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M2M Program Operating Procedures Guide TOC TABLE OF CONTENTS Chapter 1 - Mark-to-Market Program Overview and Goals Chapter 2 - Allocation of Assets to PAEs, PAE Payment Process Chapter 3 - Program Requirements and Standards Chapter 4 - Document Collection and Analysis; Financing Alternatives Chapter 5 - Underwriting; Development of the Restructuring Plan Chapter 6 - Approval, Ineligibility, and Appeals Chapter 7 - Closing Chapter 8 – Post-Closing Document Distribution Chapter 9 - Servicing and Monitoring Chapter 10 - Section 8 Contract Renewal with a Reduction of Section 8 Rents without Debt Restructuring (“Lites”) Chapter 11 - Rent Comparability Reviews Chapter 12 - MIS Reporting Requirements September 30, 2004 Page TOC-1 M2M Program Operating Procedures Guide DETAILED TABLE OF CONTENTS Chapter 1 - Mark-to-Market Program Overview and Goals 1-1 Mark-to-Market (M2M) Program Objectives A. Social B. Economic C. Administrative 1-2 Types of Transactions A. Rent Comparability Reviews B. Lites C. Fulls 1-3 Program Timetable A. Rent Comparability Reviews B. Lites C. Fulls 1-4 Overview of Mark-to-Market Full Restructuring Process Chapter 2 - Allocation of Assets to PAEs, PAE Payment Process 2-1 Executive Summary 2-2 Asset Allocation A. HUD Multifamily Hub or Program Center Actions B. OAHP’s Initial Asset Assignment Package C. Subsequent Assignment Packages D. Assignment of Assets E. Change of Asset Status F. Properties on Hold G. Increased Costs for Hold Properties H. Properties Reentering M2M I. PAE Compensation for Properties Reentering M2M 2-3 PAE Payment Process A. Invoicing Forms/Detailed Guidance B. Additional Guidance C. General Overview 2-4 Business Forms Chapter 3 - Program Requirements and Standards 3-1 Executive Summary 3-2 General Owner/Project Eligibility Requirements A. Eligible Properties B. Once Eligible Always Eligible C. Ineligible Properties D. Other Considerations September 30, 2004 Page TOC-2 M2M Program Operating Procedures Guide 3-3 Multiple Project-based Section 8 Contracts A. General B. Multiple Contracts with Differing Rents 3-4 Outyear Section 8 Contracts and Recapture Agreements A. Multiple Section 8 Contracts/Stages B. Rider to the Section 8 Contract 3-5 Return to the Owner A. Capital Recovery Payment B. Incentive Performance Fee C. Distribution of Surplus Cash D. Special Rules for Cooperatives 3-6 Affordability and Use Restrictions A. Use Agreement Required B. Terms of Use Agreement 3-7 Sale or Transfer of Property A. Timing B. OAHP Policy C. Ineligible Owners D. Transfers of Physical Assets 3-8 Tenant and Local Community Notice and Participation A. General B. Participating Administrative Entities C. First Tenant Consultation Meeting D. Second Tenant Meeting E. Notice of Completion of Restructuring Plan or Other Outcome F. Tenant and Community Access to Information G. Tenant Protections if an Expiring Contract is not Renewed 3-9 Technical Assistance Funding A. Technical Assistance Funding 3-10 Neighborhood Networks Centers A. Neighborhood Network Initiative B. Owner Request for Neighborhood Networks Funding C. PAE Evaluation of Owner Request D. Financing 3-11 Davis-Bacon Act Requirements 3-12 Standard Form Legal Documents 3-13 Business Forms Chapter 4 - Document Collection and Analysis; Financing Alternatives 4-1 Executive Summary 4-2 Kick-Off Meeting A. Schedule the Kick-off Meeting B. Send the Owner’s Package C. Hold the Kick-off Meeting 4-3 Ordering Third-party Reports September 30, 2004 Page TOC-3 M2M Program Operating Procedures Guide Third-party Reports Timing Qualifications Obtaining Drafts Tenant Comments 4-4 Collection of Data – General Use of Forms A. Underwriting Documentation Needed B. Exceptional Documentation C. Closing Documentation Not Included D. Use of Guide Provided Forms 4-5 Collection of Data from the Owner A. Owner’s Documentation B. Owner Failure to Submit Documentation 4-6 Affordability and Use Restrictions A. Coordination with the Multifamily Hub or Program Center B. Specific Concerns C. HUD Asset Management Records D. Annual Financial Statements 4-7 Collection of Other Data A. Code Compliance B. Expense Data C. Community Development Block Grant Consolidated Plan D. F47 Reconciliation and Worksheet E. Independent Review of the Property, Neighborhood, and Comparables 4-8 Evaluation of Ownership and Management A. Determination of Ownership, Term, and Consent Requirements B. Determination of Compliance with HUD Guidelines C. Evaluation of Ownership History D. Eligibility Issues E. Evaluation Management F. Conclusion on Ownership and Management 4-9 Evaluation of Physical Condition A. General B. Review of the Physical Condition Assessment (PCA), SHPO Requirements C. Owner Input D. PAE Adjustment of the PCA E. Critical Repairs F. Conclusion on Physical Condition G. Conclusion on Environmental Concerns 4-10 PAE’s Decisions Regarding any Rehab Escrow A. Applicability B. General C. Selection of Rehabilitation Escrow Administrator D. Bonding E. Compensation A. B. C. D. E. September 30, 2004 Page TOC-4 M2M Program Operating Procedures Guide 4-11 4-12 4-13 4-14 4-15 4-16 4-17 Amount of the Escrow Evidence of Completion Approval Timing Special Considerations for More Complex Repairs Deposits to the Reserve for Replacements A. Initial Estimate of Annual Deposits to the Reserve B. Final Determination of the Annual Deposit and any Initial Deposit to the Replacement Reserve PAE’s Review of the Appraisal; Determination of Market Rents A. Review B. Determine Comparable Market Rents C. Poor Quality Rental Assistance Assessment Plan (RAAP) Transfers of Physical Assets A. General Overview B. Special TPA Requirements C. Sequential Transactions D. Two Types of Review E. Process Financing Options: Coordination with Lenders and HUD A. General B. FHA Insured Mortgage under Section 223(a)(7) C. Loan Modification D. Other FHA Mortgage Insurance E. Convention Financing F. Financing Through PAE G. Loan Rates Additional Requirements for Bond Financed Properties A. General B. Required Documentation C. Other Documents D. Lite Transactions E. Executive Summary F. Defeasance Business Forms F. G. H. I. J. Chapter 5 - Underwriting; Development of the Restructuring Plan 5-1 Executive Summary 5-2 Underwriting Model A. General B. Using the Model C. Trend Factors D. MIS Input 5-3 Income September 30, 2004 Page TOC-5 M2M Program Operating Procedures Guide Estimate Gross Potential Rental Income Two Ways Commercial Income Other Income 5-4 Physical and Economic Vacancy A. Residential Vacancy and Bad Debt/Collection Loss Factor B. Commercial Vacancy and Bad Debt/Collection Loss Factor 5-5 Operating Expenses A. Estimate Operating Expenses B. General Approach C. Guidance on Individual Expense Items D. Expenses for Tenant-based Properties 5-6 Net Operating Income (NOI) for Calculating the First Mortgage A. Net Operating Income (NOI) B. Analyze the Resulting NOI 5-7 General Considerations in Structuring the Mortgages 5-8 First Mortgage A. Determine the First Mortgage B. Terms C. Debt Service Coverage D. Loan to Value E. Small Loans 5-9 Sizing the Partial Payment of Claim 5-10 Sizing the M2M Subordinate Debt A. Inn General B. New Reg Residual Receipts C. Other Residual Receipts D. Restructures of FHA-Insured Mortgages E. Restructures of HUD-Held Mortgages 5-11 Second Mortgage (Mortgage Restructuring Note or MRN) A. Terms B. Funds to Service the Second Mortgage C. Sizing the Second Mortgage D. Sizing the Second Mortgage: Restructuring of HUD-Held Mortgages E. Criteria for Determining the Amount “Reasonably Expected to be Repaid” F. Qualified Non-profit Purchasers 5-12 Third Mortgage (Contingent Repayment Note or CRN) A. When Appropriate B. Terms C. Qualified Non-Profit Purchasers 5-13 Exception Rents A. General B. Exception Rent Recommendation C. Sizing Exception Rents D. Recommendation Against Exception Rents E. Exception Rent Limitations A. B. C. September 30, 2004 Page TOC-6 M2M Program Operating Procedures Guide 5-14 Sources and Uses A. Sources B. Uses 5-15 Subsidy Layering Review A. Overview B. Potential Overlapping Funding Sources C. Requirements for Owners D. Requirements for PAEs 5-16 Restructuring Plan and Commitment A. Owner and Lender Input During Underwriting B. Draft Restructuring Plan C. Completion of Underwriting and Due Diligence D. Second Tenant Meeting E. Submission to OAHP for Approval 5-17 Business Forms Chapter 6 - Approval, Ineligibility, and Appeals 6-1 Executive Summary 6-2 Owner Involvement in the Development of the Restructuring Plan A. General Guidance B. Draft Restructuring Plan C. OAHP Review of Terms D. Meeting with the Owner E. Owner Input to the Draft Restructuring Plan F. Tracking Owner Review Time 6-3 Possible Transaction Outcomes A. PAE’s Alternatives B. Problem Transaction 6-4 PAE Recommends a Restructuring Plan to OAHP A. OAHP Review and Approval B. OAHP Identification of Issues C. Review by OAHP Loan Committee D. Special Conditions E. Review and Approval of Environmental Evaluation F. Notification of Conversion to Tenant-based Assistance G. OAHP Review of the Restructuring Commitment H. PAE Presents Approved Plan and Commitment to the Owner I. Owner Acceptance J. Owner Refusal to Execute a Restructuring Commitment 6-5 PAE Recommends a Determination of Ineligibility to OAHP A. Determination of Ineligibility B. PAE Assessment of Ineligibility Issues C. Grounds for a Determination of Ineligibility - Non-cooperation. D. Grounds for a Determination of Ineligibility - Property Condition September 30, 2004 Page TOC-7 M2M Program Operating Procedures Guide E. Determination of Eligibility – OAHP 6-6 PAE Recommends to OAHP that Development of a Restructuring Plan be Discontinued A. PAE Recommendation To Discontinue Restructuring B. OAHP Review C. OAHP Concurrence D. OAHP Non-concurrence 6-7 Meeting the Goals of M2M in Problem Situations A. Completion of Restructuring Plans B. Stakeholders C. Consultations with Hub/Program Centers; Smooth Transitions 6-8 Appeals and Administrative Reviews A. Initial Owner Appeal B. Written Appeal C. OAHP Preservation Office Review D. Final Decision E. Request for Headquarters Preservation Office Review F. Headquarters Preservation Office Review (Administrative Review) 6-9 Completion Procedures for Transactions That Do Not Close A. Applicability B. Timing C. Completion of Processing D. Conversion to Tenant-based Assistance 6-10 Expiration of Section 8 Contracts A. Expiration of Section 8 Contract B. Procedures 6-11 Notification of Stakeholders A. Notification to Stakeholders if Owner Accepts Commitment B. Notification to Stakeholders in All Other Cases 6-12 Business Forms Chapter 7 - Closing 7-1 Executive Summary 7-3 General Closing Roles and Responsibilities A. Special OAHP Preservation Office Delegations B. PAE Responsibilities C. Closing Escrow Agent (Third Party Fiduciary) Responsibilities D. Take-out Financing Closing Responsibilities 7-4 Working Parties A. PAE Responsibilities B. Closing Escrow Agent (Third Party Fiduciary) Responsibilities C. Owner and Owner’s Attorney D. OAHP Preservation Office E. HUD Multifamily Hub or Program Center September 30, 2004 Page TOC-8 M2M Program Operating Procedures Guide Existing Mortgagee or Loan Servicer (if HUD-Held at Closing) New Mortgagee or Loan Servicer Title Company HUD Multifamily Claims Branch HUD’s Multifamily Insurance Operations Branch HUD Notes Servicing Branch 7-5 Pre-Closing A. Restructuring Commitment B. Choosing the Title Company and Closing Escrow Agent (third party fiduciary) C. Closing Instructions from the PAE to the Owner D. PAE Notice to the Existing Mortgagee of Debt Restructuring 7-6 Closing Escrow – Receipt of Funds and Disbursements A. Funding the Closing Escrow B. Disbursement of Funds C. Excess Funds/Shortfalls at Settlement D. Excess Bond Reserve Funds (generally after Closing) E. Sending Payments to HUD – Specific Instructions for Checks and Wires 7-7 Settlement Statement A. Disbursement Statement and/or Settlement Statement B. Interim and/or Final Statements C. Maximum Time for Closing Escrows to Remain Open D. Transmittal/Certification Form 7.21 E. PAE Controls to Track Closeout and Final Disbursement 7-8 Partial Payment of Claim (PPC) and the PPC Package A. General B. Preparation of PPC Package and Other Internal Control Documents C. Payment of Section 541(b) Payment 7-9 Closing Document Preparation, Execution, and Recordation A. Completion of Closing Documents B. Managing Closing Document Execution C. Review and Certification of Legal Documents D. Closing Escrow Agent Document Holding E. Setting Closing Date and HUD Funding Date F. Transmitting Closing Information from the PAE to All Working Parties G. Recordation and Effective Date of Closing H. Endorsement for Full Mortgage Insurance under Section 223(a)(7) I. Endorsement under Section 542(c) HFA Risk-Sharing or Section 542(b) GSE Risk-Sharing 7-10 Section 221(d)(4) Substantial Rehabilitation or Section 223(f) Refinancing A. General B. Document Execution C. Internal Control 7-11 Section 8 HAP Contract 7-12 HUD-Held Notes A. General F. G. H. I. J. K. September 30, 2004 Page TOC-9 M2M Program Operating Procedures Guide B. Closing Escrow Agent C. Multifamily Notes Servicing D. Legal Documentation E. PAE Attorney Certifications F. HUD-Held Closing Package and Form 7.12 G. Upon Receipt of the Certification of PAE Attorney Form 7.14 H. Projects with HUD-held and HUD-Insured Loans I. FHA-Insured Take-out Financing J. Payments to HUD K. Disbursements by HUD from Existing HUD-Held Escrows L. Closing Wrap-Up 7-13 Non-HUD-Held/Non 541(b) Restructurings – Full Restructurings with no 541(b) Payments A. General B. Excess Residual Receipts and/or Other Escrows 7-14 List of Business Forms, Legal Forms and Appendices Chapter 8 – Post-Closing Document Distribution 8-1 Executive Summary 8-2 Internal Document Distribution A. OAHP HQ Closing Department B. Multifamily Insurance Operations C. Multifamily Notes Servicing D. HUD FAD/FMC E. Local HUD Multifamily Field Office Director F. New Lender 8-3 Document Docket Preparation and Distribution A. General Responsibilities B. Recipients of Closing Dockets C. Preparation of Closing Dockets D. Distribution Timeframe E. Distribution of Closing Dockets 8-4 Post-Closing Internal Review by PAE and OAHP A. Requirements for Closing Dockets B. Form 7.19 Official Term Sheet C. Acceptance of the Washington D.C. Closing Docket D. Tracking of Docket Receipt and Discrepancies 8-5 Post-Closing M2M MIS and Model Data 8-6 Post-Closing Data Reconciliation 8-7 Business Forms Chapter 9 - Servicing and Monitoring 9-1 Executive Summary September 30, 2004 Page TOC-10 M2M Program Operating Procedures Guide 9-2 First Mortgage Servicing 9-3 Mortgage Restructuring Mortgage Servicing A. Cash Management B. Asset Management C. Post-Closing 9-4 Contingent Repayment Mortgage Servicing 9-5 Administering the Rehabilitation Escrow A. Applicability B. Compliance and Monitoring Activities 9-6 Mark-to-Market Use Agreement Compliance Monitoring 9-7 Section 8 Contract Administration Chapter 10 - Section 8 Contract Renewal with a Reduction of Section 8 Rents without Debt Restructuring (“Lites”) 10-1 10-2 10-3 10-4 Executive Summary Comparison to Full Debt Restructuring Owner’s Request for a Lite Initial Processing; Section 8 HAP Contract Renewal; Contract Administration A. Assignment to OAHP B. Section 8 HAP Contract Renewal C. Section 8 Moderate Rehabilitation Lite Processing Options A. General: Tiers 1 and 2 B. Transactions Found Ineligible as Lites C. Not Approvable D. Completion of Work Lite Tier 1: Review and Underwriting A. Procedures for Review of a Lite Tier 1 Transaction; Underwriting Standards for Tier 1 Transactions B. Notification of Tenants C. Determine Managerial Soundness D. Determine Physical Soundness E. Determine Market Rents F. Determine Other Income, Vacancy, and Expense Estimates G. Calculate Adjusted NOI; Determine Financial Soundness Lite Tier 2: Review and Underwriting A. Procedures for Review of a Lite Tier 2 Transaction; Underwriting Standards for Tier 2 Transactions B. Notification of Tenants C. Approvable Lite Tier 2 Projects D. Lite Tier 2 Underwriting Standards E. Calculation of the Adjusted NOI for Tier 2 Transactions F. Lite Tier 2: Options For Meeting Financial Soundness Test Approval of Lites A. Approval as a Lite 10-6 10-7 10-8 10-9 September 30, 2004 Page TOC-11 M2M Program Operating Procedures Guide 10-10 Appeal Process for Lites 10-11 List of Business and Legal Forms Chapter 11 - Rent Comparability Reviews 11-1 Referral to OAHP and Assignment to PAE A. Referral to OAHP from Multifamily Hub or Program Center B. Assignment to PAE 11-2 General Owner/Project Eligibility Requirments A. Commissioning the Market Rent Study B. PAE Review C. PAE Conclusions D. OAHP Review E. Owner Notification 11-3 Processing Upon Completion of Review A. Rents At or Below-Market B. Rents Above-Market 11-4 Appeal Process for Rent Comparability Review A. General B. Content and Timing of Owner Appeal C. OAHP Review D. Owner Notification 11-5 Business Forms Chapter 12 - MIS Reporting Requirements 12-1 General 12-2 Input Requirements A. Critical Dates B. Restructuring Plans C. Closing Module List of Appendices Appendix A: Glossary of Terms Appendix B: List of Acronyms Appendix C: Qualified Non-Profit Purchasers Appendix D: Transfer of Physical Assets September 30, 2004 Page TOC-12 M2M Program Operating Procedures Guide Appendix E: Tenant Access to Information Appendix F: Legal Forms Appendix G: Owner's Package Appendix H: Statement of Work for Appraisal Services · HUD Form 92273 Rent Comparability Grid Appendix I: Statement of Work for Physical Condition Assessment · Fannie Mae Physical Needs Assessment Guidance · Accessibility Law Compliance Appendix J: List of Information in HUD's Asset Management Records Appendix K: Property Management Standards Appendix L: Restructuring Plan Package - Outline Appendix M: Detailed Instructions for Completing the RAAP · RAAP Sample Transaction - Project-based · RAAP Sample Transaction - Tenant-based Appendix N: Section 223(a)(7) Processing Appendix O: Contract File Appendix P: M2M Requirements for Projects with Flexible Subsidy Loans Appendix Q: M2M Requirements for 236 Transactions and Re-Use of IRP Appendix R: Additional Funds Transactions · Additional Funds Transaction Highlight Memorandum Appendix S-U: Reserved Appendix V: Part A – Required Work for Transactions with Restructuring Plans and Part B – Required Work for Transactions without Restructuring Plans September 30, 2004 Page TOC-13