[Federal Register Volume 59, Number 240 (Thursday, December 15, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30776]


[[Page Unknown]]

[Federal Register: December 15, 1994]


_______________________________________________________________________

Part III





Department of Housing and Urban Development





_______________________________________________________________________



Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner



_______________________________________________________________________



Low Income Housing: Administrative Guidelines: Limitations on Subsidy 
Layering; Notice
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner
[Docket No. N-94-3722; FR-3334-N-05]

 

Administrative Guidelines: Limitations on Combining HUD and Other 
Government Assistance; ``Subsidy Layering''

AGENCY: Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner, HUD.

ACTION: Notice of Administrative Guidelines to be Applied in 
Implementing section 911 of the Housing and Community Development Act 
of 1992 (HCDA '92) (42 U.S.C. 3545 note) and section 102(d) of the 
Department of Housing and Urban Development Reform Act of 1989 (HRA 
'89) (42 U.S.C. 3545).

-----------------------------------------------------------------------

SUMMARY: This document sets forth the Administrative Guidelines which 
qualified allocating and suballocating Housing Credit Agencies (HCAs), 
as defined under section 42 of the Internal Revenue Code of 1986, must 
follow to comply with section 911 of the Housing and Community 
Development Act of 1992 (HCDA '92). HUD State/Area Offices will apply 
the Revised Subsidy Layering Guidelines (RSLGs) in accordance with 
Implementing Instructions to monitor HCAs accepting 911 authority. HUD 
State/Area Offices also have residual 102(d) Subsidy Layering Review 
authority and must apply the RSLGs in areas where HCAs do not (non-
acceptance of delegation or revocation) or for cases where HCAs cannot 
(non-LIHTC cases) accept 911 Subsidy Layering Review authority. The 
RSLGs were designed to ensure that participants in affordable 
multifamily housing projects do not receive excessive compensation by 
combining sundry HUD Housing Assistance with assistance from other 
Federal, State, or local agencies.

EFFECTIVE DATE: December 15, 1994.

FOR FURTHER INFORMATION CONTACT:For questions, write to the attention 
of Helen Dunlap, Deputy Assistant Secretary for Multifamily Housing 
Programs, Room 6106, 451 Seventh Street, S.W., Washington, D.C. 20410, 
or call (202) 708-0624; TDD # (202) 708-4594. Please note that these 
phone numbers are not toll free.

SUPPLEMENTARY INFORMATION:

Purposes

    The Revised Subsidy Layering Guidelines (RSLGs) make final the 
actions taken in the Interim Guidelines published on February 25, 1994, 
to (1) replace HUD's previous Subsidy Layering Review procedure for Low 
Income Housing Tax Credit (LIHTC) projects under section 102(d); (2) 
eliminate redundant Subsidy Layering Reviews on LIHTC projects through 
implementation of section 911; and (3) activate Subpart D of 24 CFR 
part 12 for non-LIHTC Subsidy Layering Reviews.

Statutory Basis for Delegation of Authority

    Section 911 of the Housing and Community Development Act of 1992 
(HCDA '92), as amended by section 308 of the ``Multifamily Housing 
Property Disposition Reform Act of 1994,'' provides, as follows:

Subsidy Layering Review

    (a) Certification Of Subsidy Layering Compliance.--The 
requirements of section 102(d) of the Department of Housing and 
Urban Development Act of 1989 may be satisfied in connection with a 
project receiving assistance under a program that is within the 
jurisdiction of the Department of Housing and Urban Development and 
under section 42 of the Internal Revenue Code of 1986 by a 
certification by a housing credit agency to the Secretary, submitted 
in accordance with guidelines established by the Secretary, that the 
combination of assistance within the jurisdiction of the Secretary 
and other government assistance provided in connection with a 
property for which assistance is to be provided within the 
jurisdiction of the Department of Housing and Urban Development and 
under section 42 of the Internal Revenue Code of 1986 shall not be 
greater than is necessary to provide affordable housing.
    (b) In Particular.--The guidelines established pursuant to 
subsection (a) shall--
    (1) require that the amount of equity capital contributed by 
investors to a project partnership is not less than the amount 
generally contributed by investors in current market conditions, as 
determined by the housing credit agency; and
    (2) require that the project costs, including developer fees, 
are within a reasonable range, taking into account project size, 
project characteristics, project location and project risk factors, 
as determined by the housing credit agency.
    (c) Revocation By The Secretary.--If the Secretary determines 
that a housing credit agency has failed to comply with guidelines 
established under subsection (a), the Secretary--
    (1) may inform the housing credit agency that the agency may no 
longer submit certification of subsidy layering compliance under 
this section; and
    (2) shall carry out section 102 (d) of the Department of Housing 
and Urban Development Reform Act of 1989 relating to affected 
projects allocated a low-income housing tax credit pursuant to 
section 42 of the Internal Revenue Code of 1986.
    (d) Applicability.--Section 102(d) of the Department of Housing 
and Urban Development Reform Act of 1989 (42 U.S.C. 3545(d)) shall 
apply only to projects for which application for assistance or 
insurance was filed after the date of enactment of the Housing and 
Urban Development Reform Act.

Applicability

    In all cases where a project receives HUD Housing Assistance (HHA) 
and receives or is expected to receive Other Government Assistance 
(OGA), a section 102(d) or 911 certification is required. That 
certification shall be executed affirmatively without further review, 
unless developers or owners combine HHA and OGA which programmatically 
allow payment for similar project uses within the same Multifamily 
Project. In such cases, Subsidy Layering Reviews are required. HHA 
includes the types of assistance listed in Subpart D, 24 CFR Part 12. 
OGA is broadly defined to include ``any loan, grant, guarantee, 
insurance, payment, rebate, subsidy, credit, tax benefit, or any other 
form of direct or indirect assistance from the Federal Government, a 
State, or a unit of general local government, or any agency or 
instrumentality thereof.'' (See section 102(b)(1) of HRA '89 and 24 CFR 
12.30.) A Subsidy Layering Review will be required even if HHA and OGA 
are not requested and combined at precisely the same time, if the 
available Sources may pay for similar Uses. (There are potential 
overlaps in program assistance provision periods.) Nevertheless, a 
detailed Subsidy Layering Review will not be required if HHA and OGA 
Sources categorically cannot duplicate payment of similar Uses during 
any overlap in periods, e.g., if an HHA program of rental assistance 
pays only for operations and maintenance, while the OGA program pays 
only for capital improvements. (See Comment Responses 5 and 17 below 
for other examples.) Note that there must be the LIHTC form of OGA 
combined with HHA for an HCA to perform a 911 Subsidy Layering Review.
    FHA-Housing applied other Administrative Guidelines (See Federal 
Register, dated April 9, 1991, at 56 FR 14436) and Instructions to HHA 
requests received prior to February 25, 1994. HUD published its Interim 
Guidelines for effect on February 25, 1994, at 59 FR 9332, inviting 
further public comment for their refinement. This notice responds to 
those comments, makes revisions as discussed below, and establishes the 
Final RSLGs.
    HUD reserved until February 25, 1994 implementation of its 
regulations at 24 CFR Part 12, Subpart D (as well as implementation of 
conforming changes made to HUD's program regulations--see Federal 
Register, January 16, 1992, 57 FR 1942) for Subsidy Layering Review of 
Non-LIHTC projects under section 102(d) of HRA '89. These regulations 
are now fully effective for all forms of OGA combined with HHA. The 
Final RSLGs and HUD's Implementing Instructions supersede HUD's 
previously published notices, memoranda, Administrative Guidelines and 
February 25, 1994 Interim Guidelines.
    HCAs may communicate their acceptance of section 911 Subsidy 
Layering Review authority to HUD State/Area Offices for all projects 
involving LIHTCs. HCAs may also subsequently re-delegate Subsidy 
Layering Review authority back to the HUD State/Area Office through 
written notice. HUD MFIOs will perform section 102(d) Subsidy Layering 
Reviews for all projects combining non-LIHTC forms of OGA with HHA, and 
monitor all 911 Subsidy Layering Reviews. HUD State/Area Offices will 
also perform 102(d) Subsidy Layering Reviews for all LIHTC projects 
located in states or areas where the HCA having allocation or 
suballocation authority has declined to accept section 911 Subsidy 
Layering Review authority, has re-delegated the authority back to HUD, 
or has had its authority revoked by HUD for non-compliance with the 
RSLGs. If monitoring reviews of an HCA's files are deemed necessary, 
HCAs must allow designated HUD or Office of Inspector General personnel 
access to all section 911 Subsidy Layering Review records. HCAs may 
appeal HUD State/Area Office determinations to revoke section 911 
Subsidy Layering Review authority directly to Headquarters.
    The RSLGs deliberately emphasize HUD mortgage insurance and HCA 
LIHTC assistance, because these forms of HHA and OGA provide 
comprehensive debt and equity financing for the new construction and 
rehabilitation of multifamily units. Please note that acquisition and 
rehabilitation LIHTCs can be combined with non-mortgage insurance HHA 
without necessarily triggering 102(d) or 911 Subsidy Layering Reviews 
(See Comment Response 17 below and HUD State/Area Office Implementing 
Instructions for further clarification).
    When a 102(d) or 911 Subsidy Layering Review is triggered, 
additional application exhibits are required (See HUD State/Area Office 
Instructions). If the Sponsor has previously submitted its Form HUD-
2880, ``Applicant/Recipient Disclosure/Update Form,'' to HUD with its 
mortgage insurance application and indicated no intention to apply for 
or receive LIHTCs, and the application has been processed through to a 
commitment as of the date of RSLG publication, and the Sponsor now 
submits Form HUD-2880 revisions indicating application for or receipt 
of LIHTCs, then a ``significant deviation'' from the Form HUD-92013, 
``Application for Multifamily Housing Project,'' is proposed, and new 
processing fees are required. For cases reviewed under HUD's previous 
guidelines which have not reached final endorsement, Sponsors may 
accept the results of that previous Subsidy Layering Review or resubmit 
the case to the applicable HUD State/Area Office or HCA for Subsidy 
Layering Review under the RSLGs.
    The Office of Public and Indian Housing (PIH) will publish a 
separate set of guidelines which will apply to Section 8 Moderate 
Rehabilitation projects developed under 24 CFR Part 882, Subparts D and 
E, and project based Rental Certificate projects developed under part 
882, Subpart G. Until PIH's guidelines are published, Subsidy Layering 
Reviews will continue to be conducted at Headquarters, with input from 
PIH Field Offices. In performing these reviews, PIH will rely on the 
Interim Administrative Guidelines published February 25, 1994.
    The Office of Special Needs Assistance Programs (SNAPS), of the 
Office of Community Planning and Development, will issue its own set of 
guidelines, tailored to its individual programs. Until further guidance 
is provided to CPD Field Offices and SNAPS grantees, Subsidy Layering 
Reviews for Section 8 Moderate Rehabilitation SRO projects and SRO 
projects under the Shelter Plus Care Program will continue to be 
conducted at Headquarters. For these reviews, SNAPS will generally rely 
on the Interim Administrative Guidelines published February 25, 1994. 
Please contact Maggie H. Taylor, Acting Director, (202) 708-4300 for 
additional information.

Responses to Public Comments

    The Department published Interim Guidelines on February 25, 1994 
(59 FR 9332) which: initially implemented section 911 of HCDA '92; 
revised its implementation of section 102(d) of HRA '89; and invited 
further public comment. Comments were received from 16 sources 
including 6 national trade organizations or their legal 
representatives, 5 state or city housing credit agencies (HCAs), 2 law 
firms, 1 mortgage banker, 1 syndicator, and 1 housing development 
consultant. Issues raised and HUD's responses are organized as follows:

------------------------------------------------------------------------
  Comment                                                               
    No.                            Issue reference                      
------------------------------------------------------------------------
1.........  Semantics: New Title and Organization.                      
2.........  HUD Handbook References and Non-LIHTC Subsidy Layering      
             Reviews.                                                   
3.........  Pipeline Cases and Subsidy Layering Review Timetables.      
4.........  Which HCAs May Accept 911 Subsidy Layering Review Authority.
5.........  What Types of OGA Trigger a Subsidy Layering Review.        
6.........  ``Back-End'' Subsidy Layering Reviews and Cost              
             Certification.                                             
7.........  Communication between HUD State/Area Offices and HCAs.      
8.........  Monitoring Details.                                         
9.........  HCA Fees if 911 Subsidy Layering Review Authority Accepted. 
10........  Blanket Approvals to Exceed Safe Harbors.                   
11........  Revisions to Standards 1 through 3.                         
12........  Absolute Ceilings for Standards 1 through 3.                
13........  Revisions to Standard 4.                                    
14........  Standard 4 Typical Ownership Requirements.                  
15........  Acceptable Source and Use Statement Formats.                
16........  ``Applicability Exception'' Category.                       
17........  Additional RSLG Exclusions.                                 
18........  Additional RSLG Inclusions.                                 
19........  Operating Deficit Reserves.                                 
20........  Resident Initiative Fund Reserves.                          
21........  Compounding and Discounting of Installments.                
------------------------------------------------------------------------

    1. Whether the title, terminology, and organization should be 
revised?
    Comment: Three commenters noted terminology and organization 
problems in the Interim Guidelines, and one pointed out problems with 
the title.
    Response: The Department has made several semantic and 
organizational revisions to the RSLGs. Note that procedural 
descriptions, HUD forms, and Source and Use (S & U) Formats have been 
moved from the RSLGs to the HUD State/Area Office Instructions. 
Regarding the title, HUD accidentally retained the title associated 
with the previous effective Guidelines which were applicable to only 
LIHTCs combined with HUD and Other Government Assistance. The title is 
now amended to ``Administrative Guidelines: Limitations on Combining 
HUD and Other Government Assistance,'' and may be colloquially referred 
to as the Revised Subsidy Layering Guidelines (RSLGs).
    2. Whether HCA standards should be exclusively referenced in the 
RSLGs, rather than as alternatives to HUD Handbook standards; and 
whether the RSLGs should be restructured to more clearly address how 
HUD will perform Subsidy Layering Reviews for non-LIHTC projects?
    Comment: Three commenters suggested that references to HUD Handbook 
rules not well-known by all market participants are confusing and 
should be either expanded upon, or simply replaced by an HCA's program 
administration standards. One suggested that not enough detail is 
provided for projects utilizing non-LIHTC Other Government Assistance 
(OGA).
    Response: Not all HCAs may accept 911 Subsidy Layering Review 
authority, and every Subsidy Layering Review case may not involve 
LIHTCs. The RSLGs must provide standards applicable to all cases. Also, 
reference to HUD program areas and rules is inevitable since HUD 
Housing Assistance (HHA) must be involved to trigger a Subsidy Layering 
Review. If an HCA accepts 911 Subsidy Layering Review authority, HUD 
State/Area Office communication of HHA program requirements to all 
parties involved in the transaction is essential. FHA Housing's 
Implementing Instructions, which have been revised in accordance with 
RSLG changes, explain in greater detail how HUD State/Area Offices will 
perform 102(d) Subsidy Layering Reviews for non-LIHTC assisted 
projects.
    3. What rules apply to pipeline cases; and how much time will 
Subsidy Layering Reviews take to complete?
    Comment: Five commenters raised related issues. Four requested 
clarification regarding the effect of the ``Effective Date'' of 
February 25, 1994 to cases pending, or at least some more discussion of 
``transition rules''. Two recommend that the RSLGs bind HUD and HCAs to 
specific time requirements for 102(d) or 911 Subsidy Layering Reviews.
    Response: HCAs have been eligible to accept 911 Subsidy Layering 
Review authority since February 25; but since few have, HUD is still 
performing section 102(d) Subsidy Layering Reviews in most states 
through a collaboration between Headquarters and HUD State/Area 
Offices. After HUD officially issues its Implementing Instructions and 
conducts some orientation, HUD State/Area Offices will efficiently 
perform 102(d) Subsidy Layering Reviews at the local level, and the 
process may be greatly improved for LIHTC projects where cooperating 
HCAs accept 911 Subsidy Layering Review authority. Sponsors with cases 
reviewed under previous Guidelines and Standards have the option of 
accepting HUD or an HCA's previous determinations, or requesting a new 
Subsidy Layering Review under the RSLGs. Regarding the establishment of 
fixed time frames for 911 or 102(d) Subsidy Layering Reviews, HUD will 
not bind itself or HCAs to definite time periods. If Sponsors fully 
comply with the new RSLG and HUD State/Area Office Instruction 
requirements regarding additional application exhibits, then additional 
application processing time triggered by the Subsidy Layering Review 
will be kept to a minimum, e.g., in mortgage insurance cases, the 
Sponsor's submission and updating of Forms HUD-2880, HUD-92013 and 
exhibits, Financing Plan, Syndication and Partnership Agreements all 
affect the amount of time required to start construction or 
rehabilitation.
    4. Which Allocating and Sub-Allocating HCAs may accept section 911 
Subsidy Layering Review authority?
    Comment: Four commenters raised related issues. One commenter noted 
that the RSLGs do not speak specifically to whether HCAs in New York, 
Minnesota, and Illinois may independently accept section 911 Subsidy 
Layering Review authority, and avoid any overlap in authority. One 
stated that the RSLGs do not cover which HCA has Subsidy Layering 
Review authority where 9% credits are awarded by one HCA, but another 
HCA awards tax-exempt financing and 4% LIHTCs. Another commenter stated 
that the RSLGs should clarify that LIHTCs must be involved for an HCA 
to accept section 911 Subsidy Layering Review authority.
    Response: The words ``or suballocation authority'' have been added 
to the RSLG text for clarification. The HUD State/Area Office 
Implementing Instructions describe what any interested HCA should do to 
accept 911 Subsidy Layering Review authority from HUD. Regardless of 
how state and local HCAs share allocating responsibilities, any HCA 
which has the authority to allocate LIHTCs and issue Form IRS-8609 may 
accept 911 Subsidy Layering Review authority. Such acceptance should be 
conveyed to all state or local HUD State/Area Offices which are within 
the HCA's geographical authority. It should also be noted that an HCA 
cannot provide 9% LIHTCs to a project already receiving tax-exempt bond 
financing, with or without 4% LIHTCs, so the hypothetical overlap in 
authority suggested cannot occur. Clearly, LIHTCs must be involved for 
an HCA to perform a 911 Subsidy Layering Review.
    5. Whether the inclusion of Historic Tax Credits on the list of 
examples of Other Government Assistance (OGA) should be eliminated or 
modified?
    Comment: One commenter noted that HCAs do not award Historic Tax 
Credits, and that this reference should be stricken or amended.
    Response: Historic Tax Credits are an example of OGA which HUD 
under 102(d) and an HCA under 911 must consider. The RSLGs now 
reference the broad definition of OGA included in the statute and 
regulations. This means that HCAs should use a slightly higher Market 
Rate (Standard 4) for projects receiving both Historic Tax Credits and 
LIHTCs, award only the amount of Gap Financing necessary, and calculate 
LIHTC Allocations accordingly. HUD in its residual 102(d) Subsidy 
Layering Review responsibilities (where there is no participating HCA) 
will observe the same differential HCAs deem appropriate in such 
combination cases when reviewing net amounts obtainable. If Historic 
Tax Credits are not combined with LIHTCs, Sponsors must simply 
demonstrate to the HUD State/Area Office on its Form HUD-2880 that no 
excess Sources are available for the same or similar Project Uses to 
satisfy the 102(d) Subsidy Layering Review.
    6. Whether an HCA must perform a ``back-end'' Subsidy Layering 
Review at Placement in Service?
    Comment: Two commenters raise this issue in the context of year-end 
cost certification submissions to HUD, and meeting the issuance date 
for Form IRS-8609 following the year of Placement in Service.
    Response: HUD has eliminated the ``back-end'' 911 Placement in 
Service or 102(d) Cost Certification Subsidy Layering Reviews except 
where new types of HHA or OGA are subsequently added, or construction 
or rehabilitation costs are reduced. (See Comment 13 below.)
    7. Whether communications between HUD State/Area Offices and HCAs 
can be improved in 102(d) and 911 Subsidy Layering Reviews?
    Comment: One commenter requested that HUD provide mortgage 
insurance processing results in cases involving LIHTCs to the 
applicable HCA, and encouraged HUD to work with HCAs to ``do everything 
possible and practical to resolve its concerns before canceling a 
commitment.''
    Response: HUD State/Area Offices and HCAs must communicate with 
each other as contemplated in the HUD State/Area Office Instructions, 
sharing all relevant application processing results. The Department 
believes it has made vast improvements in the sequence and delivery of 
``joint'' assistance application processing. The RSLGs reflect 
solutions developed through consultation between HUD and the National 
Council of State Housing Agencies, its underwriting partner in 911 
Subsidy Layering Reviews.
    8. Whether HUD should describe its monitoring of HCAs in the RSLGs?
    Comment: One commenter requested that HUD's monitoring procedure be 
described in the RSLGs.
    Response: The Department intends to issue its Implementing 
Instructions soon so that HUD State/Area Offices and HCAs are fully 
advised of new 911 and 102(d) Subsidy Layering Review responsibilities.
    9. Whether the RSLGs must address HCA Fees, and whether such Fees 
may be excluded from the definition of Syndication Expenses for the 
purposes of Standard 3?
    Comment: Three commenters request clarification on HCA Fees. One 
requests that the RSLGs contain a reasonable fee standard. Two others 
suggest that such fees not be included as a Syndication Expense subject 
to Standard 3 limitations.
    Response: The Department is not responsible for the setting or 
monitoring of an HCA's fee schedule for LIHTC application reviews. 
Further, section 911 does not specifically authorize HUD to define what 
fee is reasonable if an HCA accepts the Department's delegated Subsidy 
Layering Review authority. The HUD-established RSLGs, and an HCA's 
responsibilities for satisfying HUD's requirements, are clearly 
distinguishable from an HCA's previous layering review activities 
because of varying statutory and regulatory standards. Whether such 
distinctions affect past fee schedules is a matter for affected HCAs to 
determine. The Department also agrees that whatever fees HCAs determine 
to be reasonable should not be categorized as ``Syndication Expenses'' 
subject to Standard 3 limitations, e.g., HCA Fees are now included on 
the Sources and Uses (S & U) Format as a ``Use Payable from Non-
Mortgage Sources''.
    10. Whether an HCA must seek Governing Board or Approving Authority 
approvals on a case-by-case basis, or, may instead obtain blanket 
approval through a Board of Directors' resolution to raise Safe Harbor 
standards for all projects exhibiting defined characteristics, or, by 
including in its Qualified Allocation Plan provisions regarding 
applicable Safe Harbor standards according to project type and risk 
correlations?
    Comment: Eight commenters noticed that the Interim Guidelines 
required case-by-case approvals, a procedure believed to cause delay 
without any corresponding gain.
    Response: The Department agrees and has revised the RSLGs 
accordingly. HCAs may increase Safe Harbor limitations by either 
including higher limits in their Qualified Allocation Plans, or, by 
obtaining a Board of Directors' resolution raising the limits for 
various types of projects and associated project risks. Pursuant to 
Notes which follow the Standards, the HCA or Board must specifically 
reference in the Qualified Allocation Plan or Resolution what special 
factors justify exceeding base published Safe Harbor limits in such 
cases, effectively establishing higher Safe Harbors for all such 
projects. Ceiling amounts may not be exceeded by Qualified Allocation 
Plan provision or Board Resolution, but may be exceeded in a limited 
number of ``Applicability Exception'' cases (see Comments 12 and 16). 
Where applicable, each section 911 certification and supporting Sources 
and Uses (S & U) Statement which an HCA submits to the affected HUD 
State/Area Office must also include a photocopy of the Qualified 
Allocation Plan provision or Board Resolution supporting the 
``blanket'' application Safe Harbor standard for the type of project 
involved. So long as adequate opportunity for public review and comment 
on the increasing of the Safe Harbor standards for well-defined 
projects is provided by HCAs, and all those who might support or oppose 
such revisions are heard in the process, HCAs may take a blanket 
approach to revising Safe Harbors through these or functionally 
equivalent methods.
    11. Relating to Standards 1 through 3: whether proposed Safe Harbor 
Standards should be increased; whether HUD should exceed Safe Harbors 
in 102(d) Subsidy Layering Reviews; whether the base for Builder's 
Profit and Developer's Fees should be revised; whether ``lump sum'' 
contracts may be used pursuant to Standard 1; and whether HCAs must 
elect between using HUD's processing fees or Alternatively ``funding'' 
fees for each case, or make one election for all 911 Subsidy Layering 
Reviews.
    Comment: Nine commenters expressed disagreement over the adequacy 
of Safe Harbor standards HUD established. Three of these recommend that 
HUD State/Area Offices should also have the option to exceed Safe 
Harbors. Two object to any Standard 3 limitations on Public Offerings 
and seek clarification regarding ``Regulation D'' Private Offerings. 
Six commenters stated that the base for estimating Standard 2 
Developer's Fees in rehabilitation cases should not be HUD's definition 
of Total Development Costs, but rather, should include the acquisition 
cost of the property for rehabilitation proposals (HUD includes ``as 
is'' value of improvements and land in mortgage insurance processing 
replacement cost, but not in the base for fee calculation). Four noted 
in particular that HUD's Property Disposition sales, ``bargain sale'' 
rehab, and Section 223 (f) proposals will suffer as a result of not 
including acquisition cost in the base for Developer's Fees. Four 
recommend the Alternative Standard 1 Builder's Profit base should be 
defined as construction costs, not Total Development Costs. Two request 
clarification on whether HCAs must ``elect'' to apply Alternative 
standards on a case-by-case or blanket basis. Two stated that 
establishing numerical ``builder's profit'' standards discourages the 
use of ``lump sum'' contracts and unnecessarily promotes exclusive use 
of ``cost-plus'' contracts. One commenter requested additional 
discussion of how Builder's and Developer's Overhead is treated in HUD 
mortgage insurance processing.
    Response: Safe Harbors can be Adjusted for 911 Subsidy Layering 
Reviews--The Department's response to Comment 10 makes it unnecessary 
to address uniform theoretical standards, allowing for more practical 
local solutions. HCAs may increase Safe Harbor percentages for projects 
exhibiting specified risk factors in accordance with market data in 
their area for 911 Subsidy Layering Reviews, and must document their 
actions through acceptable public accountability measures.
    HUD State/Area Offices limited to Safe Harbor processing 
limitations in 102(d)--Although the National Council of State Housing 
Agencies issued its ``Standards for State Tax Credit Administration,'' 
members are not bound to uniformly accept and apply them. State and 
local HCAs apply varying Developer Fee allowances to induce strong and 
dependable market participation, producing a large range in the fee 
schedule ceilings adopted. HUD's RSLGs are deliberately designed to 
respect the autonomy of our partners in this endeavor, and reaffirm the 
Department's confidence in an HCA's ability to measure local market 
conditions and needs. HUD is relying on the HCAs' experience and, 
therefore, recognizes and accommodates potentially higher fees so long 
as HCAs specifically reference risk or market factors which justify 
higher compensation in accordance with market data. Also, HCAs have 
public ``sunshine'' processes in place to ensure that the public good 
is being served in the establishment of appropriate fee schedules for 
builders and developers. HUD has no such procedure in place, and will 
not create another bureaucracy to serve this function. HUD will 
generally limit itself to Safe Harbor allowances in 102(d) Subsidy 
Layering Reviews, e.g., only SPRA or BSPRA for Section 221(d) proposals 
reviewed under Standard 2 Developer's Fee.
    Standard 1 Revisions: Base for Calculating Builder's Profit is now 
Construction Cost; ``Lump Sum'' and ``Cost Plus'' Construction 
Contracts are both Acceptable--HUD's typical processing assumes 
construction ``hard costs'' as the base for its non-identity of 
interest builders profit, and the ``soft costs'' as a base for the 
Sponsor's Profit and Risk Allowance (SPRA)/developer's fee. In 
contrast, identity-of-interest builders profit and developer's fees are 
intermingled in the BSPRA calculation, which is estimated on a much 
larger ``hard and soft cost'' of the improvements base, i.e., ``Total 
Development Cost''. Each of these profit calculations is separate from 
overhead. Builders overhead, general requirements, and developer's 
overhead (HUD terms the latter ``organizational expenses'') are 
estimated and included in the Total Development Cost as separate items, 
the first two as hard costs, and the latter as a soft cost. HUD 
included smaller percentages (4% and 6%) of the larger Total 
Development Cost base in its Interim Guidelines in an effort to 
accommodate potential variance with HCAs in Standard 1 ``Alternative'' 
allowances.
    But the Department has revised Standard 1's structure and 
allowances because of the confusion created. BSPRA (Builders and 
Sponsors Profit and Risk Allowance) will be retained as one acceptable 
Safe Harbor standard for identity-of-interest developer/builders under 
Standards 1 and 2, and SPRA and Builder's Profit for non-identity of 
interest developer/builders.
    Lump sum contracts are permissible for non-identity-of-interest 
developers and builders under 221 (d)(4), but the Builder must break 
out its profit and overhead for HUD under 102, or the HCA under 911, on 
Form FHA-2328, ``Contractor's and/or Mortgagor's Cost Breakdown'' in 
accordance with Standard 1 limitations.
    For identity-of-interest 221 cases, HCAs performing 911 Subsidy 
Layering Reviews may apply the HUD processing numbers to satisfy 
Standard 1, or, substitute as an Alternative up to 6% of construction 
costs for Builder's Profit, 2% for Builder's Overhead, and 6% for 
General Requirements, i.e., the ``Standards for State Tax Credit 
Administration'' must be applied (except for ``high cost'' areas, where 
the HUD State/Area Office processing numbers may be used to comply with 
Safe Harbor). Standard 1's previous Safe Harbor amounts are now 
effectively Ceiling amounts and have been retitled.
    Standard 2 Revisions: Base for Calculating Developers Fee & 
Alternative Calculation of Fee--The Department initially required HCAs 
to adhere to its definition of the Total Development Cost base for 
Standard 2 calculation, and separated out appraised values for projects 
for at least two sound reasons: (1) HCAs benefit from HUD's appraisals 
of land or land and improvements and have some basis for evaluating the 
economic reasonableness of a Sponsor's proposed acquisition and new 
construction or rehabilitation (and can compare that to competing 
Sponsors and their proposals for the limited LIHTC resource); and (2) 
HUD State/Area Offices benefit from the selection of its definition of 
estimated replacement cost for monitoring purposes. These two goals can 
be achieved without requiring HCAs to uniformly define the Total 
Development Cost base. HCAs may look to Line G73 of Form HUD-92264 for 
an independent appraisal opinion, and at the same time, Alternatively 
fund by applying percentages to its definition of Total Development 
Cost, reflecting state and local LIHTC-program requirements and 
practices. However, acquisition cost in excess of value may not 
generally be considered in the base for Developers Fees. An HCA 
indicates its election regarding the application of HUD's processing 
results versus Alternative funding by selecting between the two numbers 
on the Mortgageable Use portion of the S & U Format, and may do so on a 
case-by-case basis. HUD will generally use BSPRA/SPRA allowances and 
its Total Development Cost definition in performing 102(d) Subsidy 
Layering Reviews.
    Please note that HUD substitutes ``Sales Price'' for ``Property 
Value'' in Property Disposition (PD) cases, and HUD Approved Debt as a 
Use in cases where new HHA and OGA will be provided to projects already 
receiving some form of HHA. HUD will generally not include these 
amounts in the base for fee calculation in 102(d) Subsidy Layering 
Reviews, and HCAs must determine what acquisition costs (up to a 
maximum of price or debt) may be included in the base in 911 Subsidy 
Layering Reviews if fees are Alternatively funded.
    Standard 3 Revisions: The Department is raising Private Offering 
RSLG Standard 3 limitations to a Safe Harbor of 10% and a Ceiling of 
15%. Public Offering levels will be retained as proposed. Although two 
commenters pointed out that the latter transactions are otherwise 
regulated by the Securities and Exchange Commission and the North 
American Securities Administrators Association, the Department believes 
that sections 102(d) and 911 require efficiency, accountability, and 
cost containment in the guidelines established for all transactions. 
Also, a new enforcement mechanism has been added, as described in Notes 
following the Standards. Regarding Private ``Regulation D'' Offerings 
marketed to individuals, the RSLGs now clarify that these are subject 
to the same standards as for Public Offerings: 15% Safe Harbor and 24% 
Ceiling.
    12. Whether Ceiling amounts in Standards 1 through 3 should be 
raised, or, HCAs should be permitted to establish Ceilings through 
Qualified Allocation Plans or Governing Board or Approving Authority 
Resolutions rather than HUD through its RSLGs?
    Comment: Five commenters raised related issues. Two commenters 
agreed with HUD's Ceiling percentages, but two others disagreed. One 
commenter stated, ``HCAs ought to be able to secure governing body 
approval of Ceiling standards as a part of their allocation plans and 
reserve project-specific governing body reviews to projects with 
special circumstances (such as those elaborated in the Note on 
Standards 1 and 2 on page 9336 of the SLGs as published in the February 
25, 1994 Federal Register).''
    Response: The Department believes that absolute ``Ceilings'' are 
within its authority and responsibility to establish in the RSLGs. It 
has established these in an objective manner. There are a limited 
number of ``Applicability Exceptions'' for the truly extraordinary 
circumstances referred to which may arise and require some flexibility 
from imposition of the Ceilings; but generally the Department's own 
experience, as reinforced by HCA data regarding these standards, 
strongly supports the position that uniform maximums must be 
established and maintained. The revisions made pursuant to our 
responses to Comments 10 and 11 also ameliorate the expressed concern. 
The Department is maintaining absolute Ceilings in the RSLGs except for 
in Applicability Exception cases (Comment 16), and will consider any 
hardships caused in the future in determining whether revision is 
necessary to encourage greater market interest and participation.
    13. Whether Standard 4 should be revised to clarify its purpose and 
application?
    Comment: Ten commenters raised this concern. Eight commenters agree 
with Standard 4 in concept but request clarification and modification. 
Six of these same commenters offered suggestions for improving the 
standard. Observations and suggestions include the following: Clarify 
what effect reaching the ``threshold'' has; clarify that such cases are 
still subject to the HCA's Qualified Allocation Plan standards; base 
the numerical standard on only 99% ownership; remove all references to 
a specific number for the upper level in Standard 4, but retain the 
concept; tie the upper Standard 4 numerical standard to an established 
index so adjustments take place automatically; allow the FHA 
Commissioner to frequently adjust the standard, e.g., through monthly 
Notice to HCAs and HUD State/Area Offices, rather than through 
publication; retain a specific numerical Standard 4 upper level, but 
revise the RSLGs to describe what criteria HUD will use to adjust it.
    Response: The Department is revising Standard 4 as follows:

--The numerical concept of ``thresholds'' has been eliminated from 
Standard 4, and the standard has been modified to be more consistent 
with section (b) (1) of 911, HCDA '92 in that HUD recognizes that 
maximum equity contributions may be obtained by reliance on ``current 
market conditions, as determined by the HCA'';
--At its LIHTC Reservation stage, the HCA will rely on current market 
conditions; previous syndication data; and proposed syndicator's 
offers, Syndication Agreements, or Partnership Agreements (if available 
at the time of Reservation processing) in selecting the appropriate 
Market Rate for an individual Project. The HCA will simply capitalize 
(divide) the Gap Filler equity reflected on the applicable S & U Format 
by its selected Market Rate to estimate the maximum LIHTC Allocation 
amount (if eligible project cost calculations or other criteria produce 
a lower Allocation, the HCA will use it);
--An HCA may complete its 911 Subsidy Layering Review responsibilities 
by forwarding a balanced S & U Format and Certification to HUD prior to 
formal HUD assistance approval, e.g., Initial Endorsement in mortgage 
insurance cases. No ``back-end'' Subsidy Layering Review is required 
unless: (1) A new Source type (or a mortgage increase) not previously 
considered in the front-end Subsidy Layering Review is subsequently 
requested or obtained, or, (2) certified Project Uses (costs) decrease 
by more than 2% from estimates used in the front-end Subsidy Layering 
Review.
--Standard 4 and the section 911 certification (Attached) have been 
revised to clarify that a project which reaches the Market Rate-
estimated Gap Filler amount is not exempt from the Guidelines, nor 
necessarily from ``further review.'' Rather, it should be noted that 
HUD or 911 HCAs always perform a Subsidy Layering Review if new HHA and 
LIHTCs are requested, and HCAs always apply at least Qualified 
Allocation Plan limitations to LIHTC projects;
--The lower level of Standard 4 has also been eliminated. HUD 
anticipates that so long as LIHTC-application requests significantly 
outnumber overall allocation resources, competition should keep Market 
Rates at reasonable levels;
--HUD or HCAs will apply adjusted Market Rate assumptions to Sponsors 
retaining greater than 5% ownership interests. The effect of 
capitalizing the necessary Gap Filler by such ``above'' Market Rates 
will be to reduce the LIHTC Allocation in 911 Subsidy Layering Reviews 
(See Comment 14 below). HUD strongly discourages Sponsors from changing 
syndication/ ownership assumptions after Initial Endorsement. Sponsors 
must notify HUD through Form HUD-2880 of any change in ownership 
retention intentions, and after Initial Endorsement, HUD must approve 
such changes. Such revisions will likely cause serious delays, i.e., 
HUD Transfer of Physical Asset approval requirements pertain, which 
should be avoided once construction has commenced. (Sponsors should 
determine percentage ownership and related Gap Filler funding issues 
prior to construction closing, and stick to the original Financing Plan 
submitted to HUD, if possible.)

    14. Whether the Sponsor's required 1-5% minimum ownership retention 
assumption when an HCA estimates Net Syndication Proceeds should be 
eliminated or modified?
    Comment: One commenter states, ``This requirement is entirely 
unfair and will deny access to HUD programs to those tax credit project 
Sponsors who wish to receive compensation in the form of tax credits.'' 
Another remarks, ``Please explain why HCAs should make this assumption 
in cases where there is evidence otherwise (where the ownership 
interest exceeds 5%).'' Yet another suggests, ``A separate, higher 
standard for net equity contribution (as compared to Net Syndication 
Proceeds when equity comes from outside sources) should be inserted in 
the guidelines . . . when the developer retains more than a 5 percent 
ownership interest in the tax credits. Such a standard should be at 
least 15 percent higher than the standard for net syndication 
proceeds.''
    Response: In 911 Subsidy Layering Reviews, HCAs must make Market 
Rate adjustments when calculating maximum LIHTC Allocations for 
projects not completely syndicated. Also, the value of a ``given'' 
LIHTC Reservation amount must be more accurately assessed by HUD State/
Area Offices in 102(d) Subsidy Layering Reviews where projects are not 
fully syndicated. These requirements prevent owners and developers who 
retain and use larger percentages of LIHTCs from reaping an unintended 
windfall of benefits not available to the developer who must seek 
limited partner investment to fill equity gaps. For example, because 
``syndication expenses'' are foregone in owner-held LIHTC projects, the 
value of the interest retained is worth more than the Market Rate for 
sale of the LIHTC project per allocation dollar. The value associated 
with any cash flow, depreciation, and gain or loss on disposition which 
is retained must also be considered. HUD or HCAs, when performing 
Subsidy Layering Reviews under these RSLGs, must therefore recognize 
the full value of LIHTC projects which are not fully syndicated. The 
Department is retaining its paradigm for the Standard 4 Market Rate 
calculation: syndication of 95%-99% of the project, with adjustments 
required for projects with higher than typical percentage ownership 
retention. (See Standard 4 for effects, and the Glossary under 
``ownership''.)
    15. Whether additional Source and Use formats may be developed?
    Comment: One commenter requested that the Department allow HCAs to 
develop formats for non-mortgage insurance cases since the Interim 
Guidelines Sources and Uses Statements did not cover every possible 
combination of HHA and OGA.
    Response: See HUD State/Area Office Instruction supplements. Risk-
Sharing and Reinsurance Agencies may develop appropriate variations for 
risk-sharing and reinsurance cases.
    16. Whether the ``Applicability Exceptions'' category appearing 
under ``Guideline Standards'' should be retained as proposed, modified, 
extended to HUD 102(d) Subsidy Layering Reviews, or eliminated 
altogether?
    Comment: Five commenters expressed diverging opinions on the 
``Applicability Exceptions'' category. Three agree with the concept, 
and one of these suggests HUD State/Area Offices performing 102(d) 
Subsidy Layering Reviews should also consider granting Exceptions. Two 
others question the category because it may produce ``inequitable'' 
treatment of like circumstances. One commenter urges revision of the 
criteria HCAs apply in granting Applicability Exceptions.
    Response: HUD believes the Applicability Exceptions category is 
necessary and retains it in the RSLGs. If HUD State/Area Office 
monitoring of HCAs reveals abuse, then HUD may revoke the delegation of 
the offending HCA (HCAs must specify as justification for granting an 
Exception the extraordinary circumstance involved). If HUD finds that 
several HCAs abuse this category, which was added for the worthwhile 
purpose of adding flexibility for extraordinary development 
circumstances, then HUD will prospectively eliminate the category 
altogether without further public notice.
    The RSLG criteria have been revised to clarify that ``extraordinary 
circumstances'' must be involved before an HCA grants an Exception. 
Examples are provided describing the types of circumstances which might 
warrant compensation for added building, development, and investment 
risks. HCAs may not act arbitrarily in awarding Applicability Exception 
category status to a project. HCAs should exercise due diligence in 
identifying extraordinary circumstances justifying departure from one 
or more standards, and must include copies of approved Exceptions to 
the HUD State/Area Office. To the extent that an HCA runs out of its 
allocated Applicability Exceptions, the result may be that similar 
cases are not treated similarly. Sponsors with projects which are 
similar to Applicability Exception projects, but who are limited by the 
standards because the HCA did not have enough Exceptions to provide 
them to all like Sponsors similarly situated, do not have grounds for 
complaint against an HCA, its Governing Board, or Approving Authority. 
HUD Headquarters and State/Area Offices will not hear individual 
Sponsors' appeals relating to not receiving an HCA's Exceptional status 
and treatment. Generally, HUD will monitor an HCA's performance in its 
totality rather than on the basis of isolated incidents. Consistent 
with our reasoning in Comment 10 Response above regarding exceeding 
Safe Harbor standards, HUD State/Area Offices will generally not 
consider granting Applicability Exceptions to individual project owners 
pursuant to section 102(d) Subsidy Layering Reviews.
    17. Whether there should be additional exclusions to the scope of 
the RSLGs?
    Comment: Six commenters recommend additional exclusions to the 
RSLGs or raise applicability issues. One commenter said that the 
Department should make clear that Section 223(a)(7) refinance and 202 
elderly housing programs are not HHA which may trigger Subsidy Layering 
Reviews if combined with OGA. The same commenter requests HUD to join 
it in ``asking Congress for a statutory change which would subject only 
those projects combining HUD subsidies with Low Income Housing Tax 
Credits to a subsidy layering review.'' One commenter stated, ``HUD's 
subsidy layering requirements should not interfere with an HFA's 
statutory authority to use its own underwriting criteria for loans 
insured under the risk-sharing program. Please clarify in the final 
guidelines that an HFA's developer and builder fee limits are the 
limits that should be utilized for the subsidy layering review of 
projects financed under the risk-sharing program.'' One commenter 
requests that the Department explicitly exempt from Subsidy Layering 
Reviews projects which receive no greater than 25% project-based 
Section 8 assistance. One commenter requests that HUD clarify that 
routine annual Section 8 increases are not considered HHA and do not 
trigger a Subsidy Layering Review. One commenter requests that the 
Department exclude application of the Standards to multifamily projects 
with less than 24 units. One commenter requests that HUD clarify how 
projects which received LIHTCs 2-8 years ago will be treated if they 
make application for Section 223(f) financing 3 years after 
construction, i.e., are these applicants subject to a Subsidy Layering 
Review, and if so, who will do it?
    Response: HUD notes that Section 223(a)(7) refinances involving no 
OGA do not require a Subsidy Layering Review. Please note also that new 
HHA under 223(a)(7) may not exceed the original mortgage insurance 
assistance provided, and only modest repairs are allowed under this 
program. But if the repairs are substantial and OGA such as LIHTC 
proceeds have been or will be obtained, then the proposal is subject to 
a Subsidy Layering Review. With respect to Section 202 proposals, the 
Department notes that these are on the lists of covered programs at 24 
CFR 12.10 (8) and 12.30(8),(9); 12.50(7),(8). HUD will continue to 
subject such HHA combined with OGA to 102(d) Subsidy Layering Reviews.
    This is also the Department's position regarding excluding all non-
LIHTC OGA from subsidy layering requirements. The Department notes that 
Congress's mandate to HUD in the HRA '89 made statutory a practice FHA-
Housing has followed for approximately a decade for combinations of HHA 
with OGA, i.e., grants or loans for mortgageable or direct loan uses 
caused reductions in HHA. While it is true that the Department did not 
develop a similar device for controlling excess subsidy in LIHTC cases 
between 1986 and 1989, FHA-Housing has essentially and consistently 
performed Subsidy Layering Reviews on other OGA cases for at least 10 
years, and would not recommend statutory revisions at this time to 
well-established underwriting, direct loan, and capital advance 
processing practices.
    The Department does not agree that required Risk-Sharing Subsidy 
Layering Reviews should be performed pursuant to a participating HFA's 
Builder's Profit and Developer's Fee limitations, rather than Standards 
1 and 2. HCAs must apply the RSLGs and Standards 1 and 2 to Risk-
Sharing cases. (However, Risk-Sharer's may define the Total Development 
Cost base as discussed above in Comment 11, e.g., for rehabilitation 
proposals, acquisition costs not in excess of value may be included.) A 
risk-sharing HFA, if it is also a 911 Subsidy Layering Review HCA, may 
make appropriate alterations to HUD's S & U Formats for risk-sharing 
projects subject to 911 Subsidy Layering Reviews. (HUD Headquarters is 
available to provide any necessary guidance regarding content.)
    Where HOME fund grants or loans are provided together with some 
form of HHA, please see the HUD State/Area Office Implementing 
Instructions for further guidance.
    Projects receiving only project-based Section 8 rental assistance 
for 25% or less of the units combined with OGA are subject to a Subsidy 
Layering Review. However, if the OGA and project-based Section 8 HHA 
involved, whatever the percentage, are not provided for the same or 
similar Project Uses (e.g., LIHTCs are provided for a capital 
improvement Use, but Section 8 rental assistance does not include debt 
service for capital improvement loans, but only operating expense 
increases or reimbursement) then ``layering'' concerns are absent 
(i.e., potential Project Uses do not overlap), and a 102(d) or 911 
Certification may be made without further Subsidy Layering Review. 
Thus, routine budget-based increases based on higher operating costs, 
and annual adjustment factor increases in Section 8 assistance, do not 
trigger a detailed Subsidy Layering Review unless the increase is 
related to debt service obligations on capital improvement loans (where 
combination with LIHTCs would clearly trigger a more detailed and 
substantive Subsidy Layering Review).
    Note that program participants are generally only required to 
submit detailed Form HUD-2880s if the HHA request involved is greater 
than $200,000. (See 24 CFR 12.32(a)(1).) Where less than this amount of 
HHA is requested, HUD State/Area Offices and HCAs may, in lieu of Form 
HUD-2880, accept the Sponsor's simple written attestation that all 
programs of assistance involved do not produce a potential overlap in 
Project Uses. By way of example, if a Flexible Subsidy Capital 
Improvement Loan for $40,000 is sought, and LIHTCs are also provided to 
finance capital improvements, a Subsidy Layering Review is required; 
i.e., for cases involving clear potential program overlap, Sponsors 
must demonstrate to HUD (102(d) Subsidy Layering Reviews) or to the HCA 
(911 Subsidy Layering Reviews) through fully detailed Form HUD-2880s 
that no overlap in Project Uses is contemplated (capital improvement 
Sources being provided do not exceed capital improvement costs 
estimated), and that both Sources are necessary to provide the 
affordable multifamily housing. This is consistent with the regulatory 
requirement that Sponsors provide details on OGA ``as HUD deems 
necessary'' to make a Subsidy Layering Review Certification. (Emphasis 
added: see 24 CFR 12.32(b)(1)(iv).) In summary, where there is no 
potential program assistance overlap, i.e., where overlap cannot occur 
programmatically, HUD does not require detailed disclosures or Subsidy 
Layering Reviews, because they are not deemed necessary; but where 
there is potential overlap, the burden is on Sponsors to demonstrate no 
actual overlap in Project Uses to satisfy either a 102(d) or 911 
Subsidy Layering Review.
    Small projects of 24 units or less are already specifically 
identified in the RSLG Note regarding Standards 1 and 2 as deserving of 
special attention and compensation under the risk factor ``size''. HCAs 
should be mindful of the importance of not discouraging this type of 
development and risk by ignoring its Builders' and Developers' 
legitimate expectation to be properly compensated for developing needed 
low and moderate income housing which fits into every neighborhood, and 
offers a multifamily development alternative which avoids over-
concentration issues. HUD and HCAs will seriously consider economy of 
scale arguments such participants present.
    With respect to Section 223 (f) applications, where LIHTCs were 
allocated some years ago to a project which is now somewhere ``in the 
middle'' of the 10-year stream, a Subsidy Layering Review is required 
because new HHA is being combined with OGA which still provides current 
benefits to the project. These benefits, while previously awarded by 
the HCA, fall under the broad definition of OGA contained in section 
102, HRA '89, and were presumably awarded pursuant to capital 
improvements performed. HUD will perform the required Subsidy Layering 
Review, since HCAs cannot practically adjust LIHTCs awarded after 
Placement in Service. The Sponsor's Disclosure and Updating form must 
thoroughly detail the actual costs incurred in acquisition and 
rehabilitation, and the conventional debt financing obtained and equity 
financing raised through the syndication of the project to meet such 
costs. HUD will apply the RSLGs and Implementing Instructions in making 
adjustments to the actual net equity obtained as of the Placement in 
Service date to determine the appropriate Section 223 (f) mortgage 
necessary to replace the conventional financing. Note that HUD will 
observe this procedure regardless of what year the project is currently 
in with respect to the annual LIHTC stream. No Subsidy Layering Review 
is required if 223 (f) insurance is sought on a project which has 
received the full stream of LIHTCs, or, has fallen out of compliance 
and completely lost its LIHTC Allocation (assuming no other OGA is 
involved).
    18. Whether there should be additional inclusions to the scope of 
the RSLGs?
    Comment: One commenter states, ``. . . a standard should be 
established for cash flow distributions to limited partners . . . The 
previous guidelines contained such a standard. If HUD acts to reduce 
the mortgage amount, or if a low mortgage is proposed, and the credit 
agency comes in and provides tax credits (with or without other 
subsidies) to fill up whatever financing gap remains, there is a 
potential for excessive profit in the form of cash flow distributions. 
A judgement cannot be made as to whether or not government assistance 
is more than is necessary to make a project work unless there is some 
judgement on the amount of cash flow the project is likely to 
receive.'' The commenter cites 24 CFR 207.19(b) (4), and the Department 
would supplement by citations to 24 CFR 12.52 (a)(2)(ii); 221.532(d); 
231.8(c),(d); 232.45(b); 241.130(c); 882.714(c) (4); 882.715 (c); and 
882.732 (c). The same commenter observes that HUD should add to its 
list of risk factors under Standard 2 the ``proposed percentage of set-
aside units which will benefit low income households.''
    Response: The Department does not agree that cash flow 
distributions must be analyzed and approved at precisely defined levels 
in order to establish whether the necessary amount of government 
assistance is being provided to a project. This is why HUD moved from 
the ``16% Internal Rate of Return'' model applied under its previous 
guidelines to a ``net equity'' model. (See also ``Net Syndication 
Proceeds'' and ``Ownership'' in Glossary section of RSLGs). The 
Department agrees with industry critics who urged revision to HUD's 
guidelines in 1992. Cash flow from LIHTC projects is not a significant 
element affecting investor decisions, because positive cash flow cannot 
be assured. But note that HUD does limit returns in cases where there 
are limited dividend Sponsors, or where HUD Section 8 project-based 
rental assistance is combined with OGA.
    The Department agrees with the commenter to add to the ``Note on 
Standards'' the factor indicated: a project's estimated occupancy by 
truly low income households does affect the developer's risk, which may 
be rewarded by HCAs through the fee. (This is consistent with HCA 
guideline requirements under OBRA Sec. 7108(o) to give priority to 
projects serving the lowest income tenants and to projects obligated to 
serving qualified tenants for the longest period.) Some HCAs already 
apply such a policy to applications, exclusively reserving LIHTCs only 
for proposals which limit rents to 50% or less of area median income. 
But HUD does not believe it is appropriate to dictate that all HCAs 
apply such a policy to all applications.
    19. Whether any balance remaining in Operating Deficit Reserve 
escrows (when funded by Net Syndication Proceeds) may be used to reduce 
secondary debt, or, must instead roll over into the Replacement Reserve 
in all mortgage insurance cases; whether any additional Reserves or 
separate policy may be established for non-mortgage insurance HHA 
cases; and whether such Reserves affect permissible Developer's Fees 
under Standard 2?
    Comment: Four commenters raise related issues. Two commenters 
requested that the Glossary discussion of the permissible uses of any 
remaining balance of Operating Deficit Reserve be expanded to include 
the option of paying off secondary debt or extended to other uses. Two 
others request clarification on how the Developer's funding of such 
Reserves (or Working Capital Reserves) should be treated under Standard 
2 limitations. One of the former two commenters stated that HUD is too 
restrictive in its Reserves policy, or at least, should adopt a 
different policy in non-mortgage insurance cases than in other FHA-
Housing-assisted cases where the Department does not bear the long term 
risks, e.g., project-based Section 8 rental assistance cases which FHA-
Housing administers.
    Response: Because many projects may receive only HUD mortgage 
insurance assistance and no HUD rental assistance in conjunction with 
LIHTCs, the Department is concerned that projected operating deficits 
be adequately funded. HCAs may allow additional ``Rent Reserves'' so 
long as it is understood by the Sponsor that HUD's Operating Deficit 
Reserve and the HCA's Rent Reserve are commingled in the HUD Loan 
Management-administered Escrow (Form HUD-92476-A) and must be funded by 
the Sponsor prior to Initial Endorsement. In 911 Subsidy Layering 
Reviews, HCAs must determine whether Net Syndication Proceeds may be 
projected and used to fund such reserves. Since many rent-restricted 
projects will not have rental assistance, and because project expenses 
may increase at a faster rate than project income over the holding 
period in many areas, and project replacement reserves for necessary 
repairs in 10 to 15 years may not be fully funded under such ``tight'' 
cash flow situations, HUD has decided to retain the limitation on uses 
of any remaining balance in funded Operating Deficit Reserve escrows 
(commingled with Rent Reserves).
    Regarding the question about a separate policy for Flexible Subsidy 
loans, Loan Management Set-Aside, or Housing's Project-based Section 8-
assisted cases and application of unused Reserves, FHA-Housing agrees 
that while its long-term interests are not affected when it is not 
taking the long-term risks through mortgage insurance assistance, the 
project's long-term needs do not change, i.e., Replacement Reserve 
needs do not shift when the form of HHA is different. FHA-Housing 
believes it is demonstrating its long-term commitment to a project 
receiving these other forms of HHA by requiring that any unused 
Operating Deficit Reserves roll over into the Replacement Reserve 
account. FHA-Housing is not responsible for program administration 
outside its purview, and will not presume to speak regarding PIH or CPD 
program assistance and policy in this area; these offices will be 
establishing and issuing their own authoritative Guidelines. In regards 
to FHA-Housing's policy, however, new lines have been added for 
``Additional Working Capital'' and ``Rent Reserves'' to the Sources and 
Uses Formats which, if funded, may contribute to the project's long 
term viability (see Glossary).
    Regarding the question about the effect on Developer's Fees of a 
Sponsor funding such reserves, HCAs should follow their established 
practice, making that practice clear to the HUD State/Area Office 
monitoring them. Please note that where the HCA's practice requires a 
Developer to fund Reserves out of its fee, ``Developer Fees Returned to 
Fund Reserves'' may be reflected as a separate Source line on the S & U 
Format. (See Glossary discussion of Developers Fees as ``paper'' 
allowances.) Developers must plead their case to the applicable HCA 
regarding reserves and fees. The total amount of assistance the LIHTC 
program and Net Syndication Proceeds can provide in this mix is 
limited, and while S & U Statement fees represent the sum total of 
potential earnings eventually received by the Developer, reserves stay 
with the project. HCAs must determine a reasonable proportional 
allocation between fees and necessary reserves for individual projects 
within the confines of overall fee limitations and overall LIHTC-
program resources.
    20. Whether the Resident Initiative Fund Reserve requirements 
should be revised?
    Comment: Two commenters raise this issue. One commenter stated that 
HCAs should not be required to coordinate any LIHTC proceed funding of 
these reserves with HUD because the HCA ``does not have the requisite 
experience to determine the amounts necessary to provide services to be 
funded from such a fund.'' The other commenter noted as follows: ``The 
Guidelines require that any resident initiative funds unspent after ten 
years be used to pay down the mortgage or added to project reserves . . 
. We believe this limitation should be deleted.''
    Response: It is because HCAs may not have experience in funding and 
administering these services that the RSLGs encourage them to 
coordinate LIHTC-proceeds-provided assistance with the HUD State/Area 
Office offering assistance in such cases. With potential assistance 
from both sources, more tenants may benefit from such services. 
Regarding the second comment, HUD notes that the ``transfer after ten 
years'' requirement was included to encourage active use of the funds 
provided for the stated purpose of the fund. However, Sponsors may 
request an extension of the term beyond ten years if there are funds 
remaining which will be used for resident initiatives.
    21. Whether Discounting and Compounding at applicable Bridge Loan 
Rates is the only acceptable method for estimating the net present 
value of syndication proceeds as of the Placement in Service date?
    Comment: Three commenters suggested alternative methods for 
discounting and compounding, using different rates than the bridge loan 
rate to more accurately estimate the net present value of syndication 
proceeds as of the Placement in Service date, whether projects in fact 
obtain bridge loan financing or utilize an equivalent equity funding 
source at lower rates. One commenter suggested HCAs should simply be 
required to reflect the sum of the face amounts of all installments.
    Response: The Department agrees that an HCA may implement its own 
compounding and discounting requirements for the calculation. 
Compounding and Discounting may be calculated using other rates such as 
a construction rate (composed of the prime plus 2% or 3%) or the 7-year 
Treasury Note rate. If the final syndication installment is conditioned 
on several contingencies occurring, perhaps an even higher rate may be 
applied to discount its present value as of Placement in Service. 
Example: Assume a first installment of 30% of proceeds is received 2 
years prior to construction completion at the execution of the 
Syndication Agreement, a second installment of 40% is received at 
construction completion and Placement in Service, and a final 
installment of 30% is received after sustaining occupancy is reached, 
estimated to occur 2 years after completion. If the HCA determines that 
the early and late installments are to be compounded and discounted at 
the same rate, e.g., the bridge loan rate, then simply adding the face 
amounts of all installments is adequate, i.e., the 2 year compounded 
30% portion and 2 year discounted 30% portion exactly ``offset'' each 
other, and the middle installment received as of Placement in Service 
is neither compounded nor discounted. The proportion of early and late 
installments, and the difference between compounding and discounting 
rates are the factors affecting Net Syndication Proceed value as of the 
Placement in Service date. The HUD State/Area Office Instructions 
describe how Sponsors are required to provide the Net Present Value as 
of the Placement in Service date in accordance with the HCA's selected 
compounding and discounting method in 911 reviews (HCA verification of 
the net will typically occur after a 911 review is completed), while 
HUD State/Area Offices will review the Sponsor's submission for 
technical accuracy in 102(d) reviews.

Guideline Standards

    Applicability--Standards 1 and 2 apply to all cases combining HHA 
and OGA, if the program assistance involved provides for either builder 
profit or developer fees. Standards 3 and 4 specifically apply to LIHTC 
cases, whether reviewed under section 102(d) or 911.
    Separate Standards Appear for Standards 2 and 3--HCAs may simply 
apply published Safe Harbors in 911 Subsidy Layering Reviews, or raise 
the Safe Harbors through Governing Board or Approving Authority 
Resolution or Qualified Allocation Plan provision up to the published 
maximum Ceiling level. Documentation of such action should be submitted 
to the HUD State/Area Office, as applicable to individual cases. 
Ceiling Standards represent absolute limitations, except for 
Applicability Exception cases.
    Applicability Exceptions--An HCA may grant a limited number of 
exceptions to the standards referenced below, i.e., it may exclude the 
greater of either 5 individual projects or 10 percent of the total 
number of projects reviewed under 911 in a single calendar year from 
Standards 1 through 3 below. (There are no exceptions to Standard 4.) 
These exceptions should only be granted when extraordinary 
circumstances relating to the market or risk factors, as discussed 
below in the Note on Standards 1 and 2, warrant excluding the project 
from the standards. HCAs may not act arbitrarily, and all exceptions 
must be approved by the HCA Governing Board or Approving Authority in a 
public forum. For example, a small project of no more than 24 units may 
receive a Builders Profit greater than the Alternative Ceiling amount 
as one exceptional case, if approved by the Board. Similarly, a project 
located in a qualified census tract may receive a Developer's Fee of 
greater than 15 percent and may incur Syndication Expenses for private 
placement of greater than 15 percent of gross proceeds as a second 
exceptional case. Additionally for these cases, the HCA must determine 
whether the amount of equity capital raised and project costs incurred 
satisfy the mandates in section 911(b) of the HCDA '92, and do not 
exceed the HCA's Qualified Allocation Plan allowances.

1. Builder's Profit

    Ceiling Standard--Where there is no Identity-of-Interest (See 
Glossary) between the Builder and the Sponsor/Developer, the Builder's 
Overhead, General Requirements, and Profit may not exceed HUD's 
estimates reflected on Lines G42 through G44 of Form HUD-92264, 
``Rental Housing Project Income Analysis and Appraisal,'' except for 
Lump Sum contracts, where the amounts reflected on Form FHA-2328 must 
be acceptable to the HUD State/Area Office. Where there is an Identity-
of-Interest, the combined Builder's Profit and Sponsor's Profit/
Developer's Fee is limited to BSPRA, as reflected on Line G68. At HUD's 
discretion, commensurate amounts may be estimated in non-mortgage 
insurance programs. Alternatively, HCAs may elect to use the 
``Estimated Cost Excluding . . . Overhead and Profit'' line on the 
``Mortgageable Replacement Cost'' Uses portion of the S & U Statement, 
and may reflect up to 6% of construction costs for Builder's Profit, 2% 
for Builder's Overhead, and 6% for General Requirements (pursuant to 
the National Council of State Housing Agencies' ``Standards for State 
Tax Credit Administration'') under the ``Non-Mortgageable Uses--
Alternative Builders Profit'' line of the Statement. (HCAs may accept 
HUD State/Area Office processing allowances for builders in high cost 
areas which exceed the National Council Standard allowances.)

2. Sponsor's Profit/Developer's Fee

    Safe Harbor Standard--Where there is no Identity-of-Interest 
between the Sponsor/Developer and the Builder, SPRA will be recognized 
as a limitation by HUD in Section 221 mortgage insurance application 
processing and section 102(d) Subsidy Layering Reviews. Where there is 
an Identity-of-Interest, BSPRA will be recognized as the Safe Harbor 
standard limitation for the combined Builder's Profit and Developer's 
fee. Developer Overhead/''Organization'' expenses on Line G65 are also 
separately calculated and allowed in HUD processing under the Safe 
Harbor standard. At HUD's discretion, commensurate amounts may be 
estimated in non-mortgage insurance programs. Alternatively, HCAs may 
elect to allow up to 10 percent of its definition of Total Development 
Cost on the ``Non-Mortgageable Uses--Alternative Developers Fee'' line 
of the applicable S & U Statement.
    Ceiling Standard--Following the Alternative funding pattern above, 
the HCA may reflect Developer's Fees of up to 15 percent of the HCA's 
definition of Total Development Cost under the ``Non-Mortgageable 
Uses'' portion of the applicable S & U Statement where approved by the 
Governing Board or Approving Authority in accordance with special 
market or risk factors.

3. Syndication Expenses

    Safe Harbor Standard--The sum total of expenses, excluding bridge 
loan costs, incurred by the Sponsor in obtaining cash from the sale of 
LIHTC project interests to investors through public offerings may not 
exceed 15 percent of the gross syndication proceeds, and the total 
incurred pursuant to private offerings may not exceed 10 percent.
    Ceiling Standard--The sum total of expenses, excluding bridge loan 
costs, incurred by the Sponsor in obtaining cash from the sale of LIHTC 
project interests to investors through public offerings may not exceed 
24 percent of the gross syndication proceeds, and the total incurred 
pursuant to private offerings may not exceed 15 percent.

4. Net Syndication Proceeds and Market-Derived Rate Assumptions for 
Calculating Maximum LIHTC Allocations

    Net Syndication Proceeds as of Placement in Service Date--HCAs will 
divide the Gap Filler equity amount necessary to balance Sources 
against Uses for a project by an applicable Market-Rate, expressed in 
cents netted per dollar of credit allocation, in calculating maximum 
LIHTC Allocations. Net Syndication Proceeds estimated as of Placement 
in Service may approximate, but should not generally exceed, Gap Filler 
needs. The projected Placement in Service date is the date of valuation 
of Net Syndication Proceeds regardless of when a Subsidy Layering 
Review is performed. The sum of the value of all installments received 
must be included in the calculation. Sponsors must calculate and report 
the effects of compounding and discounting in accordance with an HCA's 
selected rates and methodology. An HCA's LIHTC Allocation may not 
generally produce net syndication proceeds exceeding the necessary 
Subsidy Layering Review Gap Filler, and HCAs will subsequently lower 
the annual dollar amount of credit on Form IRS-8609 accordingly. The 
Market Rate selected should be based on: (1) An individual project's 
market value as reflected in competing Letters of Intent the Sponsor 
submits, and/or (2) comparable Syndication/ Limited Partnership 
Agreements from the most recent past transactions; and/or (3) the HCA's 
judgment regarding market trends.
    Ownership Retention Adjustments--HCAs must capitalize Gap Filler 
requirements by Market Rates plus the following incremental values 
(Rates) if higher than typical ownership interests are retained (See 
``Ownership'' in Glossary):

0-5% ownership retention: use Market Rate
5-50% ownership retention: add 10 cents
over 50% retention: add 20 cents

and reduce the maximum LIHTC Allocation accordingly.
    Note On Standards 1 through 3: An HCA may choose to allow fees 
which are less than the Standard 2 Safe Harbor standard, or less than 
the Ceiling amount under Standard 1. Between Standard 2 Safe Harbor and 
Ceiling amounts, and beneath Standard 1 Ceiling amounts, HCAs may also 
use their discretion in awarding incremental Builder's Profit or 
Developer's Fees depending on project market or risk factors (and may 
re-establish the Standard 2 Safe Harbor through a blanket approach for 
well-defined categories of projects as described in Comment 10). 
Project risk factors may include: location in a ``qualified census 
tract''; project size; challenging substantial rehabilitation projects; 
affordability, e.g., the degree to which the project's set-aside units 
will serve lower income tenants earning less than 50% of median income; 
whether there is an Identity-of-Interest relationship between the 
Developer and Builder affecting total fees. An HCA may develop and rely 
on other factors not listed above, and may reference in its Qualified 
Allocation Plan all factors which its Application scoring procedure 
requires of all projects awarded Reservations, and which justify higher 
Safe Harbor levels ``across-the-board'' to projects receiving LIHTCs.
    Note Also: Because HUD analyzes and determines the allowance for 
Builder's Overhead in processing (See Line G43 of Form HUD-92264), and 
Developer's Overhead under the rubric ``Organization,'' Line G65, 
extraordinarily high overhead may not be cited as a factor justifying a 
higher Developer's fee. Similarly, where relatively high local 
development fees are involved, HUD already includes these fees under 
the rubric ``Other Fees,'' Line G48 of Form HUD-92264, so this factor 
does not justify higher fees (may not be duplicated as a Project Use). 
If HUD's processing which reflects Safe Harbors is relied on, all of 
these items may be included within the mortgage as mortgageable items, 
and may be reflected on the S & U Statement under ``Mortgageable 
Replacement Cost''. But Alternatively funded ``Builders Profit'' must 
also include ``General Requirements'' and ``Overhead,'' consolidated on 
the S & U Statement, or itemized in accordance with the Standard 
allowances under ``Non-Mortgageable Uses,'' and Alternatively funded 
Developers Fees must include consolidated overhead and profit. 
Developer's acquisition cost in excess of the HUD-appraised value does 
not generally warrant higher Developer's Fees, and should not be 
included in the base of estimation.
    For Section 223(f) refinances the Developer's Fee must be 
Alternatively funded and reflected under the ``Non-Mortgageable Uses'' 
portion of the S & U Format (See applicable HUD State/Area Office 
Instruction Format), because HUD typically recognizes minimal overhead 
but no profit allowance in this program. The base for the calculation 
will be Total Development Costs as defined by the HCA in 911 Subsidy 
Layering Reviews; but HUD will use 10% of the ``work write up'' total 
for 102(d) Subsidy Layering Reviews. Builders Profit may not be 
Alternatively funded, because 223 (f)'s ``work write-up'' includes such 
profit and overhead as mortgageable items if value is added through 
proposed repairs.
    For Section 241 proposals, Developers Fees must be Alternatively 
funded if LIHTCs are involved. 10% of Line G72 less Lines G42 through 
G44 and G65, Form HUD-92264 will be permitted in 102(d) Subsidy 
Layering Reviews, but HCAs may Alternatively fund the appropriate 
percentage of their definition of Total Development Cost in 911 Subsidy 
Layering Reviews. Builders Profit percentages are dependent on whether 
there is an identity-of-interest, but generally, will be based on 
construction hard costs for non-identity builders.
    Note On Standards 3 and 4: If ownership interests retained are 
between 5%-50%, then Standard 3 Private Offering Safe Harbors 
multiplied by 50% will be applied. Where greater than 50% ownership 
interest is retained, then ``Owner Overhead and Organization Expense'' 
must be reported in lieu of ``syndication expenses''.
    Amounts in excess of Standard 3 are added to the ``Additional 
Required Sponsor Equity Contribution'' line of the S & U Statement in 
911 Subsidy Layering Reviews, or to the Net Syndication Proceeds line 
in 102(d) Subsidy Layering Reviews, and consequently, will cause a 
reduction in Mortgage or LIHTC assistance depending on who performs the 
Subsidy Layering Review. This requirement supports enforcement of 
Standard 3 limitations, and also supports HCAs' enforcement of OBRA 
Sec. 7108 (o), which provides that state guidelines must give highest 
priority to projects that have the lowest percentage of costs 
attributable to intermediaries.
    In 102(d) Subsidy Layering Reviews, HUD State/Area Offices will 
simply review Letters of Intent, or Syndication or Partnership 
Agreements, to estimate Net Syndication Proceeds, whatever the LIHTC 
Reservation or Allocation amount is, and thereafter provide their 
assistance as a Gap Filler accordingly to balance the appropriate S & U 
Format (subject to other program limitations). High percentage 
ownership adjustments also apply.

Glossary

    Bridge Loan Costs and Other Interim Financing Devices. Sponsors 
must report and HUD or the HCA must evaluate all interim financing 
costs incurred on loans obtained by the pledge of investors' deferred 
capital contributions to the project receiving LIHTCs. Such loans and 
advances must be on an ``arm's-length'' basis, i.e., Identity-of-
Interest between the lender and any partners or investors in the 
project is prohibited. If bridge financing is secured by future 
Syndication Proceed installments, it should not be reflected on the S & 
U Format as either a Source or a Use, since the Net Syndication 
Proceeds line already includes the discounted value of such 
installments, less bridge loan interest and costs. Bridge financing 
must be an obligation of a third party who is not the mortgagor.
    BSPRA/SPRA. Line G68, Form HUD-92264 BSPRA for Identity-of-Interest 
Builder/Developers is calculated as follows: (1) Not more than 10 
percent of the sum of Lines G50, G63, and G67, and (2) no profit is 
allowed on Line G44. Line G68, Form HUD-92264 SPRA for non Identity-of-
Interest Developer/Sponsors is calculated as follows: (1) Not more than 
10 percent of the sum of Lines G45, G46, G63, and G67, and (2) profit 
is allowed on Line G44.
    Developer's Fees. The amount reflected on the Alternative 
developer's fee line of the S & U Format is the ``paper'' allowance for 
Developer's Fees. A developer's actual net fee will be affected by 
whether: acquisition costs exceed or are less than recognized HUD 
value; third party consultants are involved whom the developer must 
pay; the developer must fund other costs or reserves which are not 
otherwise reflected on the S & U Format out of its fee; there are 
highly contingent ``deferred fees'' involved, e.g., latter 
installment(s) valued as of Placement in Service.
    Grants. HUD and HCAs must recognize all grant amounts available for 
any allowable project Uses. In mortgage insurance cases, grants 
available for mortgageable item Uses are subtracted by HUD in the 
determination of the mortgage Source. However, all such grant amounts, 
plus the remaining grant amounts available to meet allowable project 
Uses outside of the mortgage, should be reflected on the S & U Format, 
and the ``Non-Mortgageable Uses'' portion should be supplemented by 
whatever costs the grant covers outside the mortgage.
    Gross Syndication Proceeds. All amounts paid by purchasers of 
project interests before subtraction of syndication and bridge loan 
costs. Sponsors must certify such amounts on Form HUD-2880, and also 
calculate Net Syndication Proceeds in the manner prescribed in these 
RSLGs. HUD and HCAs will verify whether such calculations have been 
properly performed.
    Identity-Of-Interest. A financial, familial, or business 
relationship that permits less than arm's length transactions. Includes 
but is not limited to existence of a reimbursement program or exchange 
of funds; common financial interests; common officers, directors, or 
stockholders; or family relationships between officers, directors, or 
stockholders.
    Loan Term. In cases where LIHTCs are combined with mortgage 
insurance, HUD now provides loan terms commensurate with the terms 
relating to restricted use. The mortgage term equals the initial LIHTC-
compliance period of 15 years plus whatever extended use agreement 
period applies (a minimum of 15 years), up to a maximum under Section 
221(d)(4) of 40 years. Section 223(f) mortgage insurance allows a 
maximum loan term of 35 years, so combinations of post-1989 LIHTCs and 
mortgage insurance should provide for full amortization of debt over 30 
to 35 years.
    Net Syndication Proceeds Estimates & Market Rates. The net 
estimated by Sponsors and reviewed by HUD and the HCA shall be the net 
present value of all syndication proceed installments as of the 
Placement in Service date (does not include annual cash flows; see 
``ownership'' and Comment 18) less any bridge loan interest and costs, 
and less syndication expenses. For the purpose of making estimates, 
installments received subsequently will be discounted at an appropriate 
rate, and installments received prior to Placement in Service will be 
compounded. Thus, the difference between ``early'' and ``late'' 
installments, the rate(s) selected, the syndicator's load, and an 
individual Sponsor's need for bridge financing all affect the actual 
net and appropriate Market Rate to be applied. Market Rates are 
estimated and established by HCAs to approximate the market price for 
syndications of projects with varying investment risks and combinations 
of assistance. Gap Filler Financing divided by a Market Rate equals the 
maximum LIHTC Allocation, which should approximately produce Net 
Syndication Proceed estimates, i.e., equity needs.
    Operating Deficit Reserve. An escrow established to fund net 
operating losses projected to occur between the date of initial 
occupancy and the date by which the project's operating income is 
expected to cover replacement reserve deposits, debt service, expenses, 
and ground rent, if any, related to operation of the rental project. 
HCAs may make recommendations to the HUD State/Area Office to increase 
(through the ``Rent Reserves'' line item) but not decrease the 
Operating Deficit Reserve, if funded by Net Syndication Proceeds; but 
the Sponsor must agree to enter into HUD's standard Escrow Agreement 
for the total amount involved. In addition, the Escrow Agreement must 
be amended to provide that any escrow remaining after the escrow period 
will be transferred to the project's Replacement Reserve account rather 
than being returned to the Sponsor (Form HUD-92476-A, ``Escrow 
Agreement Additional Contribution by Sponsors;'' amend clause 4).
    Ownership. There are essentially 4 benefits deriving from the 
ownership of LIHTC-assisted real estate which may be syndicated, i.e., 
sold: (1) The LIHTCs; (2) cash flow; (3) depreciation losses; and (4) 
any reversionary value at the end of the investment period. HUD's 
previous Guidelines attempted to value all four ownership benefits 
based on a Discounted Cash Flow model and defined projections occurring 
over an extended holding period. HUD's Net Syndication Proceeds/Gap 
Filler analysis replaces the previous Guidelines method, and contains 
fewer speculative factors. It simply reflects the value of all sales 
proceeds received in exchange for the ownership interests conveyed to 
limited partners, i.e., what limited partners agree to pay the 
developer in cash to acquire an equity position. Typically, investors 
purchase 98% or 99% of the LIHTCs and depreciation, but share greater 
proportions of cash flow and reversions with the Developer.
    Property Value. HCA must accept the HUD State/Area Office's 
estimates of allowable value when performing the section 911 Subsidy 
Layering Review, i.e., Line G73 of Form HUD-92264, except for Subsidy 
Layering Reviews involving risk-sharing cases. HUD estimates this value 
without considering any additional subsidies to be made available to 
the project, or any LIHTCs or other tax benefits the owner will 
receive. This permits Sponsors to acquire property for new construction 
or rehabilitation at its market value. By using ``as-is'' market value 
of improvements and/or land instead of investment value or acquisition 
cost, HUD seeks to eliminate any value attributable to the LIHTCs the 
owner/purchaser seeks, and prevent unearned windfall profits. Note: HUD 
will not require appraisals for property purchased from HUD, or at a 
foreclosure sale where HUD is the foreclosing mortgagee. In these 
cases, the allowable amount will be the purchase price when a project 
is competitively sold based on the high bid price at either a 
foreclosure sale or HUD-owned sale (if new HHA is involved; otherwise 
no Subsidy Layering Review is required). When HUD sells a property at a 
pre-determined price, as in a negotiated sale, the allowable amount is 
that price and is not subject to adjustment. Also, for acquisition or 
refinance and rehabilitation of projects that will remain subject to 
existing HUD-insured loans (whether current or assigned/HUD-held) HUD 
and HCAs will generally permit the outstanding indebtedness as a 
Mortgageable or Approveable item in lieu of value or acquisition cost, 
e.g., Section 241 cases may recognize outstanding indebtedness on Line 
G73.
    Public Versus Private Offerings. Public offerings are those 
syndications which must be registered with the Securities and Exchange 
Commission and Regulation ``D'' private offerings; Private offerings 
include all others.
    Qualified Census Tracts. Those census tracts, census enumeration 
districts, and/or block numbering areas designated by the Secretary in 
accordance with section 42(d)(5)(C)(ii)(I) of the Internal Revenue Code 
as amended (See Federal Register, Vol. 59, No. 204, Monday, October 24, 
1994, page 53518).
    Replacement Cost Uses (Section 221 cases). The ``Elected 
Mortgageable Replacement Cost Uses'' reflected on an individual 
project's S & U Format (See HUD State/Area Office Instruction Formats) 
must be equal to HUD's Line G74 of Form HUD-92264, except for cases 
where Standard 1 or 2 amounts are Alternatively funded as ``Non-
Mortgageable Uses,'' in which case Line G74 is reduced by the sum of 
Lines G42, G43, G44, G65, and G68.
    Required Repairs/Substantial Rehabilitation. For mortgage 
insurance, those repairs which HUD multifamily staff include in the 
work write-up pursuant to Section 223(f) processing, or determine to be 
necessary in Section 241 processing. FHA ``substantial rehabilitation'' 
thresholds for Sections 221 and 232 are defined in accordance with 
various criteria described in those sections of the National Housing 
Act and program instructions. Required Repairs in other HHA programs 
are defined by project need and cost estimation review.
    Resident Initiative Fund Reserve. If such a reserve is to be 
combined with other HUD Housing-administered assistance, it is required 
that: (1) The fund will be used only for resident management/ownership 
initiatives, security/drug free housing initiatives, job-training or 
other support services; and (2) all initiatives or services will be 
targeted to the residents of the project for which the fund is 
established. The HCA must coordinate any LIHTC proceed funding of such 
reserve escrows with the affected HUD Housing Office, e.g., the HUD 
State/Area Office responsible for Multifamily Property Disposition 
should be consulted pursuant to the activities described in Chapter 9 
of HUD Handbook 4315.1 REV-1. Preservation cases involving such 
activities will be analyzed in accordance with Chapter 9, HUD Handbook 
4350.6. Hope 2 resident initiative activities for multifamily projects 
must be analyzed in accordance with the Resident Initiative Office's 
``Interim Guidelines''. Generally, the HCA may include as much as it 
and HUD deems necessary to support such activities, but the Sponsor 
must agree as a term of the reserve escrow that any unused funds 
remaining after 10 years will be transferred to the Replacement Reserve 
account, or, in the event of default, will immediately be applied to 
prepay HUD-insured mortgage loans (if any are applicable). The Sponsor 
may petition the HUD State/Area Office to extend this period if 
activities will continue and any funds remain.
    Set-Aside Assumptions. HUD requires that the Sponsor provide the 
materials listed in Form HUD-2880 regarding the amount of LIHTCs or OGA 
being sought at the time any form of HHA is requested, and update this 
information as changes occur. LIHTC set-aside assumptions must be 
detailed on the form in order for HUD to perform the appraisal in 
mortgage insurance cases. Sponsors must specify whether units will be 
set aside and marketed to very low income tenants below 60% area median 
income, e.g. 45%, and HCAs should communicate with HUD State/Area 
Offices regarding LIHTC Application ``Applicable Fraction'' and 
``Qualified Basis'' assumptions so that the debt financing underwriting 
is performed properly. HUD State/Area Offices will closely scrutinize 
project marketability and feasibility at proposed set-aside levels.
    Total Project Uses. All HUD-recognized or RSLG-allowed project Uses 
must be identified and the total cost must appear on the applicable S & 
U Format. If allowable total project Uses exceed total available 
Sources, either Gap Filler LIHTC proceeds may be provided, or, 
additional equity is required of the Sponsor to ``balance'' S & U. If 
total available Sources are greater than allowable total Uses, then too 
much assistance has been provided to the project, and one of the 
Sources must be reduced. In 911 Subsidy Layering Reviews, HCAs will 
reduce the assistance within its control to balance S & U, i.e., LIHTC 
Allocations. In 102(d) Subsidy Layering Reviews, HUD will reduce the 
applicable assistance within its control to balance S & U, e.g., reduce 
the mortgage, Section 8 assistance, etc.
    Working Capital Reserve. For Profit-Motivated Sponsors developing 
Section 221 new construction proposals the HCA may allow within Project 
Costs HUD's estimated working capital reserve of 2 percent of newly 
insured mortgages, but the reserve must be funded by non-mortgage 
sources. HUD also determines whether any working capital is necessary 
for substantial rehabilitation cases, and will communicate any 
necessary amounts on Form HUD-92264A. HCAs and HUD may allow working 
capital reserves in excess of HUD's 2% to be funded by non-mortgage 
sources so long as an escrow is established prior to construction or 
rehabilitation, and at Final Closing, any remainder is at the Sponsor's 
option applied to repay grants or loans or transferred to the 
Replacement Reserve account.

Other Matters

    HUD Negotiated or Competitive sales. In addition to the 
restrictions described above, and outlined in HUD State/Area Office 
Instructions, HUD reserves the right to negotiate/impose other 
conditions when it sells real estate.
    Environmental Review. A Finding of No Significant Impact with 
respect to the environment was made on the Interim Guidelines in 
accordance with HUD regulations at 24 CFR Part 50 which implements 
section 102(2)(C) of the National Environmental Policy Act of 1969 (42 
U.S.C. 4332). That Finding is available for public inspection during 
regular business hours in the Office of General Counsel, Rules Docket 
Clerk, at the above address. Since the provisions of these Final 
Guidelines are unchanged with respect to the impact on the environment, 
the original Finding is still valid.
    Executive Order 12612, Federalism. The General Counsel, as the 
Designated Official under section 6(a) of Executive Order 12612, 
Federalism, has determined that this notice does not have ``federalism 
implications'' because it does not have substantial direct effects on 
the States (including their political subdivisions), or on the 
distribution of power and responsibilities among the various levels of 
government.
    Executive Order 12606, the Family. The General Counsel, as the 
Designated Official under Executive Order 12606, the Family, has 
determined that this notice does not have potential significant impact 
on family formation, maintenance, and general well-being.

List of Forms Referenced

    Forms HUD-2530; 92013; 92264; 92264-A; 92330; 92330-A; 92331; 
92410; 92476-A; FHA-2328; 2331A; 2580: Available through DHUD State/
Area Offices.
    Forms HUD-92264-T and Form HUD-2880: See DHUD State/Area Office 
Implementing Instructions.

    Dated: December 2, 1994.
Nicolas P. Retsinas,
Assistant Secretary for Housing--Federal Housing Commissioner.

Attachment

Section 911 Certification

    Pursuant to section 911 of the Housing and Community Development 
Act of 1992 (HCDA '92), as amended, and in accordance with HUD's 
Administrative Guidelines for implementation thereof, (name of HCA) of 
(location of HCA) hereby certifies that (project name and HUD project 
number) (Check applicable line or lines below):

    ______will be receiving tax credits for the number of units 
presumed by and discussed with your office;

or,

    ______will not be receiving tax credits in the amount assumed by 
HUD in processing assistance requests, with the following revisions to 
be noted by your office:
----------------------------------------------------------------------

----------------------------------------------------------------------
    Attached hereto please find the applicable approved Sources and 
Uses Statement. Pursuant to the subsidy layering review performed for 
projects receiving tax credits I also certify that:

    ______a ``Market Rate'' in accordance with Standard 4 was used to 
establish the maximum LIHTC Reservation/ Allocation, and,

    ______Standards 1 and 2 have been applied in accordance with ______ 
HUD processing allowances, or, ______ Alternatively funded amounts 
(check applicable), and,

    ______ Standards 2 and 3 Safe Harbor or Ceiling amounts have been 
applied, as applicable, with all supporting Governing Board, Approval 
Authority, or Qualified Allocation Plan documentation attached,

or,
    ______ at least one Ceiling standard was exceeded, but the HCA has 
determined that this case presents extraordinary circumstances 
warranting an Applicability Exception, and the HCA's Governing Board or 
Approving Authority approves (copy attached).
    Project Cost estimates reflected on the attached applicable Sources 
& Uses Statement Format are those provided by or discussed with your 
office, and are deemed reasonable.
    (Name of HCA) certifies that it has properly implemented the 
Administrative Guidelines and that the mandates of section 911 (b) of 
the HCDA '92, as amended, have been satisfied. (name of HCA) further 
certifies that, in accordance with its Qualified Allocation Plan, 
section 911, and the Administrative Guidelines, the combination of tax 
credits, HUD Assistance--(specify here, e.g. mortgage insurance, 
Section 8 HAP contract, etc.)--and any other Other Government 
Assistance, being provided to meet allowable project uses, is not more 
than is necessary to provide affordable housing.

----------------------------------------------------------------------
(Authorized HCA Official)

----------------------------------------------------------------------
Date

[FR Doc. 94-30776 Filed 12-14-94; 8:45 am]
BILLING CODE 4210-27-P