April 12, 1996 PRESERVATION LETTER No. 1 MEMORANDUM FOR: All Housing Directors; Directors of Multifamily Housing; Production Chiefs; Asset Management Chiefs; Preservation Coordinators; and Mortgage Credit Examiners /s/ FROM: Nicolas P. Retsinas, Assistant Secretary for Housing- Federal Housing Commissioner, H SUBJECT: Waiver of Certain Requirements for a Sales Transaction Under the Preservation Program Both the Administration and Congress support changing the Preservation program. The Housing Opportunity Program Extension Act provides for priority funding of sales of projects to nonprofit organizations, tenant-sponsored organizations and other priority purchasers. The law also permits an extension transaction to convert to a sales transaction. However, the Preservation Program will suspend processing on October 1, 1996. Therefore, to process and fund as many sales projects as possible given the limited time frame, the entire sales process needs to be streamlined. This memorandum waives the following Sections of 24 CFR: Section 248.135(h), Comment Period for Tenants and State or Local Governments; Section 248.157(c), Right of First Offer to Priority Purchasers; Section 248.157(e), Expression of Interest; Section 248.157(i), Submission of Offer to HUD; and Section 248.157(l), Failure to Consummate Sales Transaction. These waivers are based on a determination and finding of good cause based on the Preservation program changes contained in "Housing Opportunity Program Extension Act of 1996." These detailed requirements act as an impediment to the rapid conversion of a preservation extension transaction to a sale to a priority purchaser transaction. Based on the above waivers, the following provides guidance on converting extension transactions to sales transactions and shortening the preservation processing time frames for all sales transactions. Note that we only address changes in the process. If an item is not discussed, follow existing instructions. INSTRUCTIONS TO FOLLOW FOR SALES TRANSACTIONS I. THE OWNER WITH AN APPROVED PLAN OF ACTION (POA) TO EXTEND A. The owner of an approved extension POA must file a second notice of intent (NOI) by April 15, 1996, if it intends to sell its project to a priority purchaser. B. Submission of the Notice to Modify an approved POA. 1. An owner submits a written request to the Preservation Coordinator (PC) in the local HUD Office modifying its approved POA to sell the project to a nonprofit mortgagor entity through the capital grant process. The owner does not have to identify the priority purchaser at this time. 2. The PC will issue a letter approving the request provided that the appraisal is not more than 30 months old at the time of the approval and implementation of a Modified POA. If the appraisals will be more than 30 months old at the time of the approval and implementation of a Modified POA, then new appraisals must be ordered. C. Complete the process described under III below. II. THE OWNER WITH A POA TO EXTEND OR SELL IN PROCESS. A. The owner of a proposed extension POA must file a second NOI by April 15, 1996, if it intends to sell its project to a priority purchaser. B. Submission of the Notice to Modify a POA. 1. An owner submits a written request to the PC in the local HUD Office modifying its proposed POA to state that the owner now intends to sell the project through the capital grant process to a nonprofit mortgagor entity. The owner does not have to identify the priority purchaser at this time. 2. The PC will issue a letter approving the request provided the appraisals may not be more than 30 months old at the time of the approval and implementation of a Modified POA. If the appraisals will be more than 30 months old at the time of the approval and implementation of a Modified POA, then new appraisals must be ordered. C. Complete the process listed under III below. III. THE OWNER HAS NOT SUBMITTED A POA. A. The owner notifies the PC in the local HUD Office in writing of its intent to sell the project to a nonprofit mortgagor entity. The PC or Resident Initiative Specialist (RIS) in the local HUD Office will give the owner a mailing list of potential nonprofit purchasers and nonprofit clearing house networks. An owner who has not timely filed a second NOI PRIOR to October 1, 1995, must do so by April 15, 1996, if it intends to sell its project to a priority purchaser. Based on a technical correction, (Changing the date on the document is considered a technical correction), the local HUD Office may reissue Form HUD-9607 to an owner that could have filed a second NOI ON OR AFTER October 1, 1995, but failed to do so. By statute, the owner is required to submit the second NOI within 30 days of receipt of the corrected Form HUD-9607. The HUD Field Office is instructed to use return receipt in the mail-out to the owner, so that the date of receipt is documented. B. Transfer Preservation Equity. The PC will reissue Form HUD-9607, Calculation of Information to be Returned to Owner. 1. Adjust Transfer Preservation Equity (TPE) for: a. Principal payments made on the insured first mortgage after the Form HUD-9607 was issued; and b. Additional HUD approved debt incurred after the Form HUD-9607 was issued, if any, to be assumed by the purchaser; and c. Cost of completed required repairs as approved by HUD. 2. To be eligible, the Transfer Preservation Equity (TPE) must equal at least the lesser of: a. $5,000 per unit; b. $500,000 per project; or c. Eight times the local existing Fair Market Rent (FMR) for each unit 3. HUD may reissue Form HUD-9607 as long as the appraisal is not more than 30 months old. a. If the appraisal is close to being 30 months old, the HUD State/Area Office will determine whether the POA will be approved before expiration of the 30 month period. b. If the appraisal will be more than 30 months old, the HUD State/Area Office cannot approve POA or a modified POA. C. Second Notice of Intent (NOI). 1. The owner must submit a second NOI by April 15, 1996 if: a. An owner who has not timely filed a second NOI PRIOR to October 1, 1995, must do so by April 15, 1996, if it intends to sell its project to a priority purchaser. b. Based on a technical correction (Changing the date on the document is considered a technical correction), the local HUD Office may reissue Form HUD-9607 to an owner that could have filed a second NOI ON OR AFTER October 1, 1995, but failed to do so. By statute the owner is required to submit the second NOI within 30 days of receipt of the corrected Form HUD-9607. 2. All other owners must submit a second NOI within 30 days of the Form HUD-9607 being issued/reissued by HUD and accepted by the owner. 3. The requirements for tenant and State and local government notification still apply. D. HUD Action. The HUD State/Area Office notifies potential priority purchasers that the property is for sale and gives all potential priority purchasers the following: 1. The name and address of the property; 2. The name and address of the owner and any owner representatives; 3. The sizes, types and number of units; 4. The amount of earnest money deposit required, if any; 5. The Transfer Preservation Value of the property; and 6. The name of the PC in the local HUD Office from whom the priority purchaser can request the information listed in F. below. E. Expression of Interest. The potential priority purchaser must state in writing its interest in acquiring the subject project. Nothing else is required. F. Information from HUD. HUD will provide any potential priority purchaser with: 1. Information about the Capital Grant and the Section 241(f) Programs. 2. Copies of all relevant appraisal reports performed by HUD's and the owner's appraiser. If a third appraisal was performed, only that one must be provided; 3. The list of required repairs and estimated costs determined by the Preservation Capital Needs Assessment (PCNA) as adjusted for work completed and accepted by HUD; 4. A statement about its right to inspect the property; and 5. Any other relevant financial information Asset Management Branch (AMB) has about the project, including information the owner received in response to the Initial NOI. G. Bona Fide Offer Stage. This stage of processing still applies. The proposed priority purchaser must certify that it qualifies under the definition of priority purchaser found in 24 CFR 248.101. However, HUD's review of the proposed priority purchaser's status will be incorporated into the POA review stage of processing. H. Submission of POAs. 1. Submission to HUD. The owner and priority purchaser submit four copies of a complete POA to the PC. 2. Submission to State or Local Government. Simultaneous with submission to HUD, the owner/priority purchaser submits the POA to that officer of State or local government to whom the owner submitted an Initial NOI. a. The owner/ priority purchaser includes with its POA to HUD, a certification confirming this action. b. The owner's submission to the State or local government must indicate that the State or local government has 14 business days in which to provide comments on the POA to the HUD State/Area Office. 3. Submission to Tenants. Simultaneous with submission to HUD, the owner/priority purchaser submits the POA to the tenant representative and posts a copy in each building. a. The owner/priority purchaser includes with its POA to HUD, a certification confirming this action. b. The owner's submission to the tenants must indicate that the tenants have 14 business days in which to provide comments on the POA to the HUD State/Area Office. 4. Availability of Supporting Documentation. All notifications to tenants, tenant representatives, and State and local governments must state that a copy of all documentation supporting the POA, except "proprietary information," is available from the owner and the local HUD Office. I. Items to be Included in the POA. 1. A complete Transfer of Physical Assets package including the Form HUD-3433, Request for Preliminary Determination of Eligibility as a Nonprofit Sponsor and/or Mortgagor, and supplemental documentation. Documentation must contain, but is not limited to: a. Detailed explanation of motivation for sponsoring the acquisition of the project. b. Copy of sponsor/mortgagor's charter and bylaws or constitution as currently amended. c. Copy of current effective ruling from the Internal Revenue Service on sponsor/mortgagor's tax exempt status. 1) copy of any ruling denying tax exemption. 2) If a ruling is pending, explain the application's legal and factual basis and current status. 3) For Resident Councils, a statement that they will apply if everything else is acceptable. d. List of officers, directors or trustees of the sponsoring group/mortgagor including home addresses, titles of positions and their social security numbers. e. Resumes on all principals and staff who will actively take part in acquisition, rehabilitation and management of the project. f. Current financial statements (balance sheet, profit and loss statement, and supporting schedules) as well as statements for the past three years (statements of the sponsor/ mortgagor, not the project). If available, audited statements should be submitted. 1) If the sponsoring group/mortgagor has existed less than three years, the financial statements must be submitted from the date the group was formed. 2) Statements must identify restricted and unrestricted assets along with the related liabilities. 3) Financial statements must be signed by an officer of the sponsoring group/ mortgagor entity. 4) All statements must contain the certification of truth and accuracy and criminal certification identified in paragraph 3-2.B.1. of HUD Handbook 4470.1. This certification must reference the name of the sponsor/ mortgagor and the date of the financial statements. g. Signed written resolution of its directors or trustees, acknowledging the responsibilities and obligations of sponsorship and continuing ownership, and that this position reflects the will of the membership. h. Form HUD-92013 SUPP. listing current bank and trade references for the sponsor; mortgagors, if formed and their officers (President, Vice President, Secretary and Treasurer). Refer to paragraph 2-1.B.2.c. of HUD Handbook 4470.1. i. If the sponsor/mortgagor or any officer of either entity has a prior Federal default or claim, the following must be submitted: A letter from the affected agency, on agency letterhead and signed by an officer, stating that the delinquent Federal debt is current or satisfactory arrangements for repayment have been made. j. Detailed statement of arrangements made or proposed for the following (listing principals involved, their relationship with the sponsor/mortgagor and/or the present ownership of the property, the terms of the arrangements and the circumstances surrounding each): 1) Legal and consulting services. 2) Project financing over and above the Capital Grant. Seller financing is not permitted. 3) Project management. 4) Resident training. 5) Project repair program, including how the repair work will be contracted out. NOTE: A national, State or regional organization acting as a cosponsor must submit a separate Form HUD-3433 and supplemental documentation. 2. Information required for approval of the purchaser's consultants and a schedule of applicable fees. 3. A statement as to whether the purchaser is affiliated with any other entity for purposes of purchasing the project. 4. A statement that the priority purchaser is or will be a single-asset entity at the time the project is purchased. NOTE: If the nonprofit mortgagor/purchaser is not yet formed, the nonprofit sponsor must meet the eligibility requirements. 5. A draft copy of the "Distribution of Capital Grants Funds" work sheet. 6. A Contract for Sale signed by the proposed nonprofit mortgagor/sponsor which includes a provision that acceptance of the contract between the seller and purchaser is contingent upon HUD's approval of the POA. 7. A certification that the owner met all tenant, State or local government notification requirements. 8. Completed Form HUD-2530, Previous Participation Certificate, on the owner, proposed management agent, contractors, etc. 9. A Statement of Sources and Uses of Funds. 10. Certification Regarding Credit available from Private Sources. Under OMB Circular A-129, Managing Federal Credit Programs, the authorized officer of the proposed nonprofit mortgagor must submit a certification that the entity has been unable to obtain funds from private financing sources upon terms and conditions equally as favorable as the terms and conditions available under the Capital Grant Program. J. HUD ACTION UPON RECEIPT OF A COMPLETE POA. 1. Do not accept an incomplete POA package. 2. Distribution of POA. The PC: a. Distributes copies of the complete POA to Production Branch and Fair Housing and Equal Opportunity (FHEO). b. Distributes copy of the TPA to Field Counsel. c. Requests their comments on the POA within 2 days. 3. The Production Branch will: a. Do all credit and financial analyses on proposed priority purchaser/mortgagor entity. The Mortgage Credit Examiner (MCE) evaluates the financial statements and the financing plan, if applicable, of the prospective nonprofit purchaser and performs a credit investigation on its operating officers (President, Vice President, Secretary, and Treasurer). b. Confirm that: 1) The requested repairs and costs are acceptable; 2) The current project rents produce enough cash flow to support project operations and pay debt service on the insured first mortgagor or the uninsured first mortgage issued by a State housing finance agency; 3) Required initial deposit to the reserve for replacement account; and 4) The Capital Grant amount includes: Repair or substantial rehabilitation costs; The TPE payment as adjusted, and reimbursement for any usual and customary charges expended by the owner entity but for which that entity will not receive benefit because of the transfer; The initial deposit to the Replacement Reserve; and Reasonable acquisition and transaction costs, as applicable. c. Not prepare Forms HUD-92264 and 92264-A 4. The PC determines the adequacy of the annual deposit to the Reserve for Replacement Account. K. Preliminary Approval of the Transfer of Physical Assets (TPA) Portion of the POA. The PC in consultation with the RIS, AMB, the Multifamily MCE and the Office of Field Counsel, performs the preliminary review of the TPA package. L. POA Approval Authority. 1. For the Tenant Rental Assistance Certification System (TRACS), all POAs must be dated the first of the month in which they are approved. 2. Preliminary approval of the TPA must be made simultaneously with approval of the rest of the POA. 3. The PC encloses with the approval letter, an attachment notifying the tenants of the approval. The owner posts in the lobby of each building in the project a copy of the attachment for 7 calendar days. 4. Tenants. The owner/purchaser must post the letter provided by the PC advising tenants of the approval of the POA. This notice provides tenants with HUD's reasons for the approval. The owner also must write to each affected tenant explaining how the POA approval will personally affect the tenant. Specifically, the Capital Grant does not affect the current rent the tenant is paying. M. Effective Date. The approved POA is effective when the nonprofit mortgagor executes and records the Use Agreement to extend low-income affordability restrictions. No other action (e.g., rent increases, Section 8 contracts, grants) is permissible prior to the purchaser's execution of the Use Agreement. Recordation of the Use Agreement should take place within 24 hours of execution of the Use Agreement. N. Submissions to HUD Headquarters. 1. With approval of a POA, the PC sends a copy of the approved POA to Branch A, Existing Products/Preservation Division, Office of Multifamily Housing Development, Room 6128. 2. With the closing of the Capital Grant, the PC sends a copy of the executed Capital Grant Agreement and finalized copy of the recorded Use Agreement and the approved "Distribution of Capital Grant Funds" work sheet to Branch A, Existing Products/Preservation Division, Office of Multifamily Housing Development, Room 6128. IV. PROJECTS CURRENTLY BEING PROCESSED AS A SALES TRANSACTION. The sales transactions will be in different stages of processing. Apply those items listed in III above on a case-by-case basis to streamline the Preservation approval process. Preservation Acronym Lexicon AMB - ASSET MANAGEMENT BRANCH. Area within the HUD Field Office responsible for maintaining information on the physical, financial and other relevant information on the preservation project. ELIHPA - EMERGENCY LOW INCOME HOUSING PRESERVATION ACT. Title II of the Housing and Community Development Act of 1987. Designed to prevent the loss of affordable housing units. EPE - EXTENSION PRESERVATION EQUITY. Owner's equity from Form HUD 9607, adjusted for principal repayment and reasonable value fluctuations for condition since the issuance of the form. Calculated as Extension Pres. Value (Highest and Best Use) FH&EO - Fair Housing and Equal Opportunity. The area in HUD responsible for determining whether there are any findings of noncompliance with the Fair Housing Act, Title VI of the Civil Rights Act of 1964, Exec. Order 11063, Sec. 504 of the Rehabilitation Act of 1974. FMR - FAIR MARKET RENT. Calculated rental rate determined by the Secretary for use in facilitating Section 8 rental payments and ceilings. LIHTC - LOW INCOME HOUSING TAX CREDITS. Form of assistance used by some deals to attract investors into an affordable housing deal. Generally discouraged in Preservation deals. LOCCS - LINE OF CREDIT CONTROL SYSTEM (See VRS). Automated accounting system used by HUD to distribute on-going grant fund disbursements, i.e., rehabilitation funds, oversight costs, and approved consultant fees. MCE - MORTGAGE CREDIT EXAMINER. This HUD Staff person is responsible for reporting on the project's financial requirements as well as the credit capacity of the mortgagor, its principals and the general contractor if any. Additionally, the MCE sets the bonding requirement and the mortgage amount. NOI - NOTICE OF INTENT FORM HUD-9608. Sent by owner to HUD and other required entities to let them know the owner(s) are interested in participating in the preservation process under either Title II or Title VI. OCAF - OPERATING COST ADJUSTMENT FACTOR. Factor applied only to operating expense items to insure adequate coverage for inflationary conditions adjusted for vacancy, management fees, and, in case of priority purchaser, oversight costs. PC - PRESERVATION COORDINATOR. Staff person(s) in each processing Office designated as the point of contact for all preservation related processing and information for a given office. PCNA - PRESERVATION CAPITAL NEEDS ASSESSMENT. Report which was made during the pre-appraisal processing stage to identify the condition of the property, and estimate the cost associated with the needed repairs. POA - PLAN OF ACTION. Documentation submitted by Purchaser and Owner that details how the affordable restrictions will be maintained in the project, as well as how grant funds will be allocated. PPR - PRESERVATION PROJECT RENT. The Preservation Project Rent has two components, the GRP (Gross Rent Potential) which is all expected rental income from units and other operations, plus all approved tenant utility allowances. RIS - RESIDENT INITIATIVES SPECIALIST. Staff person in select Offices who has the responsibility of maintaining relationships with nonprofit entities throughout the field office's jurisdiction. TPA - TRANSFER OF PHYSICAL ASSETS (PACKAGE). The documentation needed to be submitted to HUD to allow for a change in ownership under the Low Income Housing Preservation and Resident Homeownership Act. TPE - TRANSFER PRESERVATION EQUITY. Owner equity from Form HUD 9607 adjusted for principal repayment since issuance and changes in value due to condition since issuance of the 9607. Calculated by taking Transfer Preservation Equity value less outstanding balance of federally assisted mortgage(s) for the project. TPV - TRANSFER PRESERVATION VALUE. Value established and reported on FORM HUD-9607, which represents the Fair Market Value based on its highest and best use. VRS - VOICE RESPONSE SYSTEM (See LOCCS). The voice activated automated system used by HUD for requesting and disbursing approved and allocated grant funds. 15