PRESERVATION LETTER NO. 4 MEMORANDUM FOR: Directors of Housing Multifamily Housing Directors Multifamily Production Chiefs Multifamily Asset Management Chiefs Preservation Coordinators FROM: Nicolas P. Retsinas, Assistant Secretary for Housing- Federal Housing Commissioner, H SUBJECT: Implementation of Housing Opportunity Program Extension Act of 1996 On April 26, 1996, the President signed H.R. 3019, Departments of Commerce, Justice and State, the Judiciary, and Related Agencies Appropriations Bill, into law. The bill provides $624 million plus authority to use interest reduction payment recaptures resulting from mortgage prepayments or terminations, for preservation activities for Fiscal Year (FY) 1996. Program design requirements for the FY 1996 preservation program were contained in the Housing Opportunity Program Extension Act of 1996, which was signed on March 28, 1996. Now that full funding for the program has been provided, we must move swiftly to implement the program and provide the maximum time possible to tenants, owners, purchasers and HUD to accomplish the processing necessary to complete program activities before the end of the FY. We will be issuing guidance via a series of preservation letters and questions and answers (Q's & A's). The attached Q's & A's, which include the Q's & A's from Preservation Letter No.2 will provide guidance to you as we continue implementation of the FY 1996 program. Please continue to fax your questions to the Preservation Branch at (202) 708-1300. If this line is busy, you may use (202) 708-3104. Responses will be included in future preservation letters. Attached is a Preservation Acronym Lexicon for your use. You should share this information with program participants. Attachments Preservation Acronym Lexicon - Designates a new Question and Answer * - Designates a Revision to an existing Question and Answer 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) EXTENSION ACT - Housing Opportunity Program Extension Act of 1996. 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. PHA - Public Housing Authority 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. IMPLEMENTATION OF HOUSING OPPORTUNITY PROGRAM EXTENSION ACT OF 1996 PRESERVATION QUESTIONS AND ANSWERS I. TENANT PROTECTIONS. Q1. What are tenants' rights when an owner prepays/terminates mortgage insurance? A1. a. An unassisted low- or very low-income family residing in the project may be eligible for a Preservation Section 8 certificate or voucher. (See Q2 and A2 below.) b. A tenant living in a Section 8 project based assisted unit under an existing Housing Assistance Payments (HAP) contract may continue to reside in the project until the contract expires. The tenants will receive a Section 8 certificate or voucher when the HAP contract expires, subject to the availability of funds. c. Tenants in low-vacancy areas and special needs tenants are addressed in Q's and A's 3, 4, and 5 below. d. Owners' responsibilities relative to relocation expenses are addressed in Q6 and A6 below. Q2. How do unassisted low- and very low-income tenants qualify for Preservation Section 8 certificates or vouchers? A2. The Extension Act states: a. Notwithstanding any other provision of law, subject to the availability of appropriated funds, each unassisted low-income family residing in the housing on the date of prepayment or voluntary termination whose rent, as a result of an increase occurring not later than 1 year after the date of prepayment, exceeds 30 percent of the adjusted income, shall be offered tenant-based assistance under Section 8 . . . under which the family shall pay no less for rent than it paid on such date . . . . Any family receiving tenant-based assistance . . . may elect: 1. to remain in the unit of housing and if the rent exceeds the fair market rent or payment standard, so long as the administering HA finds that the rent is reasonable . . . or 2. to move from the housing and the rent will be subject to the fair market rent or payment standard, as applicable, under existing program rules and procedures. b. There are two events that must occur before Section 8 tenant-based assistance can be provided under the Extension Act: 1. The owner of the preservation eligible project must either prepay its mortgage or terminate the mortgage insurance contract; and 2. The owner must raise rents on the unassisted units in the project at some point during a 1-year period after prepayment or termination of the mortgage insurance contract. c. The unassisted low- and very low-income families may request the owner to provide them a project based unit in the project, if available, or apply with the local Housing Authority to receive a Preservation Section 8 voucher or certificate. Q3. What is a low-vacancy area? A3. A low-vacancy area is defined as a Metropolitan Statistical Area (as defined by Office of Management and Budget) with a rental vacancy rate of 3 percent or less. If there are questions whether the current vacancy rate is 3 percent or less, the Preservation Coordinator should request a determination from the Economic and Market Analysis Section as to the current rental vacancy rate. Q4. Who are special needs tenants? A4. Special needs tenants include those elderly persons, 62 years of age or older, elderly families, or families that include disabled persons. Special needs tenants also means large families requiring units with three or more bedrooms. Special needs tenants may be either moderate-income or low- or very low-income. Q5. What are the rights of tenants in a low-vacancy area and special needs tenants? A5. Section 223(c)(1) of LIHPRHA requires that each owner that prepays/terminates mortgage insurance on eligible low-income housing in a low-vacancy area or with special needs tenants shall allow the tenants occupying units on the date of submission of the initial notice of intent to remain in the housing for a 3-year period at rent levels existing at the time of prepayment [except for increases necessary for increased operating costs]. a. Assistance for low- and very low-income tenants whose rents are raised during the first year after prepayment or mortgage termination is described in A2. above. b. Section 223 applies to the following classes of tenants provided they were residing in the project on the date the owner submits the first NOI. 1. Moderate-income special needs tenants; 2. Moderate-income tenants in low-vacancy areas; and 3. Unassisted low- and very-low income tenants if they do not receive assistance under a. above. Q6. Will relocation expenses be provided for tenants? A6. The owner of a preservation eligible project who prepays or terminates the mortgage insurance contract is required by 24 CFR 248.165(d) to pay 50 percent of the moving expenses of each family which is relocated. Q7. Since Section 223 is only found in LIHPRHA, does it also apply to Title II projects? A7. Yes. Since Title VI superseded Title II, Section 223 is applicable to Title II projects. Q8. Will LMSA contracts be terminated upon prepayment or allowed to go to the end of their current terms? A8. HUD will not terminate LMSA contracts. The tenant contribution for a Section 8 assisted unit within a project that prepays or terminates the mortgage insurance contract will not be affected. When the LMSA contract expires, the tenants residing in the assisted units will receive a Section 8 certificate or voucher, subject to the availability of funds. Q9. How will the Section 8 contract rents under existing LMSA contracts be computed once an owner prepays or terminates the mortgage insurance contract? A9. Rents will be computed in accordance with the requirements of each individual contract. II. PREPAYMENT. Q1. Who is eligible to prepay? A1. The Extension Act reinstated the rights of all Preservation eligible owners to prepay their mortgages or terminate the mortgage insurance, if they are otherwise eligible by the terms of the mortgage and the regulations under which the mortgage was insured (i.e., a limited dividend mortgagor at the 20th year). Note that a mortgagor between the 18th and 20th year is not eligible until the 20th year. * Q2. Must an owner request HUD approval prior to prepayment or termination? A2. No. However, restoration of an owner's right to prepay does not eliminate the need for HUD notification of the owner's intent or the need for HUD review. As part of its normal prepayment/mortgage termination procedure, HUD must assure that there are no outstanding regulatory agreement violations or outstanding audit findings and that it will be made whole in the event that the mortgage is in default or HUD-held. Further, under the Extension Act, the Department is required to offer protections to tenants who may be displaced due to prepayments or mortgage insurance terminations. In order to comply with our statutory mandate, the Department will require that owners use the same 30-day notification period provided for in the note and mortgage with regard to notification of the mortgagee of the owner's intent to prepay, to provide HUD with the information it needs in connection with the tenant protections. HUD will use this notification period, in cooperation with the owners, to ensure that actions relative to tenant protections, are implemented. * Q3. What is the process by which a Preservation eligible owner requests prepayment or termination of mortgage insurance? A3. The owner should submit the various components of a prepayment request simultaneously to the mortgagee, HUD, State or local government agencies, and tenants. The mortgagee will submit the official Form HUD-9807, Request for Termination of Multifamily Mortgage Insurance to the Mortgage Insurance Accounting Staff once the owner has made an official request to the mortgagee to prepay or terminate. The form is signed by both the owner and the mortgagee. Q4. Did the Extension Act change the time frames (6 months, 9 months or 15 months after POA approval) for prepayment contained in LIHPRHA legislation and, if so, what are the changes? A4. Yes. The time frames are eliminated. Prepayment of the mortgage for any eligible project can take place with the requisite notice as detailed in response, Section III, A#1 below. In addition, the owner must agree not to raise rents for 60 days after prepayment. This is an important requirement because it will allow tenants to apply to apply to the PHA for tenant-based rental assistance to eligible families. * Q5. Can an owner prepay if he/she is in the processing pipeline, processed and in the funding queue, or approved and closed on the loan/grant? A5. Yes. The Extension Act restored the owner's prepayment right on all Preservation eligible low-income housing. However, for approved and closed projects, while an owner may prepay the mortgage, the project shall continue to be governed by the Use Agreement resulting from acceptance of preservation incentives. If HUD is no longer able to provide the original incentives approved in the POA or a revised package of incentives, the owner may request release from Use Agreement from the local HUD State/Area Office. However, the owner must comply with the tenant protections in Section 223 of LIHPRHA. * Q6. What are the steps to process a prepayment or termination of mortgage insurance? A6. A contract of mortgage insurance may be terminated either by prepayment in full of the insured mortgage or by acceptance of a request for voluntary termination of the mortgage insurance contract made jointly by the mortgagor and mortgagee. Simultaneously with the official notification to the mortgagee, the owner must notify the local HUD AMB of its intention. a. The mortgagor notifies the mortgagee, consistent with the terms and conditions of the mortgage insurance, that the mortgagor wishes to prepay the mortgage in full or seek voluntary termination of the insurance. b. The owner gives the Preservation Coordinator in the HUD State/Area Office: 1. A certification that tenant notification has occurred using Appendix 10-1 of HUD Handbook 4350.6. The certification must indicate that the owner posted a copy of the notice in each building and gave each tenant a copy of the notice. NOTE: Appendix 10-1 is being revised and will be shared with you soon. 2. Tenant information required by 24 CFR 248.165(b). See Section III. 3. A certification that all of the information submitted to AMB relating to tenants' status was accurate and correct. c. The Preservation Coordinator, working with the RIS will: 1. Check for accuracy and completeness of the list submitted by the owner which identifies the tenants expected to need assistance. 2. Contact the PHA/State Agency to let them know about the particular project and find out if the PHA/State Agency is willing to administer Preservation Section 8 certificates or vouchers for tenants. 3. Assure that the owner notified each tenant by a letter in the form discussed in b.1. above which described to tenants their rights and protections. More detailed guidance will follow. d. The Office of Housing is working with the Office of Public and Indian Housing to assure the availability of Preservation Section 8 certifications or vouchers in a timely manner. More detailed instructions will follow in the near future. Q7. The Extension Act states that the Secretary may determine priorities for distributing available funds including giving priority funding to tenants displaced due to mortgage prepayment. It is silent as to priority funding to tenants displaced due to voluntary termination of the mortgage insurance contract. Does this class of tenants receive priority? A7. The legislation discusses prepayment and mortgage termination interchangeably when tenant protections are discussed. Therefore, the authorizing language permits the Secretary to determine priorities for distributing available funds, including giving priority funding to tenants displaced by mortgage prepayment or by termination of the mortgage insurance contract. Q8. The Extension Act provides that an owner of eligible low-income housing may prepay the mortgage or request voluntary termination of the mortgage insurance contract, so long as said owner agrees not to raise rents for 60 days after prepayment. Does this mean that in the case of termination of the mortgage insurance contract, the owner could immediately raise rents? A8. The legislation discusses prepayment and mortgage termination interchangeably when tenant protections are discussed. Therefore, the owner must agree not to raise rents for 60 days after termination of the mortgage insurance contract. Q9. Is an owner who prepays the mortgage or terminates the mortgage insurance contract required to accept Section 8 assistance? A9. Yes and No. Any owner who prepays the mortgage or terminates the mortgage insurance contract on eligible low-income housing and maintains the project for residential rental occupancy may not refuse to rent, refuse to negotiate for the rental of, or otherwise make unavailable or deny the rental of a dwelling unit in such project to any person, or discriminate against any person in the terms, conditions, or privileges or rental of a unit, or in the provision of services or facilities in connection therewith, because the person receives assistance under 24 CFR parts 882 or 887. III. TENANT INFORMATION REQUIRED OF AN OWNER WISHING TO PREPAY OR TERMINATE THE MORTGAGE INSURANCE CONTRACT. * Q1. What information does the owner supply to HUD at time of its initial written notification of its intent to prepay? A1. In accordance with 24 CFR 248.165(b) the owner must provide the State/Area HUD Office with the following information: a. Property Name and Number. b. Complete tenant profile. Follow outstanding instructions found in Paragraph 10-3.A.4 of HUD Handbook 4350.6 except that subparagraph e. should refer to low-income tenants as well as very low. c. Average monthly adjusted income or average monthly total tenant payment of families living in the development by family size (use Form HUD-50059 for unassisted units). d. Copies of current Form HUD-50059 for families receiving Section 8 assistance and certifications from residents stating if there have been any changes in income since the last annual recertification. e. Expiration date of each Lease at the project. f. Rent Information -- does owner intend to increase the rents. If so, what is the timing of the increase and the amount of such increase? g. Tenant information: -- Name and address of each tenant, the number of residents for which assistance is being requested. -- Current family size. -- The unit/bedroom size the tenant is currently dwelling in; the number of resident families that are low- and very low-income and needing assistance by bedroom size. -- Average monthly total tenant payment by bedroom size. -- Identify each low- and very low-income tenant not receiving Section 8. -- Individual income verification consent forms, to verify relevant information in determining tenant's eligibility and level of benefits. For a list of the forms, refer to Handbook 4350.3, Chg. 26. IV. RESERVES AND RESIDUAL RECEIPTS ACCOUNTS. Q1. Who owns the Residual Receipts and Reserve for Replacements Accounts? A1. The accounts are established by the Regulatory Agreement. For insured or HUD held projects with or without Section 8, when the insured mortgage is paid off, the Regulatory Agreement terminates and funds in the Reserve for Replacements Account and the Residual Receipts Account may be released to the owner. The exception would be new construction/substantial rehabilitation project with a "new regulation" HAP Contract. Here, the treatment of the reserves is governed by the HAP Contract and any decisions regarding Reserve Accounts must be based on the actual language of the HAP Contract (which is not identical for Replacement Reserves and Residual Receipts.) (This will rarely be the case with preservation eligible project.) Q2. In a sales transaction can the owner keep the Reserve for Replacements Account? A2. There is no longer a requirement in sales transactions that the existing Reserve for Replacements Account remain with the project, subject to the exception in A1. above. The owner is entitled to the money in the reserve accounts because the appraisal did not reflect these amounts in establishing the value of the property. Q3. Can Residual Receipts and Reserve for Replacements Accounts be used to prepay the mortgage, using a netting process? A3. Yes. The Residual Receipts and Reserve for Replacements Accounts may be used to effectuate a prepayment, but only if it results in a prepayment in full. The reserves cannot be used to effectuate a partial prepayment. This response is subject to the limitations discussed in A1. above V. TIME LINE AND TEMPORARY MORATORIUM. Q1. What is the time line for processing under the FY 1996 Preservation Program? A1. 1. By April 15, 1996. Where an owner wants to sell but had not timely filed a second notice of intent prior to October 1, 1995, he/she must have done so by this date. 2. Through August 15, 1996. a. Available preservation funds will be distributed as follows: 1) Funds will be set-aside for: a) Tenant protections, i.e., vouchers and certificates, where needed when an owner prepays or terminates mortgage insurance contract. b) Any sale to a priority purchaser with an approved Plan of Action that was in the funding queue on April 26, 1996. 2) In order of receipt of their approved POA in Headquarters, funds remaining after the above will be reserved for projects falling into any of the categories listed below: a) Any sale to a priority purchaser with an approved plan of action [sales to priority purchasers in the pipeline and conversions to sales to priority purchasers] other than those described in 2.a.1)b) above. b) Projects with approved plans of action that are subject to a repayment or settlement agreement that was executed between the owner and the Secretary before September 1, 1995. c) Projects for which submissions were delayed as a result of their location in areas that were designated as a Federal disaster area in a Presidential Disaster declaration. d) Projects whose processing was, in fact, or in practical effect, suspended, deferred, or interrupted for a period of nine months or more because of differing interpre- tations, by the Secretary and an owner concerning the time of the ability of an uninsured Section 236 property to prepay, or by the Secretary and a State or local rent regulatory agency, concerning the effect of a presumptively applicable State or local rent control law or regulation on the determination of preservation value under Section 213 of LIHPRHA, as amended, if the owner of such project filed notice of intent to extend the low-income affordability restrictions of the housing, or transfer to a qualified purchaser who would extend such restrictions, on or before November 1, 1993. 3. After August 15, 1996. The Extension Act provides that if the Secretary determines that the demand for funding may exceed amounts available for such funding, the Secretary: a. May determine priorities for distributing available funds, including giving priority funding to tenants displaced due to mortgage prepayment/termination and to projects that have not yet been funded but have approved plans of action. 1) If the Department determines that there are insufficient funds available, funds will be set aside for: a) Tenant protections, (i.e., vouchers and certificates). b) Any sale to a priority purchaser with approved POA. 2) If the Department determines that there are sufficient funds available then we will fund the items listed in 2.a.2) above. b. May impose a temporary moratorium on applications by potential recipients of such funding. Based on our current projection of funding availability State and Area Offices, as of August 16, 1996, will likely stop accepting new initial notices of intent. 4. After September 15, 1996. a. If the Department determines that there are insufficient funds available, funds will be set aside for: 1) Tenant protections, (i.e., vouchers and certificates). 2) Any project included in funding categories in 2. above with an approved POA. b. If there are sufficient funds available, we would fund extension projects based on their position in the funding queue, as well as sales to other than priority purchasers. However, at this time, we do not anticipate funding any extension or non-priority sale projects that are not part of one of the funding categories listed in 2. above. 5. October 1, 1996. The Secretary shall suspend further processing of preservation applications which do not have approved plans of action. Q2. Does HUD have to wait until August 15, 1996, to impose a temporary moratorium on potential applications? A2. Yes. Section 2(b)(1) of the Extension Act provides that HUD cannot impose a moratorium on potential applications until August 15, 1996. Q3. What is meant by "may impose a temporary moratorium on applications by potential recipients of such funding?" Does it mean that we will not accept new applications or that we can suspend processing applications we currently have? A3. It means that we can refuse to accept any new notice of intent under either LIHPRHA or ELIHPA to extend the low-income affordability restrictions of the housing or to transfer the housing to a qualified purchaser. HUD must continue to process pipeline projects until October 1, 1996. Q4. May State and Area Offices still issue conditionally approved POAs? A4. Interim Notice H95-2-I expired on December 31, 1995 and with it expired Offices' ability to issue conditionally approved POAs. Therefore, Field Offices must issue FULL approvals on any POA and include all requisite components such as Section 241(f) loan processing, TPA processing, etc. The only acceptable condition in the approval is that the closing of the transaction is subject to the availability of funding. Remember, the funding priorities still hold, so take care to issue the full approvals for projects in categories that can be funded using conditional commitment language subject to Section 241. VI. PRIORITY PURCHASERS Q1. What is a priority purchaser? A1. A priority purchaser is any entity that is not a related party to the owner and that is either: A. A resident council intending to purchase the project under Resident Homeownership Program which has met the requirement for tenant support representing 75 percent of the occupied units in the project and representing at least 50 percent of all the units in the project; B. A resident council intending to purchase the project and retain it as rental housing, which has the support of a majority of the tenants; C. A community-based nonprofit organization which has the support of a majority of the tenants; or D. Any nonprofit organization or State or local agency that agrees to maintain low-income affordability restrictions for the remaining useful life of the housing. A nonprofit organization or State or local agency that is affiliated with a for-profit entity for the purposes of purchasing a project under subpart B of 24 CFR 248.101 shall not be considered a priority purchaser. Q2. What are project oversight costs? A2. Project oversight costs fall into three categories. 1. Educational Oversight Costs: These oversight costs are used for priority purchasers to gain the experience necessary to own and operate low-income multifamily housing. Article VIII of the Capital Grant Agreement states that the Grantee may use any excess Grant Funds to pay for annual oversight costs. 2. Property Management Fee: Asset management agent duties include protecting the physical security of the project, preserving the financial soundness of project mortgagors where financial conditions relate to the project operations, and assuring that the project's residents have affordable, well-maintained housing. This fee is obtained from the projects budget each year. 3. Asset Management Project Oversight Costs: Section 307(b) of the 1992 Housing and Community Development Act added Oversight Costs as an acceptable Preservation project expense. These are costs that allow the nonprofit owner of the project to be paid for overseeing management of the asset and to pay for ownership type items not directly related to the project, e.g., ownership financial statements, operational and directional well-being, etc. These costs are separate from the property management fees associated with the project itself. Q3. Will asset management oversight fee be allowed for priority purchasers? A3. Yes, but the amount has not been determined. Also, eligible items have not been established, but will be forthcoming in future guidance. VII. CONVERSION OF EXTENSION TRANSACTIONS TO SALES TRANSACTIONS. Q1. How do you establish the transfer preservation equity on Title II projects wishing to convert? A1. To establish the transfer preservation equity, give the owner the option of: a. Using the owner's equity derived from the owner's appraisal previously accepted by HUD. You may adjust the owner's equity for: 1. Principal payments made on the insured mortgage after the date of the appraisal; and 2. Additional HUD approved debt incurred after the date of the appraisal, if any, to be assumed by the purchaser; and 3. Cost of completed repairs as approved by HUD. b. Having the owner and HUD obtain Title VI appraisals and following outstanding Title VI instructions. Q2. Will PCNA upgrades be permitted for nonprofit purchasers? A2. Yes, a priority purchaser may propose improvements to improve the economic life of the project and its livability for the tenants. Proposals to improve a property are required to contain a List of Proposed Improvements and estimated cost with the Plan of Action application. See Notice H95-14, Production Branch Instructions to Process Section 241(f) Loan Applications Pursuant to Title VI of the Low-Income Housing Preservation and Resident Homeownership Act of 1990, Plan of Action Stage. You may also apply these instructions to Title II projects. Q3. Can an owner who is currently in the funding queue with an approved extension POA, file the 2nd NOI under conversion and then reserve his/her right to go with the original approved POA for extension incentives if the sale does not work out? A3. No. Owners who make an election to go with a sale to a nonprofit priority purchaser are bound to that process. Q4. If an extension transaction in the queue converts to a sale, does it keep its original place in the queue and get funded in that order? A4. No. See Time Line Section V. Where the owner converts from extension to sale, he/she will be funded in the order that the approved Plan of Action to transfer to Priority Purchaser is received in Headquarters. VIII. APPRAISALS Q1. What marks the beginning of the 30-month appraisal period? A1. HUD's practice is to start the 30-month clock with the issuance of the 9607. However, 24 CFR 248.111(k) states that an appraisal cannot be more than 30 months old, unless the failure of the Commissioner to approve the POA within the 30-month period was due to circumstances beyond the control of the owner. If the owner feels the delay has hurt his/her financial position, he/she may pursue the options listed in Q2 and A2 below. Q2. Will HUD require/permit reappraisal of preservation projects where the appraisal is or will be more than 30 months old before the POA approval is issued? A2. Yes. The owner has several options: a. HUD and the owner can order new appraisals; b. HUD and the owner may update the existing appraisals; or c. HUD and the owner can agree to go to a third binding appraisal. In the above cases, the Preservation Capital Needs Assessment (PCNA) must be updated to reflect changes in project's condition. Q3. Will PCNA updates be permitted for profit motivated owners? A3. Yes, but only if the appraisal is redone. IX. FUNDING PRIORITY PURCHASE SALE PROJECTS. Nonconversion sales projects with approved POAs may now submit the necessary forms for Capital Grants or revised funding requests for the Section 241(f) program. The Section 8 needed to support the Section 241(f) loan for a priority purchaser, will be capped at 100 percent of the FMR. The short fall between loan proceeds and levels needed to complete the transactions will be made up by a "Carry Grant". There will no longer be a separate equity or gap grant, they are now both part of the Carry Grant. Title II projects involving a sale to a priority purchaser may use the Capital Grant Program. Conversion sale projects must use the Capital Grant Program. Q1. Can projects that are conversions from extension to sale, use a Section 241(f) loan or a Capital Grant to receive funds? A1. Projects that are conversions from extension to sale are only allowed to receive a Capital Grant. The determination that conversions to sales are not allowed to utilize a Section 241(f) loan is made as a matter of policy. This method of funding reduces the exposure to the Mortgage Insurance Fund because there is no guarantee of future project based Section 8 subsidies, which would be needed to amortize the Section 241(f) loan. Q2. Will we still have Section 241(f) loans? A2. While a Section 241(f) loan will still be an option for funding some Preservation projects, a Capital Grant is the preferred method of funding sales to priority purchasers because it is quicker and easier to process and does not expose the Mortgage Insurance Fund to potential losses if the Section 8 assistance is no longer available. Q3. What are the similarities between a Section 241(f) loan and a Capital Grant? A3. In both a Section 241(f) loan and a Capital Grant: a. The owner receives his/her transfer preservation equity, and transaction costs to which he/she is entitled. These amounts are no different if a Section 241(f) loan or a Capital Grant is used. b. The purchaser receives the necessary funds to complete the Repairs or Substantial Rehabilitation, Repair/Substantial Rehab Contingency, Deposit to Reserve for Replacement account and the allowable Transaction Costs. X. SECTION 236 EXCESS RENTAL INCOME. Q1. May owners and priority purchasers of Preservation eligible Section 236 projects keep the Section 236 Excess Rental Income? A1. Section 2(B)(1) of the Extension Act authorizes the Secretary to modify the regulatory agreement to permit owners and priority purchasers to retain rental income in excess of the basic rental charge in projects assisted under Section 236 for the purpose of preserving the low- and moderate-income character of the project. Please note that the statute gives the Department authority to modify the regulatory agreement for both for-profit owners and nonprofit priority purchasers. At the request of the owner [current or priority purchaser], the Field Office will modify the regulatory agreement to permit the owner to retain the Section 236 excess rental income. The amendment to the regulatory agreement shall provide for the following eligible uses of Section 236 excess rental income only: 1. Operating shortfalls; 2. Rental subsidy for very low-income tenants that do not receive rental assistance; 3. Future repair costs for projects. [Known repairs must be completed using Capital Grant or Section 241(f) loan funds that have been made available.]; 4. Pay owners transaction costs; and 5. Priority purchaser educational oversight fees. NOTE: The Office of General Counsel will be providing language to Field Counsel amending the regulatory agreement to be placed in Use Agreements. The Office of Asset Management will be providing detailed instructions for owners on how the owner must account for the excess funds received and spent. XI. STATE AGENCY NON-INSURED SECTION 236 PROJECTS. State or local agency determines eligibility for prepayment and loss of any affordable units. If unassisted income burdened units result from the prepayment, tenant protection must be provided in the same manner as insured projects. You must coordinate with any State agency entities in your jurisdiction to ensure that they are aware that a prepayment may now take place, and that the owner of the project must coordinate impacted tenant information with your office. The Extension Act adds a new category of eligible low-income housing where a project owner may apply for incentives. Properties that were originally low-income housing as that term is defined in Section 229(i) of LIHPRHA, retain eligibility if the mortgage is held by a State Agency as a result of a sale by the Secretary without insurance. If an owner of such project prepays the mortgage, the eligible tenants will receive assistance in accordance with Section I of this Letter. PRESERVATION LETTER NO. 4