[Federal Register Volume 63, Number 126 (Wednesday, July 1, 1998)]
[Notices]
[Pages 36130-36133]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17457]
[[Page 36129]]
_______________________________________________________________________
Part V
Department of Housing and Urban Development
_______________________________________________________________________
Portfolio Reengineering--Fiscal Year 1998 Transition Program
Guidelines; Notice
Federal Register / Vol. 63, No. 126 / Wednesday, July 1, 1998 /
Notices
[[Page 36130]]
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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
[Docket No. FR-4162-N-03]
Portfolio Reengineering--Fiscal Year 1998 Transition Program
Huidelines
AGENCY: Office of Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
ACTION: Notice of guidelines.
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SUMMARY: HUD is currently implementing a statutory demonstration
program authorized for fiscal year (FY) 1997. The Demonstration Program
is directed at FHA-insured multifamily projects that have project-based
Section 8 contracts with rents in excess of 120 percent of fair market
rents. That program has been extended by Congress through FY 1998 with
certain modifications as a transitional program while HUD develops
regulations to implement the new authority for a non-demonstration FHA-
insured mortgage and rental assistance restructuring program.
This notice provides guidelines for the FY 1998 Transition Program.
It also identifies projects that will continue to proceed under the FY
1997 Demonstration Program unmodified by these transitional provisions.
Finally, it clarifies HUD policy concerning delegation of
responsibilities to joint venture designees. This clarification applies
to both the FY 1998 Transition Program and the FY 1997 Demonstration
Program.
FOR FURTHER INFORMATION CONTACT: Dan Sullivan, Housing Project Manager,
Office of Multifamily Housing, Department of Housing and Urban
Development, 451 Seventh Street, SW., Washington, DC 20410-4000; Room
6106; Telephone (202) 708-2300, ext. 2062. (This is not a toll-free
number.) Hearing or speech-impaired individuals may call 1-800-877-8399
(Federal Information Relay Service TTY). Internet address:
Dan__S[email protected].
SUPPLEMENTARY INFORMATION:
I. Paperwork Reduction Act Statement
Paperwork Reduction Act Statement
The information collection requirements contained in this notice
and in the notice published on January 23, 1997, at 62 FR 3566 have
been approved by the Office of Management and Budget (OMB) in
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-
3520), and assigned OMB control number 2502-0519. An agency may not
conduct or sponsor, and a person is not required to respond to, a
collection of information unless the collection displays a valid
control number.
II. Background
The FY 1997 Demonstration Program was authorized by sections 211
and 212 of the Departments of Veterans Affairs and Housing and Urban
Development, and Independent Agencies Appropriations Act, 1997 (FY 1997
Appropriations Act) (Pub. L. 104-204; 110 Stat. 2874, 2895-2904;
approved September 26, 1996). HUD is currently implementing the FY 1997
program under Guidelines published on January 23, 1997, at 62 FR 3566.
(See also FY 1997 Portfolio Reengineering Request for Qualifications
published on July 16, 1997, at 62 FR 38109.)
The Multifamily Assisted Housing Reform and Affordability Act of
1997 (MAHRA) was enacted in title V of the Departments of Veterans
Affairs and Housing and Urban Development, and Independent Agencies
Appropriations Act, 1998 (FY 1998 Appropriations Act) (Pub. L. 105-65;
111 Stat. 1344, 1384; approved October 27, 1997). Subtitle A of MAHRA
contains the FHA-Insured Multifamily Housing Mortgage and Housing
Assistance Restructuring Program. That program provides authority to
deal with Section 8 contract expirations occurring in FY 1999 and
later. In accordance with section 522(a) of MAHRA, the new non-
demonstration program will be initially implemented by an interim rule
to be followed by a final rule.
Section 522(b) of MAHRA contains transition provisions for projects
with Section 8 contracts expiring in FY 1998. For these projects, the
transition provisions direct HUD to apply all the terms of sections 211
and 212 of the HUD FY 1997 Appropriations Act except for two provisions
in section 212. First, the 50,000 unit limitation in section 212(k)
does not apply. Second, the mortgage restructuring provisions in
section 212(h)(1)(G) do not apply. In addition, HUD is directed to
apply section 517(a), Mortgage Restructuring, of MAHRA.
Section 517(a) provides for a new second mortgage loan program from
HUD that is available to eligible project owners as part of a
prepayment on the existing unpaid principal balance on the first
mortgage so that the restructured or new first mortgage is sustainable
at rents determined under section 514(g) of MAHRA. The amount of the
second mortgage cannot be more than the difference between the
restructured or new first mortgage and the indebtedness under the
existing insured mortgage. The second mortgage is further limited to an
amount that can reasonably be expected to be repaid.
Section 517(a) contains other requirements for the second mortgage,
including a requirement that at least 75 percent of excess project
income be applied to the second mortgage note.
Section 514(g), which, as noted above, is used in determining the
amount of the restructured or new first mortgage, in general, requires
the use of market rents based on at least two comparable properties,
or, if those rents cannot be determined, on 90 percent of the
applicable fair market rents. Section 514(g) also authorizes budget-
based exception rents. In general, such rents cannot exceed 120 percent
of fair market rent (FMR). Up to 5 percent of the units subject to
mortgages restructured in a fiscal year may have rents that exceed this
limit based on a finding of special need.
Under the transition program there are two statutory bases for debt
forgiveness and two statutory bases for providing budget-based rents.
Debt forgiveness can be authorized under section 212(h)(1)(H) and also
under section 517(a) but only when application of the ``reasonably be
expected to be repaid'' limitation results in a second mortgage that is
less than the amount required to pay down the first mortgage to a
sustainable level. Budget-based rents are authorized under section
212(h)(1)(I) and, as discussed above, under the exception rent
provisions in section 514(g)(2) and (3).
These Guidelines implement all of these authorities in a manner
that is consistent with overall statutory requirements, and in
particular, with the requirement in section 522(b) to apply section
517(a).
III. Projects Continuing Under the FY 1997 Demonstration Program
Any project covered by a Demonstration HAP Contract that was
executed on or before September 30, 1997 shall continue to be processed
under the provisions of the January 23, 1997 Guidelines unmodified by
section IV. of today's Federal Register notice. Certain of these
Demonstration HAP Contracts may be extended for a period not to exceed
120 days in accordance with section 212(g)(2) of the FY 1997
Appropriations Act, as added by section 523(f) of MAHRA. Section
212(g)(2) authorizes these extensions for contracts originally executed
before February 1, 1997 and for contracts originally executed before
October 1, 1997 in connection with a restructuring under the joint
venture approach, if HUD, in its sole discretion, determines that the
renewal period needs to exceed one year
[[Page 36131]]
(i) for the pre-February 1, 1997 contracts, due to the delay in
publishing the January 23, 1997 Guidelines and (ii) for the pre-October
1, 1997 contracts, due to a delay in implementation of the joint
venture agreement. The two categories described involve not more than
21 and 25 projects, respectively. A project continuing under the FY
1997 Demonstration Program is not subject to the FY 1998 Transition
Program Guidelines (see section IV. of this notice), but is subject to
the revision to joint venture designee policy in section V. of this
notice.
IV. FY 1998 Transition Program Guidelines
A. Applicability of the January 23, 1997 Guidelines
Because MAHRA applies almost all of the statutory provisions for
the FY 1997 Demonstration Program to the FY 1998 Transition Program,
sections IV. through IX. of the January 23, 1997 Guidelines (62 FR
3569-3581), as augmented by this notice, constitute the FY 1998
Transition Program Guidelines. Except for statutory references, all
references in sections IV. through IX. of the January 23, 1997
Guidelines to ``FY 1997'' mean ``FY 1998.''
In section III.B. of the January 23, 1997 Guidelines (62 FR 3568),
the definitions of ``FMR'' and ``in the aggregate'' apply to the FY
1998 Transition Program.
B. General Eligibility
This section IV.B. applies instead of section IV.B.1., General
Eligibility, of the January 23, 1997 Guidelines (62 FR 3569). For a
project to be eligible for the FY 1998 Demonstration Program, the owner
must agree to participate. The project must be subject to an FHA-
insured mortgage and supported by project-based Section 8 Housing
Assistance Payments (HAP) contracts with rent levels which, in the
aggregate, exceed 120 percent of FMR. In managing its workload, HUD
will give preference to projects with contracts expiring in FY 1998.
C. Disqualified Owner
The following conforms the Guidelines to the amendment to section
211(b)(4)(B) of the HUD FY 1997 Appropriations Act made by section
10006 of the 1997 Emergency Supplemental Appropriations Act, Pub. L.
105-18; 111 Stat. 158; approved June 12, 1997 which added ``affiliate
of the owner'' to the definition of ``owner.'' In section IV.C.3. of
the January 23, 1997 Guidelines (62 FR 3569), Disqualified Owners, the
term owner also means an affiliate of the owner and the term purchaser
also means an affiliate of the purchaser. The terms affiliate of the
owner and affiliate of the purchaser mean any person or entity
(including but not limited to, a general partner or managing member, or
an officer of either) that controls an owner or purchaser, is
controlled by an owner or purchaser, or is under common control with
the owner or purchaser. The term control means the direct or indirect
power (under contract, equity ownership, the right to vote or determine
a vote, or otherwise) to direct the financial, legal, beneficial or
other interests of the owner or purchaser.
D. Demonstration Approaches/Underwriting
1. Mandatory FY 1998 Transition Program Approaches
This section applies in place of the guidance in sections IV.E.1.,
Mandatory Demonstration Approaches, through and including section
IV.E.1.b., Debt Forgiveness, of the January 23, 1997 Guidelines (62 FR
3569-3571).
With respect to any eligible project, HUD must perform an analysis
under section 517(a)(1)(B) of MAHRA. HUD is obligated to require a new
second mortgage to the extent that it makes a determination that a new
second mortgage can reasonably be expected to be repaid.
To the extent that the combination of the new first mortgage and
the new second mortgage is less than the outstanding principal balance
of the existing insured mortgage, immediately before it is restructured
or refinanced, HUD will consider debt forgiveness or budget basing, or
a combination of these, pursuant to sections 212(h)(1)(H) and
212(h)(1)(I) and sections 514(g)(2) and (3) and 517(a).
a. Mortgage Restructuring.
Under the Mortgage Restructuring approach, the unpaid principal
balance (UPB) on the existing FHA-insured mortgage loan is paid down
to, or refinanced by a new first mortgage at, an amount equal to the
Supportable Debt. The reduction in the first mortgage UPB is effected
by an advance of funds from HUD. This advance is secured, in whole or
in part, by a second mortgage note. The portion of the advance that is
secured by the second mortgage cannot exceed the amount that HUD
determines can reasonably be expected to be repaid.
(1) Supportable First Mortgage Loan
The amount of the UPB of the supportable first mortgage loan after
restructuring is determined by applying a 1.10 or greater debt service
coverage ratio, at the interest rate and term approved by HUD, to the
adjusted NOI. The amount may, at HUD's option, be adjusted if the
security for the existing FHA-insured loan includes vacant land or
other non-income producing assets with additional market value. HUD
will require that the restructured or new first mortgage carry an
interest rate and term that is competitive in the market.
(2) Second Mortgage Loan.
The initial unpaid principal balance of the second mortgage loan
will equal the lesser of:
(a) The amount required to pay down the existing FHA-insured
mortgage loans(s) to a sustainable level; or
(b) An amount HUD determines can reasonably be expected to be
repaid.
The second mortgage loan shall bear interest at a rate less than or
equal to the long term applicable Federal rate, as set forth pursuant
to section 1274(d) of the Internal Revenue Code of 1986 (26 U.S.C.
1274(d)). The term of the second mortgage shall be equal to the term of
the restructured or new first mortgage.
The interest rate and payment and other terms of the loan will be
established by HUD, consistent with section 517(a) of MAHRA. Principal
and interest on the second mortgage loan will be payable out of Net
Cash Flow (discussed below), and unpaid interest will accrue.
(3) Debt Forgiveness.
HUD may forgive a certain portion of the outstanding balance of an
existing FHA-insured loan to the extent HUD determines that a second
mortgage cannot reasonably be expected to be repaid.
(i) Amount of Debt Forgiveness.
The amount of the debt that may be forgiven is equal to--
(a) If HUD will make a second mortgage loan, the outstanding UPB of
the existing FHA-insured mortgage loan(s) at the time of restructuring
minus the sum of UPB of the restructured or new first mortgage and the
UPB of the second mortgage loan determined under section IV.D.1.a.(2)
of this notice; or
(b) If there will be no second mortgage loan from HUD, the
outstanding UPB of the existing FHA-insured mortgage loan(s) at the
time of restructuring minus the market value. The project's ``market
value'' will be determined based upon an appraisal of the project's as-
is value prepared in accordance with the Uniform Standards of
Professional Appraisal Practice (USPAP). The appraisal will take into
consideration, among other factors, the current market rents for
unsubsidized units in the local market area, the project's current
operating expenses, any necessary reserves for long term capital
[[Page 36132]]
replacements, any necessary rehabilitation costs (see section
IV.E.2.b.(1)(c), Determining the Level of Required Physical
Improvements, of the January 23, 1997 Guidelines (62 FR 3572)), and any
anticipated costs relating to the transition of the project to market
rents.
(4) Restructuring Payment.
The amount of the restructuring payment made by HUD shall equal the
UPB of the existing FHA-insured mortgage loan(s) minus (i) the
supportable debt, (ii) all contributions made by the owner (and the
owner's partners/investors) in connection with the restructuring, as
determined by HUD, and (iii) all excess funds in the project's reserve
for replacement account, and (iv) all funds in the project's residual
receipts account and any other escrows and reserves, as determined by
HUD, plus (v) reasonable, cost effective rehabilitation costs approved
by HUD, and (vi) reasonable transaction costs approved by HUD.
(5) Use of Net Cash Flow.
For purposes of the Mortgage Restructuring approach, ``Net Cash
Flow'' means that portion of the NOI that remains after the payment of
all required debt service payments on the first mortgage loan. Net Cash
Flow shall be applied as follows: first, to payment to the holder of
the first mortgage loan of any past due principal or interest, and
required escrows and reserves, on such mortgage loan; second, to the
extent of the remaining Net Cash Flow to any other expenditures
approved by HUD; and third, to the extent of the remaining Net Cash
Flow, to be distributed with at least 75 percent to payment of
principal and interest due on the second mortgage and up to 25 percent
to an escrow account for payment to the owner after the requirements of
section IV.D.2. of this notice have been met.
(6) Funding of Rehabilitation Costs.
If the FHA-insured mortgage loan will be refinanced with non-FHA-
insured financing, the HUD-approved rehabilitation costs will be
financed with funds available in the project's residual receipts
account and excess funds in the project's reserve for replacements
account, as of the date of the mortgage restructuring. If the
rehabilitation costs exceed the amount of such funds, the
rehabilitation costs may be funded by (a) a contribution of cash equity
from the owner's partners/investors, and/or (b) the proceeds of the
non-FHA-insured refinancing loan, and (c) to the extent that other
sources of funds are unavailable, and at HUD's sole discretion, through
a loan or grant from HUD.
If the FHA-insured mortgage loan is retained or refinanced with
another FHA-insured loan, the HUD approved rehabilitation costs will be
financed with funds available in the project's residual receipts
account and excess funds in the project's reserve for replacements
account, as of the date of the mortgage restructuring. If the
rehabilitation costs exceed the amount of such funds, the
rehabilitation costs may be funded by (1) a contribution of cash equity
from the owner's partners/investors, (2) the proceeds of a non-FHA-
insured rehabilitation loan, (3) the proceeds of an FHA-insured
rehabilitation loan, and/or (4) to the extent that other sources of
funds are unavailable, through a loan or grant from HUD.
For owners who want to refinance the original FHA-insured loan,
mortgage insurance from the following FHA programs may be provided:
(a) Section 223(f), acquisition and refinance with limited
renovations--loan to value limit of 85 percent; or
(b) Section 223(a)(7), refinance of an insured loan to lower the
interest rate and to fund rehabilitation costs--loan limit is up to the
original insured principal amount.
b. Budget-Based Rents.
The provisions of section IV.E.1.c., Budget-Based Rents, of the
January 23, 1997 Guidelines (62 FR 3571) apply, subject to the
following. The above referenced Budget-Based Rents provisions implement
the authority under section 212(h)(1)(I) of the 1997 Appropriations
Acts. Budget-based rents under that authority may not exceed the
expiring contract rents, and there is no percentage limitation on the
number of units that may receive budget-based rents. Sections 514(g)
(2) and (3) of MAHRA also authorize the use of budget-based rents.
Those sections have a general limit of 120 percent of FMR but allow up
to 5 percent of all units subject to mortgages restructured within the
fiscal year to exceed that limit. While there is no express statutory
requirement in section 514(g)(2) or (3) limiting budget-based rents to
no more than the expiring contracts rents, it is HUD policy to approve
budget-based rents only at or below expiring contract rents.
32. Owner's Distribution From Net Cash Flow
This section IV.D.2. applies instead of section IV.E.2.b.(2),
Owner's Distribution from Net Cash Flow, of the January 23, 1997
Guidelines (62 FR 3569).
As an incentive to maintain the property the owner may receive an
annual distribution of up to 25 percent of Net Cash Flow (``Owner's
Distribution'').
The Owner's Distribution will be held in an escrow account and paid
to the owner only after HUD or its representative inspects the project
and finds that all units are in substantial compliance with maintenance
standards set forth by HUD as part of the restructuring agreement. Any
owner who fails to deposit all Net Cash Flow to the escrow account will
waive its rights to future distributions.
E. Project Underwriting--Market Rents
In estimating a project's net operating income under section
IV.E.2.b. of the January 23, 1997 Guidelines (62 FR 3572), market rents
will be established through an appraisal of the property that utilizes
at least two comparables. If two comparables cannot be found, HUD may
authorize the appraiser to use 90 percent of the applicable fair market
rents.
F. HUD Housing Notices
The following sections of the January 23, 1997 Guidelines referred
to Housing Notice H 96-89, issued October 15, 1996: Sections V.F. (62
FR 3574); V.B.2. (62 FR 3575); VI.D. (62 FR 3576); and VI.L. (62 FR
3577). Housing Notice H 97-66, issued November 12, 1997, reinstates H
96-89 with certain exceptions. The reader should refer to both Housing
Notices. They are available through HUDCLIPS, which is on HUD's web
site. The location (URL) for the HUDCLIPS Database Selection Screen is
http://www.hudclips.org/subscriber/cgi/legis.cgi?legis. These notices
are in the Handbooks and Notices--Housing Notices database. Enter only
the number without the letter prefix (e.g., 97-96) in the ``Document
Number'' to retrieve the program notice.
G. Obsolete Provisions
Section V.G., Funding and Unit Limitations, of the January 23, 1997
Guidelines (63 FR 3574) described limitations as they existed in FY
1997 and does not apply.
Section IX.A., Participation of Projects with Post-FY 1997
Expirations, of the January 23, 1997 Guidelines (62 FR 3581) does not
apply. (See section IV.B of today's notice for guidance on preference
for projects with contracts expiring in FY 1998.)
H. Sunshine Provision
This section IV.H. applies instead of section X.B., Sunshine
Provision, of the January 23, 1997 Guidelines (62 FR
[[Page 36133]]
3581). In order that others may learn from the experience of the FY
1998 Transition Program, all proposals accepted by HUD to participate
in the FY 1998 Transition Program may be posted on HUD's Web Page
(www.hud.gov/fha/mfh/mfhsec8.html). The posted information will
include, but not be limited to, the final restructuring commitment,
detailed financial information regarding the asset and tenant issues.
Owners will be requested to waive the provisions of the Privacy Act (5
U.S.C. 552a) and the Trade Secrets Act (18 U.S.C. 1905).
V. Revision to Joint Venture Designee Policy for Both the FY 1997
Demonstration Program and the FY 1998 Transition Program
Section VII.A. of the January 23, 1997 Guidelines (62 FR 3578, 2d
col.) contained a statement encouraging designee applicants to
``develop partnerships with each other as well as with other private
and public entities * * * .'' This inaccurately stated the policy set
out in section 212(d)(3) of the FY 1997 HUD Appropriations Act. Rather,
designee applicants are encouraged to develop partnerships with each
other and to contract or subcontract with other private and public
entities, including the entities listed in section VII.A. of the
January 23, 1997 Guidelines.
Section VII.B.2.a. of the January 23, 1997 Guidelines (62 FR 3580)
stated in part, ``It is possible that HUD would delegate all of its
powers to the designees including the ability to authorize full or
partial mortgage prepayment and would rely solely on a post-
restructuring audit to verify that the interests of the Federal
Government are fairly represented in the transaction.'' Section
VI.B.2.b. of the January 23, 1997 Guidelines (62 FR 3580) stated in
part, ``The Joint Venture Designees will be responsible for all
decision making. HUD approvals will be based on representations and
certifications made by the Designee.'' These two statements do not
apply to the FY 1998 Transition Program.
A Joint Venture Designee will be responsible for decision making as
set out in its agreement with HUD. All other provisions of section VII.
continue to apply to the FY 1997 Demonstration Program and the FY 1998
Transition Program.
VI. HUD Findings and Certifications
A. Environmental Impact
A Finding of No Significant Impact with respect to the environment
has been made in accordance with HUD regulations at 24 CFR part 50,
which implement section 102(2)(C) of the National Environmental Policy
Act of 1969. The Finding of No Significant Impact is available for
public inspection between 7:30 a.m. and 5:30 p.m. weekdays in the
Office of the Rules Docket Clerk at the above address.
B. Executive Order 12612, Federalism
The General Counsel, as the Designated Official for HUD under
section 6(a) of Executive Order 12612, Federalism, has determined that
the provisions in this notice are closely based on statutory
requirements and impose no significant additional burdens on States or
other public bodies. This notice does not affect the relationship
between the Federal Government and the States and other public bodies
or the distribution of power and responsibilities among various levels
of government. Therefore, the policy is not subject to review under
Executive Order 12612.
Dated: June 22, 1998.
Art Agnos,
Acting General Deputy Assistant Secretary for Housing--Deputy Federal
Housing Commissioner.
[FR Doc. 98-17457 Filed 6-30-98; 8:45 am]
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