[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