[Federal Register Volume 61, Number 128 (Tuesday, July 2, 1996)]
[Notices]
[Pages 34664-34667]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16790]



[[Page 34663]]


_______________________________________________________________________

Part V





Department of Housing and Urban Development





_______________________________________________________________________



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



_______________________________________________________________________



Mark-to-Market/Portfolio Reengineering Demonstration: Notice of 
Demonstration and Initial Program Guidelines; Notice

  Federal Register / Vol. 61, No. 128 / Tuesday, July 2, 1996 / 
Notices  

[[Page 34664]]



DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-4099-N-01]
Office of the Assistant Secretary for Housing--Federal Housing 
Commissioner


Mark-to-Market/Portfolio Reengineering Demonstration: Notice of 
Demonstration and Initial Program Guidelines

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

ACTION: Notice of demonstration program and initial guidance.

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

SUMMARY: This notice announces a demonstration program that is designed 
to restructure the financing of projects that have FHA-insured 
mortgages and that receive Section 8 rental assistance. The purpose of 
this Congressionally authorized demonstration is to test the 
feasibility and desirability of multifamily projects meeting their 
financial and other obligations with or without FHA insurance and with 
or without above market Section 8 assistance and utilizing project-
based assistance or, with the consent of the project owner, tenant-
based assistance. In negotiating agreements with eligible project 
owners, HUD must act to, among other things, take into account the need 
for assistance of low- and very low-income tenants; address structural 
problems of projects; and protect the financial interests of the 
Federal Government. This notice also provides initial guidance on how 
the Department plans to operate the demonstration program. HUD 
anticipates that, over time, it will publish additional guidance that 
reflects in more detail how the program will operate as well as the 
experience derived through the execution of successful agreements with 
project owners.

DATES: This demonstration program guidance is effective July 2, 1996. 
In a separate notice, HUD will publish information requirements that 
demonstration participants will need to comply with.

FOR FURTHER INFORMATION CONTACT: George Dipman, Office of Multifamily 
Housing, Department of Housing and Urban Development, 451 Seventh 
Street, SW., Washington, DC. 20410-4000; Room 6174; telephone (202) 
708-3321. (This is not a toll-free number.) Hearing or speech-impaired 
individuals may call 1-800-877-8399 (Federal Information Relay Service 
TTY).

SUPPLEMENTARY INFORMATION:

I. Background:

    This demonstration, titled FHA Multifamily Demonstration Authority, 
is authorized by section 210 of the Departments of Veterans Affairs and 
Housing and Urban Development and Independent Agencies Appropriations 
Act (Pub. L. No. 104-134, 110 Stat. 1321, April 26, 1996). It reflects 
concern of both the Congress and the Administration about social issues 
and budgetary costs associated with the renewal of Section 8 project-
based assistance contracts on multifamily properties having FHA-insured 
mortgages. As of August 1995, the HUD portfolio contained 8,563 
projects, with a total of over 850,000 units, that have HUD insured 
loans supported by Section 8 rental assistance contracts. Under 
existing contracts, most of which are due to expire over the next few 
years, many projects receive project-based Section 8 rental assistance 
for rents that exceed those charged on comparable, unassisted units 
within the local market. At the same time, these projects often have 
substantial unmet capital needs. The Federal assistance, in the 
aggregate, is costly. If assistance contracts were to be renewed on a 
long term basis, based on current contract rent levels, the annual cost 
to the Federal Government would increase dramatically by the year 2000. 
Consequently, Congress has opted not to renew Section 8 contracts on 
these projects for more than one year, while the Department seeks 
alternative solutions to the housing and budget issues.
    For many project owners, if their level of Section 8 assistance is 
reduced or eliminated, and all else remains constant, the likelihood is 
that they will be unable to continue to meet project financial 
obligations, including mortgage debt service payments, current and 
future capital needs, and operating expenses such as project reserve 
and repair costs. This could lead to mortgage defaults, deterioration 
of this important housing stock, and the possible displacement of 
thousands of low-income families and seniors nationwide.
    Over the past year, Congress, owners, lenders, tenants, and other 
interested parties have proposed various alternative solutions to this 
long term and serious problem. Congress has authorized this 
demonstration, enabling HUD to test various methods of restructuring 
the financing of these projects. One goal of the demonstration program 
is to test alternative creative solutions that will provide long-term 
viability of the properties as affordable housing, which will benefit 
local communities and their tenants.
    The remaining sections of this notice provide the following 
information:
    Section II. Summarizes provisions of Section 210, including project 
owner eligibility requirements, and tools that HUD can employ to carry 
out the demonstration.
    Section III. Describes HUD's primary objectives in implementing the 
demonstration, and how HUD anticipates working with owners in reaching 
agreements.
    Section IV. Employs a Question and Answer format to address a 
variety of specific issues, and is intended to further clarify HUD's 
approach to implementing the demonstration program.
    Section V. Describes certain certifications that HUD makes in 
connection with publication of this notice of demonstration program.

II. Section 210--Goals, Mandates and Tools

A. Eligible Program Participants

    Eligible projects, defined in the legislation, include those 
multifamily properties
    1. Whose owners agree to participate; and
    2. Whose mortgages are FHA insured and which receive project-based 
assistance under Section 8 of the United States Housing Act of 1937; 
and
    3. Whose present Section 8 rents are, in the aggregate, in excess 
of the Fair Market Rent (FMR) for the area in which the project is 
located.

B. Goals

    Consistent with the legislative objectives, HUD's goal will be to 
carry out this demonstration program in a manner that will:
    1. Result in significant discretionary cost savings through the 
reduction of above-market Section 8 assistance through early 
terminations and restructuring of long-term project-based assistance 
contracts.
    2. In the least costly fashion--
    a. Maintain existing housing stock in a decent, safe, and sanitary 
condition;
    b. Minimize the involuntary displacement of tenants;
    c. Restructure mortgages in a manner that is consistent with local 
housing market conditions;
    d. Support fair housing strategies;
    e. Minimize any adverse income tax impact on property owners; and
    f. Minimize any adverse impact on residential neighborhoods; and
    3. Protect the financial interests of the Federal Government.


[[Page 34665]]


Congress provided, in addition, that in determining the manner in which 
a mortgage is to be restructured or the subsidy reduced, the Secretary 
may balance competing goals relating to individual projects in a manner 
that will further the purposes of this demonstration.

C. Mandates

    Section 210 provides that, under the demonstration, HUD can pursue 
these goals with respect to project mortgages securing up to 15,000 
units. Moreover, Congress has appropriated $30,000,000 for the cost of 
modifying mortgage loans, as such costs are defined in section 502 of 
the Congressional Budget Act of 1974, as amended. Also, the legislation 
authorizes HUD to directly enter into joint venture arrangements with 
third parties, under which the Secretary may assign some or all of the 
functions, obligations and benefits of the Secretary, and to purchase 
reinsurance, enter into participations, or otherwise transfer the 
economic interest in contracts of insurance or mortgage insurance 
premiums on such contracts of insurance. (This notice, however, does 
not address the implementation of the third party joint venture 
component of the demonstration. Guidelines for joint venture partners 
shall be released at a later date.)

D. Tools

    The demonstration program will use a variety of tools and 
authorities to restructure the financing of assisted FHA-insured 
projects. The basic approach will work through the voluntary 
participation of the project owners and lenders to move rents and 
operating costs toward market levels immediately or over time, and to 
reduce the outstanding principal balance to reflect any decline in net 
operating income that may result. The restructuring process attempts to 
put the projects on a sound financial and physical footing with market 
rents, sufficient to service the remaining debt and operating costs, 
including replacement reserves.
    Reasonable rehabilitation costs may be supported first through the 
release of reserves and residual receipts accounts, and then by further 
reduction of the principal balance. Extraordinary rehabilitation needs 
may require capital infusions from partners and state and local 
government assistance.
    Existing tenants will continue to be assisted with tenant based 
Section 8 assistance or by project based Section 8 assistance. Section 
8 assistance for projects with contracts expiring in 1997 shall be 
renewed only after annual budget authorizations by Congress. To support 
mixed-income developments, some tenants who receive tenant-based 
assistance and vacate the project may be replaced with families that 
are not eligible for Section 8 assistance.
    Post workout refinancing methods may include leaving the existing 
FHA-insured loan in place, refinancing the mortgage with an FHA-insured 
mortgage under an FHA refinancing program, obtaining a new loan and FHA 
insurance, and financing through conventional sources.
    Existing tax law will apply to reengineered, assisted FHA projects. 
Mitigating any tax consequences resulting from debt cancellation will 
be the responsibility of the owner. HUD will consider any approach that 
is revenue neutral to the property owners and investors.
    Depending on the particular characteristics of a project, HUD and 
an owner and, where applicable, with the consent of affected third 
parties, could enter into a restructuring agreement that includes, but 
is not limited to, one or more of the following actions:
    1. Restructuring rents at or above market where, in the latter 
instance, market rents are insufficient to cover operating costs 
irrespective of debt service;
    2. Forgiving and cancelling any FHA-insured mortgage debt that a 
demonstration project cannot carry at market rents while bearing 
reasonable operating costs;
    3. Paying all or a portion of a project's debt service, including 
monthly payments from the appropriate Insurance Fund for the full 
remaining term of the insured mortgage;
    4. Replacing FHA mortgage insurance with uninsured debt or 
continuing FHA mortgage insurance, if warranted;
    5. Not renewing expiring existing project-based assistance 
contracts with the provision of tenant-based assistance to previously 
assisted households;
    6. Providing project-based assistance with rents at or below fair 
market rents for the locality and negotiating other terms acceptable to 
HUD and the owner;
    7. Deciding to remove, relinquish, extinguish, modify, or agree to 
the removal of any mortgage, regulatory agreement, project-based 
assistance contract, use agreement, or any restriction that had been 
imposed by the Secretary, including the restriction on distribution of 
income; and
    8. Requiring the owner of an assisted property to apply any 
accumulated residual receipts toward effecting the purposes of the 
reengineering initiative.

III. HUD's Portfolio Reengineering Program--Overview

    HUD's Portfolio Reengineering program, which will implement the 
Demonstration, is designed to soften the impact of Section 8 budget 
reductions. Under its Portfolio Reengineering program, HUD seeks to 
reduce Federal assistance payments while stabilizing projects 
physically and financially and reducing reliance on Federal insurance, 
and to do so with the least possible disruption to tenants and 
neighborhoods.
    These objectives will be accomplished by, among other things, (1) 
reducing rents and operating costs to market levels; (2) making 
corresponding reductions in the principal balances of outstanding 
mortgages; and (3) improving the ability of the current assisted 
residents to pay market rent levels. Reengineering may also provide 
tenants with tenant-based rental assistance or continued project-based 
rental subsidies at lower rent levels.
    HUD will implement the demonstration through a combination of HUD 
field and headquarters staff, private consultants and third parties or 
joint venture partners. As previously noted, these guidelines do not 
address guidelines for the involvement of joint venture partners. 
Guidelines for joint venture partners will be released at a later date.
    Project readiness will be a significant criterion for allocating 
demonstration resources. HUD seeks reengineering projects with very 
real prospects for support from the existing mortgagee, owners, new 
lenders, and the community, including tenants.
    Under the demonstration, HUD intends to ensure that affected 
tenants and representatives of the local community and government have 
a meaningful opportunity to review and react to a proposed agreement 
before any agreement is finalized.
    Reviews of proposals made under the demonstration will be conducted 
on an ``open window'' batched basis with monthly reviews by a loan 
workout committee that will consider various workout approaches as 
described in section II. D. Proposals that contain a number of the 
following characteristics will be given priority if demand for the 
demonstration exceeds authority and resources. HUD may add additional 
priority criteria, in future notices that provide additional guidance 
under the demonstration. HUD prefers projects and proposals that meet 
the following criteria:
    1. Have Section 8 contracts that extend beyond 1997, and which 
reduce

[[Page 34666]]

rental assistance over the remaining life of the contract, or use 
rental assistance to prepare the project for market rents;
    2. Reduce rents to market rents, rather than to an above-market 
level;
    3. Minimize the impact of credit subsidy requirements resulting 
from the modification of the existing mortgage debt or the provision of 
new FHA insurance;
    4. Maximize reduction of Federal expenditures through--
    a. Low principal reduction (i.e. minimum partial payment of claim);
    b. Section 8 savings; or
    c. Reduced operating costs;
    5. Eliminate project-based rental assistance in favor of tenant-
based rental assistance;
    6. Eliminate or reduce the existing FHA mortgage insurance;
    7. Achieve restructuring through the use of non-HUD personnel;
    8. Preserve some long-term affordability;
    9. Serve housing needs of low- and very low-income tenants; and
    10. Illustrate efforts to raise the economic value of property by 
increasing the earning power of the existing tenant population through 
initiatives such as education, job training and entrepreneurship.

IV. Ongoing Clarification of Demonstration Guidelines

    The primary goal of the Portfolio Reengineering Demonstration is to 
provide HUD, Congress, and assisted FHA project owners and tenants a 
testing ground for wide-scale restructuring and stabilizing of this 
endangered housing resource. As the demonstration evolves, questions 
that arise through field testing approaches to reengineering will be 
answered through periodic published question and answer bulletins. The 
following ``Qs and As'' address some issues already communicated to 
HUD.
    Q. One goal of the demonstration is to test alternative creative 
solutions that will provide long term viability to the properties and 
their tenants. What kind of alternative creative solutions would be 
considered?
    A. HUD will give highest priority in restructuring to owners who 
can demonstrate a decreasing need for Section 8 assistance because of 
the implementation of programs which enhance the ability of assisted 
residents to pay an increasingly greater portion of the market rent. 
The additional effects of increased tenant earning capacity will be to 
reduce other governmental expenditures and increase tax receipts and 
also to stabilize and enhance property values. Illustrations of 
alternative solutions, in addition to reliance on the financing and 
rehabilitation tools specified above, include investment of owner and/
or project resources targeted at resident job training and placement, 
education, self-sufficiency, enterprise development, entrepreneurship 
and social services; and commitments from community related 
organizations to assist in similar endeavors. Owners whose proposals 
include such initiatives should outline specifically the goals they 
plan to achieve and how the implementation of such programs will result 
in enhanced financial capacity for the real estate and the tenants.
    Q. What is the definition of market rents?
    A. Market rents refers to the rent achievable by the project 
without rent subsidy when competing in the market place for new 
tenants. Two or more market rent projections for a given project may be 
considered in reengineering negotiations. For example, there may be a 
market rent for a project in ``as-is'' condition, another rent for a 
rehabilitated project, another rent for a project to which amenities 
have been added, and still another rent that is achievable two or three 
years after restructuring is completed and income mixing has occurred.
    Q. How will operating expenses be determined for the purposes of 
calculating the mortgage supportable after rents are moved to market?
    A. HUD's due diligence contractor will evaluate project operating 
statements, will reduce costs that are a product of HUD requirements 
and processes that can be eliminated, and HUD will negotiate the 
balance of any operating expenses that appear to exceed market levels 
with the owner in light of industry standards for market rate 
developments.
    Q. Will HUD keep existing FHA insurance in place after 
restructuring?
    A. It is HUD's preference to extinguish existing insurance 
immediately or over time and transition reengineered projects to 
freshly underwritten permanent financing. This preference is driven by 
both HUD budget considerations, and well established banking principles 
regarding the restructuring of troubled assets. However, HUD will 
consider extenuating circumstances that may justify leaving existing 
insurance in place.
    Q. Will projects with HUD held mortgages be considered for the 
demonstration?
    A. No. The demonstration is limited to insured mortgages.
    Q. What rehabilitation levels and capital improvements will be 
supported by the demonstration?
    A. Restructuring must be designed to ensure the long term physical 
integrity of the project. HUD will consider rehabilitation necessary to 
achieve that objective. In addition, HUD will consider the addition of 
amenities when the owner can demonstrate they will support higher 
market rents that will reduce net long term costs to the Federal 
Government. This could include, for example, improvements that promote 
the economic self-sufficiency of the tenants. Any project 
rehabilitation or capital improvements supported by HUD will comply 
with 24 CFR part 50.
    Q. What owner administrative costs will HUD allow to be offset in 
the workout process?
    A. Non-profit owners may include reasonable transaction costs and 
administrative fees as eligible uses of funds in loan workouts.
    Q. How will the demonstration approach projects in which market 
rents are insufficient to support operating costs?
    A. These projects are not included in the initial focus of the 
demonstration, but will be addressed in future guidelines.
    Q. Will the demonstration include projects in which restructuring 
occurs in conjunction with a sale or transfer to a new owner?
    A. Yes.

V. Other matters

Executive Order 12612, Federalism

    The General Counsel, as the Designated Official for HUD under 
section 6(a) of Executive Order 12612, Federalism, has determined that 
the provisions in this NOFA are closely based on statutory requirements 
and impose no significant additional burdens on States or other public 
bodies. This notice does not affect the relationship between the 
Federal Government and the States and other public bodies or the 
distribution of power and responsibilities among various levels of 
government. Therefore, the policy is not subject to review under 
Executive Order 12612.

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 for significant impact on family formation, maintenance, and 
general well-being, and, thus, is not subject to review under the 
order. The notice implements a statutorily

[[Page 34667]]

authorized demonstration program and is intended to find ways of 
reducing the impact on families that might otherwise not be caused by 
the nonrenewal of Section 8 project-based rental assistance.

    Dated: June 26, 1996.
Nicolas P. Retsinas,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 96-16790 Filed 6-27-96; 4:03 pm]
BILLING CODE 4210-27-P