Preservation Letter No. 10 August 1, 1996 MEMORANDUM FOR: Directors of Housing Multifamily Housing Directors Multifamily Production Chiefs Multifamily Asset Management Chiefs Preservations Coordinators FROM: Nicolas P. Retsinas, Assistant Secretary for Housing - Federal Housing Commissioner, H SUBJECT: Oversight Fees for Preservation Eligible Projects I. PURPOSE. This memorandum establishes an interim policy on Asset Management Project Oversight Fees (AMPOF) and revises our policy on Educational Oversight Fees (EOFs). Both of those fees are "oversight costs." AMPOF are ongoing, regular costs of good stewardship while EOFs are finite term, capacity building efforts geared to increasing the ability of resident-controlled purchasers to assume all of the responsibilities of ownership. The Office of Housing expects to incorporate this policy into Chapter 3 of Handbook 4381.5 REV-2 when it is revised later this year. We also expect that this policy may be modified further as legislation is enacted and procedures are developed for portfolio re-engineering. II. BACKGROUND. This policy addresses legitimate management needs of a nonprofit owner to provide regular and ongoing oversight and guidance of its project and those persons or firms hired by the owner to provide services in connection with the owner's project. III. ELIGIBILITY. Project oversight fees may only be collected by a priority purchaser. A priority purchaser is any entity that is not a related party to the owner and that is either: (1) A resident council organized to acquire the project in accordance with a resident homeownership program that meets the requirements of subpart B of 24 CFR Part 248; or (2) Any nonprofit organization or State or local agency that agrees to maintain low-income affordability restrictions for the remaining useful life of the project. A nonprofit organization or State or local agency that is affiliated with a for-profit entity for purposes of purchasing a project under subpart B of 24 CFR Part 248 shall not be considered a priority purchaser. IV. ASSET MANAGEMENT PROJECT OVERSIGHT COSTS. A. Section 307(b) of the 1992 Housing and Community Development Act added Oversight Costs as an acceptable Preservation project expense for priority purchasers under Section 220(d)(2)(D) of LIHPRHA and Section 224 (b)(7) of ELIHPA. B. A priority purchaser may contract with an outside party, including the sponsor, to provide asset management services. A priority purchaser also has the option to hire an outside party, including the sponsor, to provide property management services. However, where a priority purchaser hires an outside party to provide such services, there can be no identity of interest between the party providing the asset management services and the party providing the property management services. C. Allowable Activities. Asset Management involves "the careful oversight by the nonprofit owner of the financial and physical health of the project. It includes both long-term capital planning and monitoring the performance of the property and the property manager or managing agent." While the duties of the Asset Manager (AM) and the property manager are closely interrelated, the AM should not duplicate the property manager or managing agent activities. The duties of the AM include, but are not limited to the following: "Preparing and forwarding reports to lenders; Restructuring financing; amending regulatory agreements as necessary; working with management agents and lenders on planning and implementing capital improvements; dealing with funding and supervisory agencies regarding owner decisions (e.g., rent increases, waivers, subsidies); Supervising the management agent or property manager - either in- or out-of-house." V. Educational Oversight Fees. A. If the nonprofit sponsor's development plan indicates that the tenants will be permitted to organize and will within 3 years after final endorsement of the Section 241(f) loan or the closing of the Preservation Capital Grant be given a majority of seats on the Board of Directors of the nonprofit mortgagor entity, the project operating expenses will provide for an annual expense for EOFs. The concept of EOFs is that these are for capacity building activities for a limited number of years. EOFs may include staff, overhead, or third party contract costs for ensuring adequate participation by the Board of Directors, facilitating long-range planning by the Board of Directors and preparing for priority purchasers to own and operate low-income multifamily housing. B. This function may be performed by the nonprofit sponsor or a consultant. VI. ALLOWABLE EDUCATIONAL AND ASSET MANAGEMENT OVERSIGHT FEES. A. The Combined Annual Oversight Costs. May not exceed the greater of: 1. A fixed fee of $10,000 per year, or; 2. One percent of Transfer Preservation Value. In no event shall the combined fee exceed $30,000. NOTE: Asset Management can approve a lower fee if it believes the formula - derived fee of $10,000 - $30,000 is too high for the services that will be provided. B. The annual fee is set at the time of Plan of Action (POA) approval and incorporated into the budget as an operating expense, to be paid out similarly to the management fee. Where the POA was implemented, the owner may submit a revised budget for the remaining Fiscal Year (FY). D. Owner Responsibilities: The nonprofit owner of eligible projects may submit a request for an AMPOF and/or EOFs at any time to the HUD AM which services their project but no more frequently than annually. The fee(s) may be drawn down periodically. In order to pay this fee, officers and directors of the nonprofit entity must sign the attached Certification and submit it to the HUD Office of jurisdiction. E. HUD State/Area Office Responsibilities. 1. Rely on the owner's certification, Attachment 1 below, and the auditor's verification as part of the annual audited financial statement preparation that the work is being done. 2. If the asset management function assumes duties that are now performed by or under the contract of the managing agent, review the current management fee and consider the extent to which it should be reduced. 3. After initial approval, HUD/State staff may approve future AMPOF and/or EOFs as part of a project's normal budget submission. VII. FOR FURTHER INFORMATION: Project owners should contact the local HUD Asset Management Branch that normally has jurisdiction over the project. HUD AMs may contact the Program Management Division at 202-708- 4162. Attachment ATTACHMENT 1 ASSET MANAGEMENT PROJECT OVERSIGHT FEE CERTIFICATION (Format- for Preservation Projects ONLY) We certify that the following information is true and correct: 1. Asset Management Fees (AMFs) are not for services that duplicate services provided by the project's Managing Agent. 2. AMFs will be used for the following purposes (list specifically; following are examples): "Preparing and forwarding reports to lenders; Restructuring financing; amending regulatory agreements as necessary; working with management agents and lenders on planning and implementing capital improvements; dealing with funding and supervisory agencies regarding owner decisions (e.g., rent increases, waivers, subsidies);and Supervising the management agent or property manager - either in- or out-of-house." 3. AMFs will be disclosed fully and appropriately in the audited annual financial statements of the owner, will be shown on Form HUD-92410, on supplemental schedules as needed, and addressed in the Compliance portions of the audit in accordance with the reporting requirements of HUD Handbook 4370.2 and IG Handbook 2000.4 and any such successor handbooks and instructions as may be issued by HUD. 4. Any AMFs improperly paid or taken will be restored fully and immediately to the funds of the owner by the recipient of the funds upon a request from HUD or automatically in order to resolve auditors' findings of impropriety. 5. All AMFs paid by funds of the owner are reasonable and necessary for the efficient, cost-effective operation of the project. 6. We agree that the privilege of paying AMFs may be suspended unilaterally and incontestably by HUD upon written notice mailed to the Board at its last known place of business. 7. The amount of funds paid as AMFs in any FY of the project shall not exceed ____________. 8. The certifications of the auditor, the owner, and the managing agent (if applicable) contained in the annual audited financial statements of the owner are construed to mean that all AMFs that were paid were, in fact, proper for payment. 9. This certification will be binding on all successive directors and members of the Board. Warning: HUD will prosecute false claims and statements. Conviction may result in criminal and/or civil penalties. (18 U.S.C. 1001, 1010, 1012; 31 U.S.C. 3729, 3802) Signed____________________________________Date______________ (President/Chairman, Board of Directors) Signed____________________________________Date______________ (All Officers of Board of Directors)