February 18, 1997 MEMORANDUM FOR: Directors of Housing; Multifamily Housing Directors; Multifamily Production Chiefs; Multifamily Asset Management Chiefs; Preservation Coordinators; for the following State/Area Offices: Hartford, Boston, New York, Los Angeles FROM: Nicolas P. Retsinas, Assistant Secretary for Housing- Federal Housing Commissioner, H SUBJECT: Amended Instructions for Preservation Capital Loans I. Introduction: This notice amends Preservation Letter 97-3, and revises the terms under which Capital Loans will be offered to Owners of projects in the carve-out queue. Technical clarification is also provided in response to questions raised by HUD staff and owners concerning implementation of the program. A revised Capital Loan Commitment Agreement incorporating changes to the program is attached. The Capital Loan Commitment Agreement is the document which obligates the funds, and must therefore be submitted along with the worksheets (Preservation Letter 97-3, Attachments A, B, and C) immediately. The modified terms under which the Capital Loan will be offered are summarized below. Unless explicitly stated, all terms and conditions specified in Preservation Letter 97-3, are unchanged. The modifications detailed below are expected to enhance the owner's incentives to preserve the affordability of the projects. If an owner decides to not accept the Capital Loan, you are requested to immediately document their decision and contact HUD Headquarters Preservation staff so that funds can be made available to the next project on the queue. Given the imminent statutory deadline for obligating carve-out funds, it is imperative that the executed Commitment Agreements and worksheets for the Capital Loans (or documentation of the owner's refusal of the loan) be received in HUD Headquarters within 48 hours of receipt of this Letter. II. Modifications to the Structure/Terms of the Capital Loan: A. The Capital Loan has a balloon payment due upon sale of the property or payoff of the first (or other priority) mortgage. The Commitment Agreement has been revised to allow the Department to defer payment of the loan under certain conditions. The Capital Loan will be extended to be co-terminus with the Use Agreement, if at the time the first mortgage is paid off, the Department determines the project's physical and financial condition warrant the extension, and if the owner has demonstrated a commitment to enhancing the quality of life of the tenants. B. As noted in Preservation Letter 97-3, consent of the first mortgagee is required in order to record the mortgage securing the Capital Loan. Such consent is required even if the owner will be charged a fee. The option to obtain a Letter of Credit securing the owner's personal guarantee is retracted. The Capital Loan Commitment Agreement has been revised for cases where the owner provides evidence that the mortgagee will not allow a subordinate lien. If the first mortgagee refuses to consent to a mortgage securing the Capital Loan, we will accept an executed Assignment of the rents which inures to the Capital Loan, along with an Agreement to record an executed mortgage upon payment in full of the first mortgage. The Agreement will contain a covenant that the owner will not further encumber the property without written consent of the Secretary. C. The Capital Loan Commitment Agreement specified that none of the owner's equity portion of the loan would be released until completion of the repairs. The Agreement has been revised to allow 50 percent of the owner's equity to be released at closing; the remaining 50 percent will be placed in LOCCS and held in accordance with the Agreement until completion of the repairs. III. Technical Clarification: A. As noted in Preservation Letter 97-3, any required Initial Deposit to Reserve for Replacement shall be funded at closing out of the owner's equity portion of the loan. The worksheets should specify the shortfall, not the total amount after the Initial Deposit is made. B. Since the owner's Extension Preservation Value (EPV) is calculated net of repairs, the basis for the 8 percent distribution is calculated by deducting the combined indebtedness of the first mortgage and the owner's equity portion of the Capital Loan from the EPV. C. Preservation Letter 97-3, specifies that an FHA inspection fee of the greater of 1 percent of the required repairs or $500 will be charged. The intent was to include this fee in the repair portion of the capital loan. Include it in the worksheet as either a soft construction cost or built into the repair/substantial rehabilitation hard construction costs. The State/Area Office has the discretion to waive the fee. D. The 10 percent repair contingency will NOT be waived. The owner has the option to fund the escrow for this amount out of their equity, and reduce the net equity realized (and the Capital Loan amount) after completion of the repairs if the contingency is not required. E. Owner's may request the owner's equity portion of the Capital Loan be reduced. Such a request will be documented by a letter from the owner (for each project). The funding made available by reducing the Capital Loan amount will be made available to the next project in the queue. F. As noted in Preservation Letter 97-3, Plan of Action (POA) Updates will only be processed (in accordance with Preservation Letter 97-2), for those projects which have POA approval dates older than 12 months. Attachment CAPITAL LOAN COMMITMENT AGREEMENT (Mortgagor) (Street) (City and State) Subject: Commitment for Capital Loan Project No.: Name of Project: Address: The Secretary of Housing and Urban Development, acting through the Federal Housing Commissioner, will make a capital loan under the provisions of the Departments of Veterans Affairs and Housing and Urban Development, and Independent Agencies Appropriations Act, 1997, Pub. Law 104-204, in an amount not to exceed $ to be secured by such security instrument as the Commissioner may approve, on the property identified above. The loan will be subject to compliance with the terms and conditions set forth below. The capital loan amount, however, is subject to reduction prior to closing as provided herein. 1. The capital loan note (the "Note") shall not bear interest. The Note shall be non-amortizing. The entire principal of the Note shall be due upon payment in full of the (Describe the first mortgage) . However, upon payment in full of the first mortgage if, in the sole discretion of the Secretary, the physical and financial condition of the project so warrant and the Mortgagor has shown a commitment to enhancing the quality of life of the tenants and the surrounding community, the term of the Note may be extended so that the entire principal of the Note becomes due upon expiration of the Use Agreement executed in accordance with Paragraph 25 hereof. The Note may be prepaid, in part or in full, at any time without penalty. 2. At least 15 days before the anticipated date of closing, two draft copies of each of the following documents and exhibits shall be submitted to the Secretary. After review, the place and date of the closing will be designated, at which time the following documents and exhibits in final form shall be delivered to the Secretary for approval: (a) Title evidence satisfactory to the Secretary which shall show that on the date of the Note, such loan is junior only to a loan or loans insured, assisted or held by the Secretary and to such other liens as are acceptable to the Secretary. If such title evidence is in the form of a title insurance policy, it shall by its terms inure to the benefit of the Secretary of Housing and Urban Development. Evidence will be required to show that the premises are not zoned or restricted so as to prevent the construction of the improvements, and the building and other permits have been issued by legally constituted authorities having jurisdiction. (b) The written consent of the mortgagee of the existing insured mortgage on the project to a capital loan mortgage on the project securing the Note, together with an indication that said insured mortgage is not in default. Because the mortgage form contains a covenant precluding the placing of a lien inferior or superior to the HUD-insured mortgage, mortgagee consent to the junior lien created by the capital loan mortgage is required. If the first Mortgagee needs to review the capital loan documents to satisfy company policy, it must be done at no cost to HUD. If the Mortgagor provides evidence that the mortgagee will not allow a subordinate lien to be recorded, the Mortgagor shall execute at closing an agreement which provides for (1) an assignment of rents, which shall be subordinate to the assignment of rents in the HUD-insured mortgage; (2) an executed mortgage to be placed in escrow at closing, which shall be recorded upon payment in full of the first mortgage; (3) a covenant not to further encumber the property without the written consent of the Secretary, which covenant shall also appear in the mortgage. (c) Contractor's Certificate of Labor Standards and Prevailing Wage Requirements. 3. A fully completed Capital Loan Work Sheet has been attached hereto as Exhibit A and is incorporated herein by reference. A fully completed Distribution of "Capital Loan" Funds Worksheet has been attached hereto as Exhibit B and is incorporated herein by reference. The disbursement of the capital loan proceeds shall be made as described in the Distribution of "Capital Loan" Funds Worksheet. 4. The Mortgagor must possess the powers necessary for operating the project and meeting all the requirements of the Secretary of Housing and Urban Development. At the loan closing, there shall be filed with the Secretary copies of all instruments or agreements necessary under the laws of the applicable jurisdiction to authorize the execution of the Note, mortgage (if applicable) and the other closing documents, the Use Agreement and Amendment to Existing Regulatory Agreement or other instrument to permit the Secretary's regulation of the Mortgagor as to rents, charges, and methods of operation. 5. Upon closing: [Choose either Alternative A or B and delete the other] (a) Alternative A: Shortage in R for R: The Mortgagor must deposit $ into the Reserve Fund for Replacements which is under the control of HUD and being held by the Mortgagee of the insured first mortgage. The FHA case number of this first mortgage is _________________. Alternative B: Overage in R for R: Excess funds in the Reserve Fund for Replacements, in the amount of $ may be withdrawn by the Mortgagor. (b) The Mortgagor is required to pay transaction costs from the Owner's Equity portion of loan proceeds, and cannot seek reimbursement from project income nor from the residual receipts account. If the 50% of Owner's Equity to be released at closing in accordance with Paragraph 12(a) hereof is insufficient to cover these costs, the Mortgagor must provide the difference at closing. Typical transaction costs include, but are not limited to: Appraisal. Title and Recording Expenses. Legal Expenses. Any relocation expenses approved by the CPD relocation specialist. Cost Certification. PCNA repairs shown in the Plan Of Action ("POA"). (c) The Mortgagor will fund an operating deficit escrow established in LOCCS in the amount of $ for a period of months from the date of closing. (d) All requirements and conditions of the Plan of Action Final Approval, dated , must be fully satisfied. 6. The residual receipts account will continue to be restricted. Any residual receipts will be applied toward the Note balance at the time the loan is paid off. 7. An 8 percent distribution on the owner's equity is allowed in accordance with Section 214 of the LIHPRHA statute. This amount shall not exceed $ . 8. The estimated cost of required repairs outlined in the POA for this project have been determined to be $ . A repair escrow, including the contingency amount, as specified in the approved POA, must be funded in LOCCS. If the actual cost of repairs is less than the estimated cost and contingency, the difference must be used to pay down the outstanding Capital Loan amount. If the actual cost of repairs exceeds the estimated cost and contingency, the cost overruns will be funded by reducing the owner's equity takeout. 9. If any repairs are to be made to an existing project which require additional sewer, water, gas or electrical facilities, evidence satisfactory to the Secretary shall be submitted prior to loan closing showing that adequate sewer, water, gas, and electric facilities have been or will be fully installed and that necessary public streets, sidewalks and curbing outside the project site have been completed. 10. During the course of repairs, if any, the Secretary and his/her representatives shall at all times have access to the property and the right to inspect the progress of repairs. In addition, if required by the Secretary, the Mortgagor will furnish at the project site all necessary facilities for the use of the Secretary's inspector, such as office space, use of a telephone, typewriter, etc. The inspection of the repairs by a representative or representatives of the Secretary shall be for the benefit and protection of the Secretary of Housing and Urban Development. 11. The Mortgagor shall pay an Inspection Fee of One Percent (1%) of estimated total repairs, with a minimum fee of $500.00. The Inspection Fee is payable at loan closing. 12. At loan closing, the Mortgagor will enter into a formal escrow agreement with HUD which provides: (a) All repair funds and 50% of the Owner's Equity must be placed in LOCCS (the remaining portion of the Owner's Equity will be released at closing). The 50% of Owner's Equity held in escrow will not be released until all repairs have been completed to HUD's satisfaction. Evidence shall be submitted to HUD that the work financed with the capital loan has been inspected and approved by all departments, boards, or agencies of the municipality, county, or State, or other governmental bureaus or departments having jurisdiction thereof, and by the Board of Fire Underwriters or any bureau or body performing similar functions and that such certification as may be required with respect to the approval for occupancy and use and otherwise as may be required by HUD have been issued to the Mortgagor. (b) All repairs must be completed by the Mortgagor within 12 months. HUD may specify a shorter escrow period, or grant extension of the escrow beyond 12 months. Any change in the escrow period shall be evidenced in writing signed by an authorized HUD representative. (c) If the Mortgagor does not complete all the repairs within the allotted time frame, HUD may grant an extension or use the balance of the escrow to complete the repairs. 13. The repairs shall commence upon the Project within 30 days from loan closing and must be continued thereafter diligently to completion. 14. At loan closing, the Mortgagor shall submit to HUD a copy of the Mortgagor's Estimate of Progress Schedule for completing the repair work. This schedule shall indicate for each work item: (a) The anticipated start of repairs, (b) The estimated time for completing the work, and (c) Whether the work will be performed by a contractor or project maintenance staff. 15. If the project involves substantial rehabilitation: At loan closing, the Mortgagor must provide Assurance of Completion acceptable to HUD in the form of corporate surety bonds for payment and performance, each in the minimum amount of 100 percent of the HUD estimate of rehabilitation cost, or a completion assurance agreement secured by a cash deposit in the minimum amount of 15 percent of the amount of the HUD estimate of rehabilitation cost. 16. Any contract or subcontract executed for the performance of the construction of the project shall comply with all applicable Labor Standards and provisions of the Regulations of the Secretary of Labor (29 CFR Part 5). 17. Money may be approved by HUD Production staff to be released from the repair contingency reserve for change orders involving unanticipated necessary repair items. 18. Contingency escrow funds may be disbursed as work progresses by following HUD's instructions for advances under LOCCS. (a) HUD will inspect and approve all work before authorizing release of the escrow funds. (b) Funds released from the repair or substantial rehabilitation escrow are not subject to any holdback. (c) Before releasing the remaining funds, the following conditions must be met: (1) All PCNA repairs have been satisfactorily completed; (2) Latent defects guarantee is satisfied (see paragraph 20); (3) An updated title search, provided to the Area/State Office, must show no liens have been placed on the project because of the PCNA repairs, and; (4) All Davis-Bacon payroll requirements have been satisfied. 19. If the repair or substantial rehabilitation component of the capital loan equals $200,000 or less, or the project contains 40 units or less: At the completion of all repairs, a cost certification is required in accordance with the simplified cost certification requirements described in paragraph 11-6.A of HUD Handbook 4470.1. For all other capital loans: At the completion of all repairs, a cost certification is required in accordance with the long form cost certification requirements described in paragraph 11-6.B of HUD Handbook 4470.1. 20. Upon completion of the repair work, the general contractor, or the Mortgagor if there is no general contractor, must submit a certification that construction is in accordance with the plans and specifications which were approved by the Secretary, listing all outstanding unpaid obligations and agreeing to pay all listed obligations within 15 days following receipt of payment from the Mortgagor. 21. Upon completion of the repair work the Mortgagor must give satisfactory evidence that the repair work is covered by a guarantee, running for a period of at least 15 months from the date all repair work is satisfactorily completed, against defects due to faulty materials or workmanship. This guarantee must be in the form of either (a), (b) or (c) below. (a) Form FHA-3529, Surety Bond Against Defects Due to Defective Material and/or Faulty Workmanship, by a surety on the accredited list of the U.S. Treasury and drawn in an amount not less than l0 percent of the cost of repairs as estimated by HUD. The bond must remain in effect for two years from the date all repair work is satisfactorily completed. (b) Cash escrow equal to 2-l/2 percent of the total cost of repairs, to be retained for a period of 15 months from the date all repair work is satisfactorily completed. (c) If Form FHA-2452, Performance Bond-Dual Obligee, or the American Institute of Architect's Form AIA A311, Performance Bond was used for substantial rehabilitation, no action is required as the bonds remain in effect for two years from the date of final payment under the construction contract. 22. Any change in the ownership upon which this commitment is predicated must be requested in writing by the Mortgagor on behalf of any proposed substitute owner, and such request must be approved in writing by the Secretary. 23. Certification(s) in the form required by the Secretary, executed by the General Contractor, each subcontractor, or the Mortgagor if there is no general or sub contractor(s) that the laborers and mechanics employed in the construction of the Project have been paid not less than the wages prevailing in the locality in which the work was performed. Certification(s) must provide and be submitted for the corresponding classes of labor and mechanics employed on the construction of similar character, as determined by the Secretary of Labor with respect to the above-captioned project in accordance with Section 212 of the National Housing Act. 24. Any principal who is now involved, but not yet identified, or who may later become involved in this project by way of financial interest, employment, or otherwise as defined under the FHA Form 2530 procedures, and who has not filed a certificate with the Secretary fully disclosing his/her previous participation in HUD/FHA multifamily programs, shall file such a certificate on the form prescribed by the Secretary. Any such certificate submitted must be approved under the 2530 procedures. 25. At loan closing, a Use Agreement and Amendment to Existing Regulatory Agreement, as prepared by the Secretary, shall be executed and recorded. 26. This Commitment shall terminate 45 days from the date hereof unless renewed or extended by the Secretary. Prior to any renewal or extension of this Commitment, the Secretary may, at his/her option, re-examine the Commitment to determine whether it shall be extended in the same amount, or shall be amended to include a lesser amount. This Commitment, together with the applicable Federal Housing Administration statutes and regulations, constitute the entire agreement between us, and acceptance of the terms hereof is evidenced by the signature and seals of the Secretary's representative and Mortgagor upon the lines provided therefor below. Please contact our Chief Counsel at telephone number to schedule closing of this loan. SECRETARY OF HOUSING AND URBAN DEVELOPMENT By: FEDERAL HOUSING COMMISSIONER By: Authorized Agent Dated: The above Capital Loan Commitment Agreement, which is enclosed in duplicate, is hereby acknowledged by the undersigned, and we hereby agree to be bound by the terms thereof. One copy must be properly executed and returned to this Office. Mortgagor Attest By: Dated: CHANGES TO CAPITAL LOAN COMMITMENT AGREEMENT 1. The capital loan note (the "Note") shall not bear interest. The Note shall be non-amortizing. The entire principal of the Note shall be due upon payment in full of the (Describe the first mortgage) . However, upon payment in full of the first mortgage if, in the sole discretion of the Secretary, the physical and financial condition of the project so warrant and the Mortgagor has shown a commitment to enhancing the quality of life of the tenants and the surrounding community, the term of the Note may be extended so that the entire principal of the Note becomes due upon expiration of the Use Agreement executed in accordance with Paragraph 25 hereof. The Note may be prepaid, in part or in full, at any time without penalty. 2. (b) The written consent of the mortgagee of the existing insured mortgage on the project to a capital loan mortgage on the project securing the Note, together with an indication that said insured mortgage is not in default. Because the mortgage form contains a covenant precluding the placing of a lien inferior or superior to the HUD-insured mortgage, mortgagee consent to the junior lien created by the capital loan mortgage is required. If the first Mortgagee needs to review the capital loan documents to satisfy company policy, it must be done at no cost to HUD. If the Mortgagor provides evidence that the mortgagee will not allow a subordinate lien to be recorded, a principal of the owner entity shall provide a loan guarantee backed by a Letter of Credit in order to secure the capital loan. Both the guarantee and the Letter of Credit must be in a form acceptable to the Secretary. The Letter of Credit must be kept in place for at least three years.the Mortgagor shall execute at closing an agreement which provides for (1) an assignment of rents, which shall be subordinate to the assignment of rents in the HUD-insured mortgage; (2) an executed mortgage to be placed in escrow at closing, which shall be recorded upon payment in full of the first mortgage; (3) a covenant not to further encumber the property without the written consent of the Secretary, which covenant shall also appear in the mortgage. 5. (b) The Mortgagor is required to pay transaction costs from the Owner's Equity portion of loan proceeds, and cannot seek reimbursement from project income nor from the residual receipts account. If the 50% of Owner's Equity to be released at closing in accordance with Paragraph 12(a) hereof is insufficient to cover these costs, the Mortgagor must provide the difference at closing. Typical transaction costs include, but are not limited to: Appraisal. Title and Recording Expenses. Legal Expenses. Any relocation expenses approved by the CPD relocation specialist. Cost Certification. PCNA repairs shown in the Plan Of Action ("POA"). 12. At loan closing, the Mortgagor will enter into a formal escrow agreement with HUD which provides: (a) All repair funds and 50% of the Owner's Equity must be placed in LOCCS (the remaining portion of the Owner's Equity will be released at closing). The 50% of Owner's Equity held in escrow will not be released until all repairs have been completed to HUD's satisfaction. Evidence shall be submitted to HUD that the work financed with the capital loan has been inspected and approved by all departments, boards, or agencies of the municipality, county, or State, or other governmental bureaus or departments having jurisdiction thereof, and by the Board of Fire Underwriters or any bureau or body performing similar functions and that such certification as may be required with respect to the approval for occupancy and use and otherwise as may be required by HUD have been issued to the Mortgagor.