[Federal Register Volume 63, Number 126 (Wednesday, July 1, 1998)]
[Notices]
[Pages 36130-36133]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17457]



[[Page 36129]]

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Part V





Department of Housing and Urban Development





_______________________________________________________________________



Portfolio Reengineering--Fiscal Year 1998 Transition Program 
Guidelines; Notice

  Federal Register / Vol. 63, No. 126 / Wednesday, July 1, 1998 / 
Notices  

[[Page 36130]]


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DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT

[Docket No. FR-4162-N-03]


Portfolio Reengineering--Fiscal Year 1998 Transition Program 
Huidelines

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

ACTION: Notice of guidelines.

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SUMMARY: HUD is currently implementing a statutory demonstration 
program authorized for fiscal year (FY) 1997. The Demonstration Program 
is directed at FHA-insured multifamily projects that have project-based 
Section 8 contracts with rents in excess of 120 percent of fair market 
rents. That program has been extended by Congress through FY 1998 with 
certain modifications as a transitional program while HUD develops 
regulations to implement the new authority for a non-demonstration FHA-
insured mortgage and rental assistance restructuring program.
    This notice provides guidelines for the FY 1998 Transition Program. 
It also identifies projects that will continue to proceed under the FY 
1997 Demonstration Program unmodified by these transitional provisions. 
Finally, it clarifies HUD policy concerning delegation of 
responsibilities to joint venture designees. This clarification applies 
to both the FY 1998 Transition Program and the FY 1997 Demonstration 
Program.

FOR FURTHER INFORMATION CONTACT: Dan Sullivan, Housing Project Manager, 
Office of Multifamily Housing, Department of Housing and Urban 
Development, 451 Seventh Street, SW., Washington, DC 20410-4000; Room 
6106; Telephone (202) 708-2300, ext. 2062. (This is not a toll-free 
number.) Hearing or speech-impaired individuals may call 1-800-877-8399 
(Federal Information Relay Service TTY). Internet address: 
Dan__S[email protected].

SUPPLEMENTARY INFORMATION:

I. Paperwork Reduction Act Statement

Paperwork Reduction Act Statement

    The information collection requirements contained in this notice 
and in the notice published on January 23, 1997, at 62 FR 3566 have 
been approved by the Office of Management and Budget (OMB) in 
accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-
3520), and assigned OMB control number 2502-0519. An agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless the collection displays a valid 
control number.

II. Background

    The FY 1997 Demonstration Program was authorized by sections 211 
and 212 of the Departments of Veterans Affairs and Housing and Urban 
Development, and Independent Agencies Appropriations Act, 1997 (FY 1997 
Appropriations Act) (Pub. L. 104-204; 110 Stat. 2874, 2895-2904; 
approved September 26, 1996). HUD is currently implementing the FY 1997 
program under Guidelines published on January 23, 1997, at 62 FR 3566. 
(See also FY 1997 Portfolio Reengineering Request for Qualifications 
published on July 16, 1997, at 62 FR 38109.)
    The Multifamily Assisted Housing Reform and Affordability Act of 
1997 (MAHRA) was enacted in title V of the Departments of Veterans 
Affairs and Housing and Urban Development, and Independent Agencies 
Appropriations Act, 1998 (FY 1998 Appropriations Act) (Pub. L. 105-65; 
111 Stat. 1344, 1384; approved October 27, 1997). Subtitle A of MAHRA 
contains the FHA-Insured Multifamily Housing Mortgage and Housing 
Assistance Restructuring Program. That program provides authority to 
deal with Section 8 contract expirations occurring in FY 1999 and 
later. In accordance with section 522(a) of MAHRA, the new non-
demonstration program will be initially implemented by an interim rule 
to be followed by a final rule.
    Section 522(b) of MAHRA contains transition provisions for projects 
with Section 8 contracts expiring in FY 1998. For these projects, the 
transition provisions direct HUD to apply all the terms of sections 211 
and 212 of the HUD FY 1997 Appropriations Act except for two provisions 
in section 212. First, the 50,000 unit limitation in section 212(k) 
does not apply. Second, the mortgage restructuring provisions in 
section 212(h)(1)(G) do not apply. In addition, HUD is directed to 
apply section 517(a), Mortgage Restructuring, of MAHRA.
    Section 517(a) provides for a new second mortgage loan program from 
HUD that is available to eligible project owners as part of a 
prepayment on the existing unpaid principal balance on the first 
mortgage so that the restructured or new first mortgage is sustainable 
at rents determined under section 514(g) of MAHRA. The amount of the 
second mortgage cannot be more than the difference between the 
restructured or new first mortgage and the indebtedness under the 
existing insured mortgage. The second mortgage is further limited to an 
amount that can reasonably be expected to be repaid.
    Section 517(a) contains other requirements for the second mortgage, 
including a requirement that at least 75 percent of excess project 
income be applied to the second mortgage note.
    Section 514(g), which, as noted above, is used in determining the 
amount of the restructured or new first mortgage, in general, requires 
the use of market rents based on at least two comparable properties, 
or, if those rents cannot be determined, on 90 percent of the 
applicable fair market rents. Section 514(g) also authorizes budget-
based exception rents. In general, such rents cannot exceed 120 percent 
of fair market rent (FMR). Up to 5 percent of the units subject to 
mortgages restructured in a fiscal year may have rents that exceed this 
limit based on a finding of special need.
    Under the transition program there are two statutory bases for debt 
forgiveness and two statutory bases for providing budget-based rents. 
Debt forgiveness can be authorized under section 212(h)(1)(H) and also 
under section 517(a) but only when application of the ``reasonably be 
expected to be repaid'' limitation results in a second mortgage that is 
less than the amount required to pay down the first mortgage to a 
sustainable level. Budget-based rents are authorized under section 
212(h)(1)(I) and, as discussed above, under the exception rent 
provisions in section 514(g)(2) and (3).
    These Guidelines implement all of these authorities in a manner 
that is consistent with overall statutory requirements, and in 
particular, with the requirement in section 522(b) to apply section 
517(a).

III. Projects Continuing Under the FY 1997 Demonstration Program

    Any project covered by a Demonstration HAP Contract that was 
executed on or before September 30, 1997 shall continue to be processed 
under the provisions of the January 23, 1997 Guidelines unmodified by 
section IV. of today's Federal Register notice. Certain of these 
Demonstration HAP Contracts may be extended for a period not to exceed 
120 days in accordance with section 212(g)(2) of the FY 1997 
Appropriations Act, as added by section 523(f) of MAHRA. Section 
212(g)(2) authorizes these extensions for contracts originally executed 
before February 1, 1997 and for contracts originally executed before 
October 1, 1997 in connection with a restructuring under the joint 
venture approach, if HUD, in its sole discretion, determines that the 
renewal period needs to exceed one year

[[Page 36131]]

(i) for the pre-February 1, 1997 contracts, due to the delay in 
publishing the January 23, 1997 Guidelines and (ii) for the pre-October 
1, 1997 contracts, due to a delay in implementation of the joint 
venture agreement. The two categories described involve not more than 
21 and 25 projects, respectively. A project continuing under the FY 
1997 Demonstration Program is not subject to the FY 1998 Transition 
Program Guidelines (see section IV. of this notice), but is subject to 
the revision to joint venture designee policy in section V. of this 
notice.

IV. FY 1998 Transition Program Guidelines

A. Applicability of the January 23, 1997 Guidelines

    Because MAHRA applies almost all of the statutory provisions for 
the FY 1997 Demonstration Program to the FY 1998 Transition Program, 
sections IV. through IX. of the January 23, 1997 Guidelines (62 FR 
3569-3581), as augmented by this notice, constitute the FY 1998 
Transition Program Guidelines. Except for statutory references, all 
references in sections IV. through IX. of the January 23, 1997 
Guidelines to ``FY 1997'' mean ``FY 1998.''
    In section III.B. of the January 23, 1997 Guidelines (62 FR 3568), 
the definitions of ``FMR'' and ``in the aggregate'' apply to the FY 
1998 Transition Program.

B. General Eligibility

    This section IV.B. applies instead of section IV.B.1., General 
Eligibility, of the January 23, 1997 Guidelines (62 FR 3569). For a 
project to be eligible for the FY 1998 Demonstration Program, the owner 
must agree to participate. The project must be subject to an FHA-
insured mortgage and supported by project-based Section 8 Housing 
Assistance Payments (HAP) contracts with rent levels which, in the 
aggregate, exceed 120 percent of FMR. In managing its workload, HUD 
will give preference to projects with contracts expiring in FY 1998.

C. Disqualified Owner

    The following conforms the Guidelines to the amendment to section 
211(b)(4)(B) of the HUD FY 1997 Appropriations Act made by section 
10006 of the 1997 Emergency Supplemental Appropriations Act, Pub. L. 
105-18; 111 Stat. 158; approved June 12, 1997 which added ``affiliate 
of the owner'' to the definition of ``owner.'' In section IV.C.3. of 
the January 23, 1997 Guidelines (62 FR 3569), Disqualified Owners, the 
term owner also means an affiliate of the owner and the term purchaser 
also means an affiliate of the purchaser. The terms affiliate of the 
owner and affiliate of the purchaser mean any person or entity 
(including but not limited to, a general partner or managing member, or 
an officer of either) that controls an owner or purchaser, is 
controlled by an owner or purchaser, or is under common control with 
the owner or purchaser. The term control means the direct or indirect 
power (under contract, equity ownership, the right to vote or determine 
a vote, or otherwise) to direct the financial, legal, beneficial or 
other interests of the owner or purchaser.

D. Demonstration Approaches/Underwriting

1. Mandatory FY 1998 Transition Program Approaches
    This section applies in place of the guidance in sections IV.E.1., 
Mandatory Demonstration Approaches, through and including section 
IV.E.1.b., Debt Forgiveness, of the January 23, 1997 Guidelines (62 FR 
3569-3571).
    With respect to any eligible project, HUD must perform an analysis 
under section 517(a)(1)(B) of MAHRA. HUD is obligated to require a new 
second mortgage to the extent that it makes a determination that a new 
second mortgage can reasonably be expected to be repaid.
    To the extent that the combination of the new first mortgage and 
the new second mortgage is less than the outstanding principal balance 
of the existing insured mortgage, immediately before it is restructured 
or refinanced, HUD will consider debt forgiveness or budget basing, or 
a combination of these, pursuant to sections 212(h)(1)(H) and 
212(h)(1)(I) and sections 514(g)(2) and (3) and 517(a).
    a. Mortgage Restructuring.
    Under the Mortgage Restructuring approach, the unpaid principal 
balance (UPB) on the existing FHA-insured mortgage loan is paid down 
to, or refinanced by a new first mortgage at, an amount equal to the 
Supportable Debt. The reduction in the first mortgage UPB is effected 
by an advance of funds from HUD. This advance is secured, in whole or 
in part, by a second mortgage note. The portion of the advance that is 
secured by the second mortgage cannot exceed the amount that HUD 
determines can reasonably be expected to be repaid.
    (1) Supportable First Mortgage Loan
    The amount of the UPB of the supportable first mortgage loan after 
restructuring is determined by applying a 1.10 or greater debt service 
coverage ratio, at the interest rate and term approved by HUD, to the 
adjusted NOI. The amount may, at HUD's option, be adjusted if the 
security for the existing FHA-insured loan includes vacant land or 
other non-income producing assets with additional market value. HUD 
will require that the restructured or new first mortgage carry an 
interest rate and term that is competitive in the market.
    (2) Second Mortgage Loan.
    The initial unpaid principal balance of the second mortgage loan 
will equal the lesser of:
    (a) The amount required to pay down the existing FHA-insured 
mortgage loans(s) to a sustainable level; or
    (b) An amount HUD determines can reasonably be expected to be 
repaid.
    The second mortgage loan shall bear interest at a rate less than or 
equal to the long term applicable Federal rate, as set forth pursuant 
to section 1274(d) of the Internal Revenue Code of 1986 (26 U.S.C. 
1274(d)). The term of the second mortgage shall be equal to the term of 
the restructured or new first mortgage.
    The interest rate and payment and other terms of the loan will be 
established by HUD, consistent with section 517(a) of MAHRA. Principal 
and interest on the second mortgage loan will be payable out of Net 
Cash Flow (discussed below), and unpaid interest will accrue.
    (3) Debt Forgiveness.
    HUD may forgive a certain portion of the outstanding balance of an 
existing FHA-insured loan to the extent HUD determines that a second 
mortgage cannot reasonably be expected to be repaid.
    (i) Amount of Debt Forgiveness.
    The amount of the debt that may be forgiven is equal to--
    (a) If HUD will make a second mortgage loan, the outstanding UPB of 
the existing FHA-insured mortgage loan(s) at the time of restructuring 
minus the sum of UPB of the restructured or new first mortgage and the 
UPB of the second mortgage loan determined under section IV.D.1.a.(2) 
of this notice; or
    (b) If there will be no second mortgage loan from HUD, the 
outstanding UPB of the existing FHA-insured mortgage loan(s) at the 
time of restructuring minus the market value. The project's ``market 
value'' will be determined based upon an appraisal of the project's as-
is value prepared in accordance with the Uniform Standards of 
Professional Appraisal Practice (USPAP). The appraisal will take into 
consideration, among other factors, the current market rents for 
unsubsidized units in the local market area, the project's current 
operating expenses, any necessary reserves for long term capital

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replacements, any necessary rehabilitation costs (see section 
IV.E.2.b.(1)(c), Determining the Level of Required Physical 
Improvements, of the January 23, 1997 Guidelines (62 FR 3572)), and any 
anticipated costs relating to the transition of the project to market 
rents.
    (4) Restructuring Payment.
    The amount of the restructuring payment made by HUD shall equal the 
UPB of the existing FHA-insured mortgage loan(s) minus (i) the 
supportable debt, (ii) all contributions made by the owner (and the 
owner's partners/investors) in connection with the restructuring, as 
determined by HUD, and (iii) all excess funds in the project's reserve 
for replacement account, and (iv) all funds in the project's residual 
receipts account and any other escrows and reserves, as determined by 
HUD, plus (v) reasonable, cost effective rehabilitation costs approved 
by HUD, and (vi) reasonable transaction costs approved by HUD.
    (5) Use of Net Cash Flow.
    For purposes of the Mortgage Restructuring approach, ``Net Cash 
Flow'' means that portion of the NOI that remains after the payment of 
all required debt service payments on the first mortgage loan. Net Cash 
Flow shall be applied as follows: first, to payment to the holder of 
the first mortgage loan of any past due principal or interest, and 
required escrows and reserves, on such mortgage loan; second, to the 
extent of the remaining Net Cash Flow to any other expenditures 
approved by HUD; and third, to the extent of the remaining Net Cash 
Flow, to be distributed with at least 75 percent to payment of 
principal and interest due on the second mortgage and up to 25 percent 
to an escrow account for payment to the owner after the requirements of 
section IV.D.2. of this notice have been met.
    (6) Funding of Rehabilitation Costs.
    If the FHA-insured mortgage loan will be refinanced with non-FHA-
insured financing, the HUD-approved rehabilitation costs will be 
financed with funds available in the project's residual receipts 
account and excess funds in the project's reserve for replacements 
account, as of the date of the mortgage restructuring. If the 
rehabilitation costs exceed the amount of such funds, the 
rehabilitation costs may be funded by (a) a contribution of cash equity 
from the owner's partners/investors, and/or (b) the proceeds of the 
non-FHA-insured refinancing loan, and (c) to the extent that other 
sources of funds are unavailable, and at HUD's sole discretion, through 
a loan or grant from HUD.
    If the FHA-insured mortgage loan is retained or refinanced with 
another FHA-insured loan, the HUD approved rehabilitation costs will be 
financed with funds available in the project's residual receipts 
account and excess funds in the project's reserve for replacements 
account, as of the date of the mortgage restructuring. If the 
rehabilitation costs exceed the amount of such funds, the 
rehabilitation costs may be funded by (1) a contribution of cash equity 
from the owner's partners/investors, (2) the proceeds of a non-FHA-
insured rehabilitation loan, (3) the proceeds of an FHA-insured 
rehabilitation loan, and/or (4) to the extent that other sources of 
funds are unavailable, through a loan or grant from HUD.
    For owners who want to refinance the original FHA-insured loan, 
mortgage insurance from the following FHA programs may be provided:
    (a) Section 223(f), acquisition and refinance with limited 
renovations--loan to value limit of 85 percent; or
    (b) Section 223(a)(7), refinance of an insured loan to lower the 
interest rate and to fund rehabilitation costs--loan limit is up to the 
original insured principal amount.
    b. Budget-Based Rents.
    The provisions of section IV.E.1.c., Budget-Based Rents, of the 
January 23, 1997 Guidelines (62 FR 3571) apply, subject to the 
following. The above referenced Budget-Based Rents provisions implement 
the authority under section 212(h)(1)(I) of the 1997 Appropriations 
Acts. Budget-based rents under that authority may not exceed the 
expiring contract rents, and there is no percentage limitation on the 
number of units that may receive budget-based rents. Sections 514(g) 
(2) and (3) of MAHRA also authorize the use of budget-based rents. 
Those sections have a general limit of 120 percent of FMR but allow up 
to 5 percent of all units subject to mortgages restructured within the 
fiscal year to exceed that limit. While there is no express statutory 
requirement in section 514(g)(2) or (3) limiting budget-based rents to 
no more than the expiring contracts rents, it is HUD policy to approve 
budget-based rents only at or below expiring contract rents.
32. Owner's Distribution From Net Cash Flow
    This section IV.D.2. applies instead of section IV.E.2.b.(2), 
Owner's Distribution from Net Cash Flow, of the January 23, 1997 
Guidelines (62 FR 3569).
    As an incentive to maintain the property the owner may receive an 
annual distribution of up to 25 percent of Net Cash Flow (``Owner's 
Distribution'').
    The Owner's Distribution will be held in an escrow account and paid 
to the owner only after HUD or its representative inspects the project 
and finds that all units are in substantial compliance with maintenance 
standards set forth by HUD as part of the restructuring agreement. Any 
owner who fails to deposit all Net Cash Flow to the escrow account will 
waive its rights to future distributions.

E. Project Underwriting--Market Rents

    In estimating a project's net operating income under section 
IV.E.2.b. of the January 23, 1997 Guidelines (62 FR 3572), market rents 
will be established through an appraisal of the property that utilizes 
at least two comparables. If two comparables cannot be found, HUD may 
authorize the appraiser to use 90 percent of the applicable fair market 
rents.

F. HUD Housing Notices

    The following sections of the January 23, 1997 Guidelines referred 
to Housing Notice H 96-89, issued October 15, 1996: Sections V.F. (62 
FR 3574); V.B.2. (62 FR 3575); VI.D. (62 FR 3576); and VI.L. (62 FR 
3577). Housing Notice H 97-66, issued November 12, 1997, reinstates H 
96-89 with certain exceptions. The reader should refer to both Housing 
Notices. They are available through HUDCLIPS, which is on HUD's web 
site. The location (URL) for the HUDCLIPS Database Selection Screen is 
http://www.hudclips.org/subscriber/cgi/legis.cgi?legis. These notices 
are in the Handbooks and Notices--Housing Notices database. Enter only 
the number without the letter prefix (e.g., 97-96) in the ``Document 
Number'' to retrieve the program notice.

G. Obsolete Provisions

    Section V.G., Funding and Unit Limitations, of the January 23, 1997 
Guidelines (63 FR 3574) described limitations as they existed in FY 
1997 and does not apply.
    Section IX.A., Participation of Projects with Post-FY 1997 
Expirations, of the January 23, 1997 Guidelines (62 FR 3581) does not 
apply. (See section IV.B of today's notice for guidance on preference 
for projects with contracts expiring in FY 1998.)

H. Sunshine Provision

    This section IV.H. applies instead of section X.B., Sunshine 
Provision, of the January 23, 1997 Guidelines (62 FR

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3581). In order that others may learn from the experience of the FY 
1998 Transition Program, all proposals accepted by HUD to participate 
in the FY 1998 Transition Program may be posted on HUD's Web Page 
(www.hud.gov/fha/mfh/mfhsec8.html). The posted information will 
include, but not be limited to, the final restructuring commitment, 
detailed financial information regarding the asset and tenant issues. 
Owners will be requested to waive the provisions of the Privacy Act (5 
U.S.C. 552a) and the Trade Secrets Act (18 U.S.C. 1905).

V. Revision to Joint Venture Designee Policy for Both the FY 1997 
Demonstration Program and the FY 1998 Transition Program

    Section VII.A. of the January 23, 1997 Guidelines (62 FR 3578, 2d 
col.) contained a statement encouraging designee applicants to 
``develop partnerships with each other as well as with other private 
and public entities * * * .'' This inaccurately stated the policy set 
out in section 212(d)(3) of the FY 1997 HUD Appropriations Act. Rather, 
designee applicants are encouraged to develop partnerships with each 
other and to contract or subcontract with other private and public 
entities, including the entities listed in section VII.A. of the 
January 23, 1997 Guidelines.
    Section VII.B.2.a. of the January 23, 1997 Guidelines (62 FR 3580) 
stated in part, ``It is possible that HUD would delegate all of its 
powers to the designees including the ability to authorize full or 
partial mortgage prepayment and would rely solely on a post-
restructuring audit to verify that the interests of the Federal 
Government are fairly represented in the transaction.'' Section 
VI.B.2.b. of the January 23, 1997 Guidelines (62 FR 3580) stated in 
part, ``The Joint Venture Designees will be responsible for all 
decision making. HUD approvals will be based on representations and 
certifications made by the Designee.'' These two statements do not 
apply to the FY 1998 Transition Program.
    A Joint Venture Designee will be responsible for decision making as 
set out in its agreement with HUD. All other provisions of section VII. 
continue to apply to the FY 1997 Demonstration Program and the FY 1998 
Transition Program.

VI. HUD Findings and Certifications

A. Environmental Impact

    A Finding of No Significant Impact with respect to the environment 
has been made in accordance with HUD regulations at 24 CFR part 50, 
which implement section 102(2)(C) of the National Environmental Policy 
Act of 1969. The Finding of No Significant Impact is available for 
public inspection between 7:30 a.m. and 5:30 p.m. weekdays in the 
Office of the Rules Docket Clerk at the above address.

B. Executive Order 12612, Federalism

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

    Dated: June 22, 1998.
Art Agnos,
Acting General Deputy Assistant Secretary for Housing--Deputy Federal 
Housing Commissioner.
[FR Doc. 98-17457 Filed 6-30-98; 8:45 am]
BILLING CODE 4210-27-P