between the old loan documents and the new Regulatory Agreement? Historically, we have tried to get a new owner committed to the most recent expression of the Regulatory Agreement. This still seems like a good idea.

Historically, we have tried to have a new owner acquiring a property through the TPA process to enter into the most current Regulatory Agreement. It was decided not to do this, however, when a property being transferred via a TPA is subject to the old loan documents because the documents are incompatible. For example, there are many requirements in the new Security Instrument that are coordinated with the new Regulatory Agreement. The old Security Instrument is not consistent with the new Regulatory Agreement, even with respect to the terms and definitions of the documents, and so it was determined that projects with HUD-insured or -held loans at the time the new documents became effective would not be made subject to the new documents through the TPA process. Any refinances, however, would have to enter into all the new loan documents.

41. 6/20/2013
We are working to close a 223(f) loan and the Borrower has requested loan document changes with respect to the following: MAP Guide Section10.6(2)(b) [should be 10.6.B.2(b)] allows termination of the Management Agreement in the following circumstances: (1)Immediately if a default occurs under the Mortgage, Note, Regulatory Agreement, or Rental Assistance Contract that is attributable to the actions of the management agent; (2) Upon 30 days written notice, for failure to comply with the provisions of the Management Certification or for other good cause; or (3) When HUD takes over the property as Mortgagee in Possession.

However, Section 23 of the Regulatory Agreement contains the following provisions: "Any management contract entered into by Borrower pertaining to the Mortgaged Property shall contain a provision that the contract shall be subject to termination without penalty and without cause upon written request by HUD and shall contain a provision that gives no more than a thirty day notice of termination."

So there appears to be a direct conflict between HUD's right to terminate for "good cause" or "without cause". The Borrower has requested that we submit a document request change to the HUD attorney reviewing this transaction so that the provisions of the Regulatory Agreement would require that any management contract shall be subject to termination without penalty in accordance with Program Obligations (i.e. MAP Guide Section 10.6(2)(b)).

You are correct that there is a discrepancy between the Regulatory Agreement and the MAP Guide with respect to HUD’s requirements for termination of management agreements. This discrepancy will be corrected in the next issuance of the Regulatory Agreement in 2014 that results from the OMB and Paperwork Reduction Act approval process. Until this time, Borrowers and Lenders are encouraged to substitute the following revised Section 23 of the Regulatory Agreement in place of the existing provision. Field offices have authority to accept this revised language without HQ review.

23. TERMINATION OF CONTRACTS. Any management contract entered into by Borrower pertaining to the Mortgaged Property shall contain atermination provisions that are consistent with Program Obligations. ~~that the contract shall be subject to termination without penalty and without cause upon written request by HUD and shall contain a provision that gives no more than a thirty day notice of termination~~. Upon ~~such~~a request by HUD to terminate the management contract pursuant to Program Obligations, Borrower shall immediately arrange to terminate the contract, and Borrower shall also make arrangements satisfactory to HUD for continuing acceptable management of the Mortgaged Property effective as of the termination date of the contract.

42. 12/19/2013

I believe the answer to the question published on 1-17-13 entitled "Do we need to create a Use Agreement on an Elderly 221(d)(4) sub rehabs?" should be edited to indicate that you don't need a Use Agreement UNLESS it is a special condition of the commitment or required per the HQ prepayment approval letter. I am currently working on an age restricted 221d4SR which specifically requires a Use Agreement. As written the answer implies that you can ignore the special condition.

The situation referred to in this question involves a Section 202 property that has been refinanced with an FHA-insured loan, where the use agreement is a requirement of the prepayment of the 202 financing and not that of the FHA-insured loan. All Section 202 Direct Loan prepayments that require prior approval by the HUD Secretary must meet a variety of requirements that are set forth in HUD Notice H 2013-17, Updated Requirements for Prepayment and Refinance of Section 202 Direct Loans, May 30, 2013, Section V. The Owner must, among other things, execute a use agreement that will ensure the continued operation of the project until at least 20 years following the maturity date of the original 202 loan under terms at least as advantageous to existing and future tenants as the terms required by the original 202 loan agreement. The use agreement form to be used by the Owner is an attachment to the Notice. Id at p.5. This is the use agreement referred to in the question. The use agreement must be recorded in a superior position to the new financing, including any FHA-insured loan. Id. This requirement to “maintain” the property means that the same population housed prior to the prepayment must continue to be housed following prepayment for the life of the use agreement.

Prior to October 1, 1991, the population to be housed in a Section 202 property was “elderly and handicapped families.” These are families that consist of two or more persons and the head of which (or his spouse) is sixty-two years of age or over or is handicapped, and such term also means a single person who is sixty-two years of age or over or is handicapped.” Section 202(d)(4) of the Housing Act of 1959, repealed by the Cranston-Gonzalez National Affordable Housing Act, §801. The rules changed as of October 1, 1991, when the Section 202 program was modified to provide supportive housing for elderly persons, and the Section 811 program was established to provide supportive housing for persons with disabilities. The definition of elderly person for the 202 program was also amended to then mean a “household composed of one or more persons at least one of whom is 62 years of age or more at the time of initial occupancy.” 12 USC 1701q(k)(1), as amended. Handicapped persons that did not have a family member at least 62 years of age or more were no longer included in the population to be housed in newly funded Section 202 properties.

Regardless of whether a Section 202 property was financed before or after October 1, 1991, the Owner of a refinanced Section 202 property with a use agreement must ensure that occupancy is consistent with the occupancy rules in place prior to the prepayment. For properties financed prior to October 1, 1991, eligible households are those that, at initial occupancy, are composed of a single person who is 62 years of age or over, a handicapped person (regardless of age), a family with at least the head of household or spouse 62 years of age or over. A household that meets at least one of these criteria cannot be excluded because it includes children. For properties financed after October 1, 1991, eligible households are those that, at initial occupancy, are composed of one or more persons at least one of whom is 62 years of age or more. A household that meets this criterion cannot be excluded because it includes children.

Section 31(a) of the Regulatory Agreement prohibits the Borrower when selecting tenants, from discriminating against tenants by reason of the fact that there are children in the family, unless in accordance with the Fair Housing Act and with HUD prior written approval. This provision does not apply if the property is financed under Section 231 of the National Housing Act. The 202 use agreement is not inconsistent with Section 31(a) in that the definition of an eligible elderly family, whether the property was financed before or after October 1, 1991, has always recognized that children may be part of an eligible elderly family.

43. 2/06/2014
A formerly coinsured Section 221(d)(3) new construction housing cooperative received a commitment to refinance pursuant to Section 223(a)(7). The commitment is silent as to whether MAP applies, though there is a reference to parties who will be named in Section 50 of the Regulatory Agreement. The new Regulatory Agreement is appropriate for 221(d)(3) nonprofit projects. There is a reference to Housing Cooperatives in the Definitions, Section 'o' Leases. May the new MAP loan documents be used for this 221(d)(3) housing cooperative refinance in conjunction with the HUD formats for the Occupancy and Subscription Agreements?

Yes, the new Multifamily loan documents should be used in connection with such housing cooperative refinances. More particular guidance on how the new forms should be altered to fit the unique characteristics of cooperative housing will be issued in the future.

44. 4/09/2014
According to the Committee's Q&A published 2/6/14, the new Multifamily closing documents should be used when a Section 221(d)(3) cooperative refinances under Section 223(a)(7), but "should be altered to fit the unique characteristics of cooperative housing." The Q&A published on 2/6/12 says we should use the FHA-3225 form of Reg Agreement instead of the HUD-92466M on Section 213 new construction cooperative closings. On 7/20/11, the Committee advised field counsel to use the old closing documents when a project converts to a cooperative or condominium. Should new or old closing documents be used on Section 213 new construction cooperative closings? Should new or old documents be used when a Section 213 refinances with a HUD-insured mortgage? These transactions are becoming increasingly common in my jurisdiction.

A group of HUD attorneys in HQ and the field has been established to develop more detailed
closing document instructions for the various cooperative programs. Until the group has
completed its work, please contact the Assistant General Counsel, Multifamily Mortgage Division- Office of Insured Housing, for cooperative closing questions.

45. 7/02/2014
Should a reserve fund for replacement funding schedule be added to the Regulatory Agreement? One HUD Housing office consistently requires as a special condition that we add the reserve fund for replacement funding schedule as an exhibit to the Regulatory Agreement. This requires several modifications to the Regulatory Agreements: (1) Adding to paragraph 10(b) "The funding schedule for the Reserve for Replacement is attached hereto as Exhibit B;" (2) Revising "Attached Exhibits" to include Exhibit B; and (3) attaching Exhibit B to the Regulatory Agreement. This special condition becomes somewhat problematic when through work sharing this particular Housing office issues the commitment, but then the project closes with another Housing office. Does a change to add the annual adjustment factor to the Reserve for Replacement calculation require a Form Change Approval?

When HUD Program Obligations allow reserve for replacement ("RFR") funding schemes different from the fixed, monthly RFR contribution set forth in the form Regulatory Agreement (HUD-92466M), the Regulatory Agreement must be modified in the form of an attached exhibit memorializing the alternative RFR schedule. This form change does not need to come to HUD HQ for review. Examples of guidance where such alternative RFR funding schedules are permitted include MAP Guide App. 5G (IV.E) and Mortgagee Letter 2012-25/Notice H 2012-27 (V.F). Provided Program Obligations concerning RFR contributions have been followed, if a firm commitment issued by one HUD office includes an alternative RFR funding schedule to be memorialized as an exhibit to the Regulatory Agreement, a different HUD office closing the loan must accommodate the modification to the Regulatory Agreement consistent with this guidance.

Note that if the Lender proposes (and appropriate HUD staff approves) the traditional fixed monthly RFR contribution contemplated in the form Regulatory Agreement, then no RFR exhibit may be attached to the document; the fixed monthly contribution should be inserted in the appropriate blank space in the Regulatory Agreement. No HUD office should uniformly require a RFR schedule attached as an exhibit to the Regulatory Agreement, as RFR determinations may conclude with either a fixed or variable amount, depending on HUD’s guidance as applied to each unique project loan application. For new loan closings only, participants may contact HQ Office of Multifamily Housing Development directly if they encounter HUD offices they believe are incorrectly applying HUD guidance on RFR determinations.

46. 10/16/2014
The cover page for the new Regulatory Agreement (HUD-92466M(06/14)) references a Residual Receipts Rider to modify the surplus cash provisions. Do we have a form for that Rider or do I let the mortgagee’s attorney draft a Rider from scratch?

The Residual Receipts Rider is included in the revised Closing Guide (issued October 2014).

47. 10/16/2014
Editorial Correction to Section 50 Addendum.

The Section 50 Addendum in HUD-92466M (06/14), Regulatory Agreement for Multifamily Projects, was recently revised to make the editorial correction noted below. HUD did not intend to make any substantive changes to Section 50 when it revised the provision to include an Addendum during the recent PRA approval and document revision process. The language shown below in strikethrough was included by mistake. A corrected Word version has been posted in HUDCLIPS and a ".pdf" version will be posted as well.

SECTION 50 ADDENDUM

The Loan is nonrecourse. Each individual/entity (each, a “Section 50 party”) as identified below and in the “Firm Commitment” (which means the commitment for insurance of advances or commitment for insurance upon completion issued to Lender by HUD under which the debt evidenced by the Note is to be insured pursuant to a Section of the Act, dated ___________ [month, date, year], and any amendments thereto):

1._______________________ (Individual/Entity Name) 2._______________________ (Individual/Entity Name)

does not assume personal liability for payments due under the Note and Security Instrument, or for the payments to the Reserve for Replacements, or for matters not under its control, provided that each Section 50 Party shall be personally liable under this Agreement only with respect to the matters hereinafter stated; namely: (a) for funds or property of the Project coming into its hands which, by the provisions hereof, it is not entitled to retain; (b) for authorizing the conveyance, assignment, transfer, pledge, encumbrance, or other disposition of the Mortgaged Property or any interest therein in violation of Section 35(a) of the Regulatory Agreement to which this addendum is attached (“Regulatory Agreement”) without the prior written approval of HUD; and (c) for its own acts and deeds, or acts and deeds of others, which it has authorized in violation of the provisions of ~~the Regulatory Agreement~~ this Section 50 Addendum. The obligations of each Section 50 Party shall survive any foreclosure proceeding, any foreclosure sale, any delivery of any deed in lieu of foreclosure, any termination of the Regulatory Agreement, or any release of record of the Security Instrument.

48. 1/16/2015

Should the term "displaced persons or families" in Section 29(b) of the Regulatory Agreement be capitalized so as to correspond with the definition of "Displaced Persons or Families" in Section 1(f)?

Yes, the term “displaced persons or families” as used in Section 29(b) is intended to be the defined term set forth in Section 1(f). This is a scrivener’s error in the initial published document that has now been corrected in the 2014 Regulatory Agreement in HUDClips. Thank you for letting us know about this needed edit.

49. 1/21/2015

Is it acceptable to strike the paragraphs regarding “segregated accounts” in both the Security Instrument and Regulatory Agreement when no such accounts have been identified at closing? (This unnumbered paragraph follows Section 1(s)(17) in the Regulatory Agreement and Section 1(w)(17) in the Security Instrument). We are concerned that the collateral carve-out for segregated accounts is ambiguous. For example, does equity contributed to a borrower-entity become collateral, or is it per se “segregated”?

No, the paragraphs regarding “segregated accounts” that follow Section 1(s)(17) of the Regulatory Agreement and Section 1(w)(17) of the Security Instrument should not be stricken. The language of those paragraphs anticipates that such segregated accounts may not exist at the time of Closing but may come into existence at a later date. Please note while there is not a per se rule as to whether funds will be deemed “non-project funds,” the HUD program client will determine whether the funds are or are not part of the Mortgaged Property; i.e. whether the funds may be placed in a segregated account. The paragraph provides two examples of nonproject funds: surplus cash and loan repayments.

50. 2/19/2015

We note that the attached Rider 1 for the Regulatory Agreement (HUD-9266R-1) has expired in 2012. However, the other riders 2, 3, and 4 expire in 2016. Should we continue to use the Rider 1 even though it has expired?

The four riders mentioned in the incoming question are for Multifamily transactions involving master lease structures to facilitate use of New Market and Historic Tax Credits pursuant to Chapter 16 of the MAP Guide. The four riders currently posted to HUDClips were drafted to work with the pre-2011 Regulatory Agreement, and should not be used with the 2014 Regulatory Agreement. Please note that Housing is currently working to ensure that OMB approval is extended for Rider 1 (HUD-92466R-1, 09/2009) through 2016, to the extent participants still need access to this form. OGC attorneys in HQ revised the riders for use with the 2014 version of the Regulatory Agreement, which will be followed by the Paperwork Reduction Act and OMB approval process. Until the PRA/OMB process is completed, you may access the updated draft forms on this site for new transactions using the 2014 Regulatory Agreement.

51. 2/19/2015

With regard to the FAQ published on 1/21/15 regarding segregated accounts, could you please provide some guidance for how to handle and approve, or not approve, segregated accounts?

The 1/21/15 FAQ referred to the definition of Mortgaged Property and the exclusion from Mortgaged Property of non-project assets. It is the Borrower’s responsibility to segregate project assets from non-project assets. For example, although there may not be any non-project assets at Closing, over the life of the Project, it may be necessary for a General Partner or Managing Member to contribute its own funds to the Borrower for distribution to a Limited Partner or Investor Member. Such infusions might be deposited into an account identified as “Entity Cash” in HUD’s chart of accounts, and would not be considered by HUD to be project assets or part of Mortgaged Property. The subject language in no way allows a Borrower to segregate project assets and declare such assets outside of Mortgaged Property. It is a recognition that some funds occasionally coming into Borrower’s possession over the life of the Project are intentionally not captured by the definition of Mortgaged Property. In the normal course, there is no need for HUD to “approve” prospectively the segregation of non-project assets; this is the Borrower’s responsibility in its normal course of managing its finances and accounting to treat funds appropriately. If and when the project is audited, errors in segregation may be discovered just as other errors in financial management and accounting are discovered. If a Borrower has questions as to how to treat an asset, the Borrower should contact the Office of Housing.

52. 5/15/2015

Paragraph 17 of the Security Instrument provides ". . . Surplus Cash or Residual Receipts (as both terms are defined in the Regulatory Agreement) . . . . " However, there's not a definition in the Regulatory Agreement for Residual Receipts.

In redrafting the Regulatory Agreement for the 2014 version of the form, a decision was made to remove the Residual Receipts provisions that were in the 2011 version of the Regulatory Agreement and to use a Residual Receipts Rider instead, when appropriate. The rationale for this decision is provided in some detail in the 2015 Closing Guide at 2.5(C) on page 38. It was a scrivener's error to not make a comparable change to the residual receipts reference to the Regulatory Agreement in Paragraph 17 of the Security Instrument. Paragraph 17 of the Security Agreement has now been changed and reads: "...Surplus Cash (as defined in the Regulatory Agreement) or residual receipts... ." Program Obligations will guide the use of residual receipts.

53. 8/20/2015

The 2011 version of the Regulatory Agreement included the initial deposit amount to the Reserve for Replacement but this provisions was removed in the 2014 version of the Regulatory Agreement. In this regard, HUD noted in the Federal Register published on July 11, 2014: "A commenter requested a change to Section 10(b) with respect to the initial deposit to the reserve for replacement, stating that requiring a specific amount in the Regulatory Agreement for a one-time deposit that occurs at closing is often problematic since the Reserve for Replacement amount can change. HUD agrees and has removed the first sentence of Section 10(b). The initial deposit for the reserve for replacement account should be disclosed, including any applicable transfer amounts, in the closing statement and the Request for Endorsement." A HUD office is requiring the lender to modify Section 10(b) of the 2014 Regulatory Agreement to add the following: "An initial deposit of $_____ shall be made to the Reserve for Replacements at initial final endorsement of the Note." Can you clarify whether this is a permissible change?

This change is not permissible. The language capturing the initial deposit was intentionally removed from the 2014 Regulatory Agreement, and the amount is captured in other closing documents.

54. 3/17/2016

I received an inquiry in regards to the Residual Receipts Rider indicated on form HUD 92466M. I have tried to locate this document for the requestor, but without success. Is there a sample Residual Receipts Rider available since this is a requirement for projects subject to Residual Receipts to attach this form to the Regulatory Agreement?

The Residual Receipts Rider (“Rider”) is found in section 5.5 of the FHA Multifamily Program Closing Guide, and further explained in section 2.5.C.

HUD staff and program participants have also asked when and how to use the Rider. Any Residual Receipts (“RR”) requirement for a new FHA project loan closing will stem from the fact that the project has a longstanding RR requirement that should be known to the project owner and HUD Project Manager. The Rider, however, requires identification of the specific underlying document that contains the RR requirement going forward such as a use agreement or Section 8 HAP Contract.

As such, Housing Production staff should investigate whether the project is subject to RR during the application stage and memorialize this as a special condition to the firm commitment, perhaps even earlier in the case of a 202 refinance (through the prepayment approval letter). Clues such as the project being a 202 refinance, existing use agreements shown in iREMS for the project, or having Section 8 assistance should tip off Housing and lender staff to investigate possible RR requirements. In most cases where there are still questions/uncertainty about whether the project is subject to RR requirements, the ultimate determination will need to come from Housing Asset Management.

The following guidance may be helpful in determining the existence of Section 8 RR requirements.

As general matter, HAP contracts that require the owner to maintain a residual receipts account are what we call "new regulation" HAP contracts. There is a good, general definition of new regulation projects in footnote 1 of Housing Notice 2012-14, (excerpted further below). It must be emphasized for HUD staff and participants that this definition is necessarily only general because it's not possible to provide a definition that covers each and every instance. In other words, there is a small number of exceptions that don't fit into this general definition. Also, and again as a general matter, if the HAP contract contains a requirement for a residual receipts account, it's usually located in a section 2.6 called "Financial Requirements." As a general rule of thumb, if the HAP contract doesn't contain a section 2.6 called "Financial Requirements," then it doesn't likely require a residual receipts account. However, in a small number of cases, it is tacked on at the end of the HAP contract as a rider or amendment. So, in light of these exceptions, it's not sufficient to not find a section 2.6 called 'Financial Requirements" and then conclude that there is no residual receipts requirement. HUD staff and participants must carefully review the HAP contracts in question for a given FHA-insured transaction to make a final determination about whether the RR Rider is required. For further guidance on this topic, please click on the following document from HUD OGC Assisted Housing, titled “HAP Contracts Residual Receipts Table”.

Housing Notice 2012-14, Footnote 1:

The new regulations are as follows: 24 C.F.R. Part 880, in effect as of November 5, 1979; 24 C.F.R. Part 881, in effect as of February 20, 1980; and 24 C.F.R. Part 883, in effect as of February 29, 1980. Section 202/8 projects that are subject to a new regulation Section 8 HAP contract (i.e., one that permits HUD or a State Housing Agency to require that excess project funds be deposited into an interest-bearing account to be used to reduce housing assistance payments or for other project purposes) are also subject to this Notice despite the absence of a provision in 24 C.F.R. Part 891 (formerly Part 885), which governs such projects, that corresponds to 24 C.F.R. 880.205(e), 881.205(e), or 883.306(e). See Section IV. B. of this Notice, which identifies the relevant language regarding the use of Residual Receipts to reduce housing assistance payments that typically appears in new regulation HAP contracts.

55.6/8/2018

For transactions that closed under the 2011 Multifamily loan documents and now going through a transfer of physical assets (TPA) where the 2011 Regulatory Agreement (92466M-11) remains in effect, or an interest rate reduction (IRR), may the exculpation provisions in the Security Instrument (94000M-11) and Note (94001M-11) be amended to refer to the parties listed in Section 50 of the Regulatory Agreement (as opposed to listing the parties’ names) in a similar fashion as the 2014 documents allow?

Yes, provided the parties are able to gain lender consent, HUD will allow the exculpation provisions of the 2011 Security Instrument and Note to be modified to refer to the parties listed in Section 50 in connection with a TPA or IRR. The allowable changes are as follows:

Security Instrument (94000M-11)

6. EXCULPATION. Except for personal liability expressly provided for in this Security Instrument or in the Note or in the Regulatory Agreement, the execution of the Note shall impose no personal liability upon Borrower and ~~[LIST THE INDIVIDUALS/ENTITIES LISTED IN SECTION 50 OF THE REGULATORY AGREEMENT]~~ those parties listed in Section 50 of the Regulatory Agreement for payment of the Indebtedness evidenced thereby and in the Event of Default, the holder of the Note shall look solely to the Mortgaged Property in satisfaction of the Indebtedness and will not seek or obtain any deficiency or personal judgment against Borrower and ~~[LIST THE INDIVIDUALS/ENTITIES LISTED IN SECTION 50 OF THE REGULATORY AGREEMENT]~~ those parties listed in Section 50 of the Regulatory Agreement except such judgment or decree as may be necessary to foreclose or bar its interest in the Mortgaged Property and all other property mortgaged, pledged, conveyed or assigned to secure payment of the Indebtedness; provided, that nothing in this Section 6 of this Security Instrument and no action so taken shall operate to impair any obligation of Borrower under the Regulatory Agreement.
Note (94001M-11)

8. Exculpation; Remedies.

(a) Except for personal liability expressly provided for in this Note or in the Security Instrument or in the Regulatory Agreement, the execution of this Note shall impose no personal liability upon Borrower and ~~[LIST THE INDIVIDUALS/ENTITIES LISTED IN SECTION 50 OF THE REGULATORY AGREEMENT]~~ those parties listed in Section 50 of the Regulatory Agreement for payment of the Indebtedness evidenced thereby and in the Event of Default, the holder of the Note shall look solely to the Mortgaged Property in satisfaction of the Indebtedness and will not seek or obtain any deficiency or personal judgment against Borrower and ~~[LIST THE INDIVIDUALS/ENTITIES LISTED IN SECTION 50 OF THE REGULATORY AGREEMENT]~~ those parties listed in Section 50 of the Regulatory Agreement except such judgment or decree as may be necessary to foreclose or bar its interest in the Mortgaged Property and all other property mortgaged, pledged, conveyed or assigned to secure payment of the Indebtedness; provided, that nothing in this Section 8 of this Note and no action so taken shall operate to impair any obligation of Borrower under the Regulatory Agreement.

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