PART 401—MULTIFAMILY HOUSING MORTGAGE AND HOUSING ASSISTANCE RESTRUCTURING PROGRAM (MARK-TO-MARKET) Authority: 12 U.S.C. 1715z-1 and 1735f-19(b); 42 U.S.C. 1437(c)(8), 1437f(t), 1437f note, and 3535(d). Source: 65 FR 15485, Mar. 22, 2000, unless otherwise noted. Subpart A—General Provisions; Eligibility § 401.1 What is the purpose of part 401? This part contains the regulations implementing the authority in the Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA) for the Mark-to-Market Program. Section 511(b) of MAHRA details the purposes, and section 512(2) details the scope, of the Program. § 401.2 What special definitions apply to this part? (a) MAHRA (b) Statutory terms. (c) Other terms. Affiliate Applicable Federal rate Community-based nonprofit organization Comparable market rents Disabled family Elderly family Eligible project HUD NHA et seq. OAHP Owner PAE PCA PRA Priority purchaser (1) A tenant organization; (2) A tenant-endorsed community-based nonprofit organization or public agency; or (3) A limited partnership with a sole general partner that itself is a priority purchaser under this definition. Rental Assistance Assessment Plan Restructured rent Restructuring Plan Plan Section 8 Section 541(b) claim Tenant organization Unit of local government Voucher (d) Conflicts of interest. [65 FR 15485, Mar. 22, 2000, as amended at 65 FR 53900, Sept. 6, 2000; 71 FR 2120, Jan. 12, 2006; 72 FR 66038, Nov. 26, 2007] § 401.3 Who may waive provisions in this part? The Assistant Secretary for Housing-Federal Housing Commissioner may waive any provision of this part, subject to § 5.110 of this title. [68 FR 3363, Jan. 23, 2003] § 401.99 How does an owner request a section 8 contract renewal? (a) Requesting Restructuring Plan. (1) Project rents are above comparable market rents; and (2) The owner is not suspended or debarred or has been notified by HUD of any pending suspension or debarment or other enforcement action, or, if so, a voluntary sale or transfer of the property is proposed in accordance with § 401.480. (b) Eligible but not requesting Restructuring Plan. (c) Not eligible for Restructuring Plan. [65 FR 15485, Mar. 22, 2000, as amended at 65 FR 53900, Sept. 6, 2000] § 401.100 Which projects are eligible for a Restructuring Plan under this part? (a) What are the requirements for eligibility? (1) Have a mortgage insured or held by HUD; (2) Be covered in whole or in part by a contract for project-based assistance under— (i) The new construction or substantial rehabilitation program under section 8(b)(2) of the U.S. Housing Act of 1937 as in effect before October 1, 1983; (ii) The property disposition program under section 8(b) of the U.S. Housing Act of 1937; (iii) The moderate rehabilitation program under section 8(e)(2) of the United States Housing Act of 1937; (iv) The loan management assistance program under section 8 of the United States Housing Act of 1937; (v) Section 23 of the United States Housing Act of 1937 as in effect before January 1, 1975; (vi) The rent supplement program under section 101 of the Housing and Urban Development Act of 1965; (vii) Section 8 of the United States Housing Act of 1937, following conversion from assistance under Section 101 of the Housing and Urban Development Act of 1965; or (viii) Section 8 of the U.S. Housing Act of 1937 as renewed under section 524 of MAHRA; (3) Have current gross potential rent for the project-based assisted units that exceeds the gross potential rent for the project-based assisted units using comparable market rents; (4) Have a first mortgage that has not previously been restructured under this part or under HUD's Portfolio Reengineering demonstration authority as defined in § 402.2(c) of this chapter; (5) Not be a project that is described in section 514(h) of MAHRA; and (6) Otherwise meet the definition of “eligible multifamily housing project” in section 512(2) of MAHRA or meet the following three criteria: (i) The project is assisted pursuant to a contract for Section 8 assistance renewed under section 524 of MAHRA; (ii) It has an owner that consents for the project to be treated as eligible; and (iii) At the time of its initial renewal under section 524, it met the requirements of section 512(2)(A), (B), and (C) of MAHRA. (b) When is eligibility determined? [71 FR 2121, Jan. 12, 2006] § 401.101 Which owners are ineligible to request Restructuring Plans? (a) Mandatory rejection. (b) Discretion to reject. (1) An affiliate is debarred or suspended under 2 CFR part 2424; or (2) HUD notifies the owner that HUD is engaged in a pending suspension, debarment or other enforcement action against an owner or affiliate, and the grounds for the pending action are included in § 401.403(b)(2)(ii). (c) Exception for sale. (d) Notice to tenants. [65 FR 15485, Mar. 22, 2000, as amended at 72 FR 66038, Nov. 26, 2007; 72 FR 73496, Dec. 27, 2007] Subpart B—Participating Administrative Entity (PAE) and Portfolio Restructuring Agreement (PRA) § 401.200 Who may be a PAE? A PAE must qualify under the definition in section 512(10) of MAHRA. It must not have any outstanding violations of civil rights laws, determined in accordance with criteria in use by HUD. If the PAE is a private entity, whether nonprofit or for-profit, it must enter into a partnership with a public purpose entity, which may include HUD. A PAE may delegate responsibilities only as agreed in the PRA. § 401.201 How does HUD select PAEs? (a) Selection of PAE. (b) Priority for public agencies. (c) Qualification for PAE by nonprofit and for-profit entities. (d) No PAE for project. § 401.300 What is a PRA? A PRA is an agreement between HUD and a PAE that delineates rights and responsibilities in connection with development and implementation of a Restructuring Plan. The PRA must contain or incorporate by reference the matters required by section 513(a)(2) of MAHRA and §§ 401.301 through 401.314, as well as other terms and conditions required by HUD. § 401.301 Partnership arrangements. If the PAE is in a partnership, the PRA must specify the following: (a) The responsibilities of each partner regarding the Restructuring Plan; (b) The resources each partner will provide to accomplish its designated responsibilities; and (c) All compensation to each partner, whether direct or indirect. § 401.302 PRA administrative requirements. (a) Inapplicability of certain requirements. (b) Recordkeeping. (c) Inspection of records and audit. [65 FR 15485, Mar. 22, 2000, as amended at 80 FR 75936, Dec. 7, 2015] § 401.303 PRA indemnity provisions for SHFAs and HAs. When a PRA requires HUD to indemnify a PAE in accordance with section 513(a)(2)(G) of MAHRA, any payment under this indemnity is contingent upon the availability of funds that are permitted by law to be used for this purpose. § 401.304 PRA provisions on PAE compensation. (a) Base fee. (2) HUD will establish a substantially uniform baseline for base fees for public entities. The base fee for a PAE will be adjusted, if necessary, after the first term of the PRA. (3) Private PAEs will be compensated based on the results of a competitive bid process which evaluates bidders' capability, timeliness, ability to work with tenant and community groups, and cost. (b) Incentives. (c) Expenses. (d) Other matters. [65 FR 15485, Mar. 22, 2000, as amended at 72 FR 66038, Nov. 26, 2007] § 401.309 PRA term and termination provisions; other provisions. (a) 1-year term with renewals. (b) Termination for cause or convenience of Federal Government Termination for cause. (2) Termination for convenience of Federal Government. (3) Transfer to another PAE; temporary waiver of rights. (i) HUD may order an immediate transfer of some or all of the PAE's duties to another PAE designated by HUD; and (ii) HUD may temporarily waive its right of immediate termination in order to allow an orderly transfer of duties and responsibilities under a PRA, without waiving the right of termination after the transfer has been completed to HUD's satisfaction. (c) Liability for damages. (d) Cumulative remedies. [65 FR 15485, Mar. 22, 2000, as amended at 72 FR 66038, Nov. 26, 2007] § 401.310 Conflicts of interest. (a) Definitions. Conflict of interest (i) Has a financial interest, direct or indirect, that prevents or may prevent the PAE or other restricted person from acting at all times in the best interests of HUD; (ii) Has one or more personal, business, or financial interests or relationships that would cause a reasonable person with knowledge of the relevant facts to question the integrity or impartiality of those who are or will be acting under the PRA; or (iii) Is taking an adverse position to HUD or to an owner whose project is covered by a PRA in a lawsuit, administrative proceeding, or other contested matter. (2) Control (3) Restricted person (b) General prohibitions. (2) The PAE must establish procedures to identify conflicts of interest and to ensure that conflicts of interest do not arise or continue, subject to waiver under paragraph (c) of this section. (3) HUD will not enter into PRAs with potential PAEs who have conflicts of interest associated with a particular project, or permit PAEs to continue performance under existing PRAs when such PAEs have conflicts of interest, unless such conflicts have been eliminated to HUD's satisfaction by the PAE or potential PAE or are waived by HUD. (4) The PAE has a continuing obligation to take all action necessary to identify whether it or any other restricted person has a conflict of interest. (c) Waivers. (d) Conflicts of interest arising prior to PAE selection Request for review of conflicts of interest. (ii) If, after submitting a request but prior to selection, a potential PAE discovers that it has a conflict, it must notify HUD in writing within 10 days of submitting the request or prior to selection, whichever is earlier. Such notification must contain a detailed description of the conflict. The potential PAE may, with its notification, request that the conflict be waived or may propose how it may eliminate the conflict. The potential PAE may also request a determination as to the existence of the conflict. The potential PAE may also request a determination as to the existence of the conflict. (2) Review by HUD. (e) Conflicts of interest that arise or are discovered after PAE selection. (2) HUD will, after receipt of such notification or other discovery of the PAE's conflict or potential conflict of interest, take such action as it determines is in its best interests, which may involve proceeding under § 401.313 or as provided in the following sentences. HUD may notify the PAE in writing of its findings as to whether a conflict of interest exists and the basis for such determination, whether or not a waiver will be granted, or whether corrective actions may be taken in order to eliminate the conflict of interest. Corrective action must be completed by the PAE not later than 30 days after notification is mailed by HUD unless HUD, at its sole discretion, determines that it is in its best interests to grant the PAE an extension in which to complete the corrective action. (f) Reconsideration of decisions. [65 FR 15485, Mar. 22, 2000, as amended at 65 FR 53900, Sept. 6, 2000] § 401.311 Standards of conduct. (a) Minimum ethical standards for PAEs. (1) Solicit for itself or others favors, gifts, or other items of monetary value from any person who is seeking official action from HUD or the PAE in connection with the PRA or has interests that may be substantially affected by the restricted person's performance or nonperformance of duties to HUD; (2) Use improperly (or allow the improper use of) HUD property or property over which the restricted person has supervision or charge by reason of the PRA; (3) Use its status as PAE for its own benefit, or the financial or business benefit of a third party, except as contemplated by the PRA; or (4) Make any unauthorized promise or commitment on behalf of HUD. (b) 18 U.S.C. 201. (c) 18 U.S.C. 1001. (d) 18 U.S.C. 207. § 401.312 Confidentiality of information. A PAE and every other restricted person (as defined in § 401.310) has a duty to protect confidential information, except as provided in §§ 401.500 through 401.503, and to prevent its use to further a private interest other than as contemplated by the PRA. As used in this section, confidential information means information that a PAE or other restricted person obtains from or on behalf of HUD or a third party in connection with a PRA but does not include information generally available to the public unless the information becomes available to the public as a result of unauthorized disclosure by the PAE or another restricted person. § 401.313 Consequences of PAE violations; finality of HUD determination. (a) Effect on PRA. (1) Find the potential PAE unqualified to enter into a PRA; (2) Find the PAE unqualified to receive additional projects for restructuring under an existing PRA; (3) Find the PAE in default under an existing PRA with the right of termination for cause under § 401.309; or (4) Seek from a PAE or other restricted person HUD's actual, direct, and consequential damages resulting from the violation. (b) Cumulative remedies. (c) Finality of determination. § 401.314 Environmental review responsibilities. HUD will retain all responsibility for environmental review under part 50 of this title. Compliance with part 50 of this title will be completed before any HUD approval of the Restructuring Commitment under § 401.405. Subpart C—Restructuring Plan § 401.400 Required elements of a Restructuring Plan. (a) General. (b) Required elements. § 401.401 Consolidated Restructuring Plans. A PAE may request HUD to approve a Consolidated Restructuring Plan that presents an overall strategy for more than one project included in the PRA. HUD will consider approval of a Consolidated Restructuring Plan for projects having common ownership, geographic proximity, common mortgagee or servicer, or other factors that contribute to more efficient use of the PAE's resources. Notwithstanding the more efficient use of a PAE's resources, HUD will not approve any Consolidated Restructuring Plans that have a detrimental effect on tenants or the community, or a higher cost to the Federal Government. HUD's decision to approve or disapprove a Consolidated Restructuring Plan will be made on a case-by-case basis. [65 FR 15485, Mar. 22, 2000, as amended at 72 FR 66038, Nov. 26, 2007] § 401.402 Cooperation with owner and qualified mortgagee in Restructuring Plan development. A PAE must comply with section 514(a)(2) of MAHRA by using its best efforts to seek the cooperation of the owner and qualified mortgagee or its designee in the development of the Restructuring Plan. If the owner fails to cooperate (as demonstrated by reasonable progress in development of a Restructuring Plan) to the satisfaction of the PAE and HUD agrees, the PAE must notify the owner that the PAE will not develop a Restructuring Plan. This notice will be subject to dispute and administrative appeal under subpart F of this part. If the qualified mortgagee does not cooperate in modifying the mortgage, the PAE and owner may continue to develop a Restructuring Plan to restructure the loan using alternative financing. § 401.403 Rejection of a request for a Restructuring Plan because of actions or omissions of owner or affiliate or project condition. (a) Ongoing determination of owner and project eligibility. (b) Grounds for rejection Suspension or debarment. (2) Other grounds. (i) An affiliate is debarred or suspended under 2 CFR part 2424; (ii) HUD or the PAE determines that the owner or an affiliate has engaged in material adverse financial or managerial actions or omissions as described in section 516(a) of MAHRA, including any outstanding violations of civil rights laws in connection with any project of the owner or affiliate; or (iii) HUD or the PAE determines (under § 401.451(c) or otherwise) that the project does not meet the housing quality standards in § 401.558 and that the poor condition of the project is not likely to be remedied in a cost-effective manner through the Restructuring Plan. (3) Exception for sale. (c) Dispute and appeal. [65 FR 15485, Mar. 22, 2000, as amended at 72 FR 73496, Dec. 27, 2007] § 401.404 Proposed Restructuring Commitment. A PAE must submit a Restructuring Plan and a proposed Restructuring Commitment to HUD for approval, prior to submitting the Commitment to the owner for execution. The submission may not occur earlier than 10 days after the public meeting required by § 401.500(d). The proposed Restructuring Commitment must be in a form approved by HUD, incorporate the Restructuring Plan, and include the following: (a) The lender, loan amount, interest rate, and term of any mortgages or unsecured financing for the mortgage restructuring and rehabilitation, and any credit enhancement; (b) The amount of any payment of a section 541(b) claim; (c) The type of section 8 assistance and the section 8 restructured rents; (d) The rehabilitation required, the source of the owner contribution, and escrow arrangements; (e) The uses for project accounts; (f) The terms of any sale or transfer of the project; (g) A schedule setting forth all sources and uses of funds to implement the Restructuring Plan, including setting forth the balances of project accounts before and after restructuring; (h) All consideration, direct or indirect, received or to be received by the PAE or a related party, if known, in connection with any matter addressed in the Restructuring Commitment, except amounts paid or to be paid by HUD; and (i) Other terms and conditions prescribed by HUD. § 401.405 Restructuring Commitment review and approval by HUD. HUD will either approve the Restructuring Commitment as submitted, require changes as a condition for approval, or reject the Plan. If the Plan is rejected, HUD will inform the PAE of the reasons for rejection, and the PAE will inform the owner. HUD's rejection of the Plan is subject to the dispute and administrative appeal provisions of subpart F of this part. § 401.406 Execution of Restructuring Commitment. When HUD approves the Restructuring Commitment, the PAE will deliver the Restructuring Commitment to the owner for execution. The Restructuring Commitment becomes binding upon execution by the owner. An owner who does not execute the Restructuring Commitment may appeal its terms and seek modification under subpart F of this part. § 401.407 Closing conducted by PAE. After the owner has executed the Restructuring Commitment, the PAE must arrange for a closing to execute all documents necessary for implementation of the Restructuring Plan. The PAE must use standard documents approved by HUD, with modifications only as necessary to comply with applicable State or local laws, or such other modifications as are approved in writing by HUD. § 401.408 Affordability and use restrictions required. (a) General. (b) Use restriction. (c) Affordability restrictions. (1) At least 20 percent of the units in the project must be leased to families whose adjusted income does not exceed 50 percent of the area median income as determined by HUD, with adjustments for household size, at rents no greater than 30 percent of 50 percent of the area median income; or (2) At least 40 percent of the units in the project must be leased to families whose adjusted income does not exceed 60 percent of the area median income as determined by HUD, with adjustments for household size, at rents no greater than 30 percent of 60 percent of the area median income. (d) Comparable configuration. (e) Nondiscrimination against voucher holders. (f) Enforcement. (g) Compliance with physical condition standards. (h) Reporting. (i) Enforcement and amendment. (j) Modifications. (k) Owner obligation to accept project-based assistance. [65 FR 15485, Mar. 22, 2000, as amended at 65 FR 53900, Sept. 6, 2000] § 401.410 Standards for determining comparable market rents. (a) When are comparable market rents required? (b) Comparable market rents defined. (c) Methodology for determining comparable market rents. (1) Use non-comparable housing stock within that market from which adjustments can be made; or (2) If necessary to go outside the market, use comparable properties as far outside the local market as it finds reasonable, from which adjustments can be made. (d) Using FMR as last resort. § 401.411 Guidelines for determining exception rents. (a) When do exception rents apply? (2) In any fiscal year, the PAE may not request HUD to approve Restructuring Plans with exception rents for more than 20 percent of all units covered by the PRA, except that HUD may approve a waiver of this 20 percent limitation based on the PAE's narrative explanation of special need. (b) How are exception rents calculated? (i) Debt service on the second mortgage under § 401.461(a) or a rehabilitation loan included in the Restructuring Plan; (ii) The operating expenses of the project, as determined by the PAE, including: (A) Contributions to adequate reserves for replacement; (B) The costs of maintenance and necessary rehabilitation; (C) Other eligible costs permitted under the section 8 program; (iii) An adequate allowance for potential operating losses due to vacancies and failure to collect rents, as determined by the PAE; (iv) A return to the owner to the extent permitted by § 401.461(b)(3)(ii)(A); and (v) Other expenses determined by the PAE to be necessary for the operation of the project. (2) The exception rent must not exceed 120 percent of the Fair Market Rent for the market area, except that HUD may approve an exception rent greater than 120 percent of Fair Market Rent, based on a narrative explanation of special need submitted by the PAE, subject to the 5 percent limitation in section 514(g)(2)(A) of MAHRA. § 401.412 Adjustment of rents based on operating cost adjustment factor (OCAF) or budget. (a) OCAF. (2) Application of OCAF. (b) Budget-based. (1) Demonstrates that: (i) Project income is insufficient to operate and maintain the project, and no rehabilitation is currently needed, as determined by the Secretary; or (ii) The rent adjustment or renewal contract is necessary to support commercially reasonable financing (including any required debt service coverage and replacement reserve) for rehabilitation necessary to ensure the long-term sustainability of the project, as determined by the Secretary, and in the event the owner or purchaser fails to implement the rehabilitation as required by the Secretary, the Secretary may take such action against the owner or purchaser as allowed by law; and (2) Agrees to: (i) Extend the affordability and use restrictions required under 514(e)(6) for an additional twenty years; and (ii) Enter into a binding commitment to continue to renew such contract for and during such extended term, provided that after the affordability and use restrictions required under 514(e)(6) have been maintained for a term of 30 years: (A) An owner with a contract for which rent levels were set at the time of its initial renewal under section 514(g)(2) shall request that the Secretary renew such contract under section 524 for and during such extended term; and (B) An owner with a contract for which rent levels were set at the time of its initial renewal under section 514(g)(1) may request that the Secretary renew such contract under section 524 for and during such extended term. [89 FR 14590, Feb. 28, 2024] § 401.420 When must the Restructuring Plan require project-based assistance? The Restructuring Plan must provide for the section 8 contract to be renewed as project-based assistance, subject to the availability of funds for this purpose, if: (a) The PAE determines there is a market-wide vacancy rate of 6 percent or less; (b) At least 50 percent of the units in the project are occupied by elderly families, disabled families, or elderly and disabled families; or (c) The project is held by a nonprofit cooperative ownership housing corporation or nonprofit cooperative housing trust. § 401.421 Rental Assistance Assessment Plan. (a) Plan required. (b) Matters to be assessed. (1) The ability of the tenants to find adequate, available, decent, comparable, and affordable housing in the local market; (2) The types of tenants residing in the project (such as elderly families, disabled families, large families, and cooperative homeowners); (3) The local housing needs identified in the applicable Consolidated Plan developed under part 91 of this title; (4) The cost of providing assistance, comparing the applicable payment standard to the rent levels permitted by §§ 401.410 and 401.411; (5) The long-term financial stability of the project; (6) The ability of residents to make reasonable choices about their individual living situations; (7) The quality of the neighborhood in which the tenants would reside; and (8) The project's ability to compete in the marketplace. (c) Conversion may be phased in. (d) Reports to HUD. [65 FR 15485, Mar. 22, 2000, as amended at 65 FR 53900, Sept. 6, 2000] § 401.450 Owner evaluation of physical condition. (a) Initial evaluation. (1) All work items required to bring the project to the standard in § 401.452, including any work items needed to ensure compliance with applicable requirements of part 8 of this title concerning accessibility to persons with disabilities; (2) The capital repair or replacement items that will be necessary to maintain the long-term physical integrity of the property; (3) A plan for funding the rehabilitation work included in paragraph (a)(1) of this section, which work must be completed in a timely manner after closing the restructuring transaction, that identifies the source of the required owner contribution of non-project funds; and (4) An estimate of the initial deposit, if any, and the estimated monthly deposit to the reserve for replacement account for the next 20 years. (b) Use of CNA. (1) Was completed or updated within 1 year; and (2) Contains all of the matters required by paragraph (a) of this section. (c) Reconsideration and modification of evaluation. [65 FR 15485, Mar. 22, 2000, as amended at 65 FR 53900, Sept. 6, 2000] § 401.451 PAE Physical Condition Analysis (PCA). (a) Review and certification of owner evaluation. (2) After consultation with the owner and an opportunity for the owner to modify its evaluation performed under § 401.450, the PAE must either certify to the accuracy and completeness of the owner's evaluation performed under § 401.450 for each project covered by the PRA, or state that the evaluation fails to address certain items or does not propose a cost effective approach. (b) Rejection due to inaccurate or incomplete owner evaluation. (c) Rejection due to poor condition of the project. (d) Dispute and appeal of rejection. § 401.452 Property standards for rehabilitation. The restructuring plan must provide for the level of rehabilitation needed to restore the property to the non-luxury standard adequate for the rental market for which the project was originally approved. If the standard has changed over time, the rehabilitation may include improvements to meet the current standards. The rehabilitation also may include the addition of significant features, in accordance with § 401.472. The result of the rehabilitation should be a project that can attract non-subsidized tenants, but competes on rent rather than on amenities. When a range of options exists for satisfying the rehabilitation standard, the PAE must choose the least costly option considering both capital and operating costs and taking into account the marketability of the property and the remaining useful life of all building systems. Nothing in this part exempts rehabilitation from the requirements of part 8 of this title concerning accessibility to persons with disabilities. [72 FR 66038, Nov. 26, 2007] § 401.453 Reserves. The Restructuring Plan must provide for reserves for capital replacement sufficient to ensure the property's long-term structural integrity so that the property can be maintained as affordable housing in decent, safe, and sanitary condition meeting the standards of § 401.558. § 401.460 Modification or refinancing of first mortgage. (a) Principal amount. (b) Fully amortizing. (c) Rates and other terms. (d) Fees. (e) Refinancing. (2) The refinancing may be either without credit enhancement or with credit enhancement under one of the following: (i) FHA mortgage insurance. (ii) Other FHA credit enhancement. (iii) Credit enhancement from non-FHA sources. § 401.461 HUD-held second mortgage. (a) Amount. (2) The second mortgage must be in a principal amount that does not exceed the lesser of: (i) The amount the PAE reasonably expects to be repaid based on objective criteria such as the amount of anticipated net cash flow, trending assumptions, amortization provisions, and expected residual value of the property; and (ii) The greater of: (A) The section 541(b) claim (or the difference between the unpaid principal balance on HUD-held mortgage debt immediately before and after the restructuring), plus surplus project accounts from residual receipts accumulated pursuant to 24 CFR 880.205(e), 881.205(e), or 883.306(e) and derived from an expiring Section 8 Housing Assistance Payments contract and not otherwise distributed to the owner and made available to facilitate the Restructuring Plan pursuant to section 517(b)(6) of MAHRA, and (B) The difference between the unpaid balance on the first mortgage immediately before and after the restructuring. (b) Terms and conditions. (2) The second mortgage must have a term concurrent with the modified or refinanced first mortgage, if any. HUD may provide that if there is no first mortgage, the second mortgage may continue for a term established by HUD. (3)(i) Principal and interest on the second mortgage is payable only out of net cash flow during its term. “Net cash flow” means that portion of project income that remains after the payment of all required debt service payments on the modified or refinanced first mortgage, if any, including payment of any past due principal or interest, and payment of all reasonable and necessary operating expenses (including deposits to the reserve for replacement account) and any other expenditure approved by HUD. (ii) The priority and distribution of net cash flow is as follows: (A) HUD or the PAE may approve the payment to the owner of up to 25 percent of net cash flow based on consideration of relevant conditions and circumstances including, but not limited to, compliance with the management standards prescribed in § 401.560 and the physical condition standards prescribed in § 401.558; and (B) All remaining net cash flow will be applied to the principal and interest on the second mortgage, until paid in full, and then to any additional subordinate mortgage under § 401.461(c). (4) HUD may cause the second mortgage to be immediately due and payable on the grounds provided in section 517(a)(4) of MAHRA, including an assumption of the mortgage in violation of HUD standards for approval of transfers of physical assets (if applicable), or if the owner materially fails to comply with other material HUD requirements after a reasonable opportunity for the owner to cure such failure. A decision by HUD in this regard is subject to the administrative appeals procedure in subpart F of this part, unless HUD acts on the basis of the grounds specified in sections 517(a)(4)(A) or (B) of MAHRA. (5) HUD will consider modification, assignment to the acquiring entity, or forgiveness of all or part of the second mortgage, if: The Secretary holds the second mortgage; and if the project has been sold or transferred to a tenant organization or tenant-endorsed community-based nonprofit or public agency that meets eligibility guidelines determined by HUD; accepts additional affordability requirements acceptable to HUD; and requests such modification, assignment, or forgiveness. A community-based nonprofit group or public agency demonstrates that it is tenant-endorsed in accordance with § 401.480(e). (c) Additional mortgage to HUD. (i) For the restructuring of a mortgage insured by HUD, does not exceed the difference between: (A) The amount of a section 541(b) claim paid under § 401.471 increased by any residual receipts, pursuant to 24 CFR 880.205(e), 881.205(e), or 883.306(e); and (B) The principal amount of the second mortgage; or (ii) For the restructuring of a mortgage held by HUD, does not exceed the difference between: (A) The principal amount of a restructured HUD-held mortgage and the sum of, as applicable, a restructured HUD-held first mortgage at reduced principal amount, new mortgage funds paid to HUD at closing, and surplus project accounts other than residual receipts, pursuant to 24 CFR 880.205(e), 881.205(e), or 883.306(e); and (B) The principal amount of the second mortgage. (2) HUD may approve a Plan that does not require an additional mortgage, or provides for less than the full difference to be payable under the additional mortgage, or allows for subsequent modification, assignment, or forgiveness of the additional mortgage under any of the following circumstances: (i) The anticipated recovery on the additional mortgage is less than the servicing costs; or (ii) HUD has approved modification, assignment, or forgiveness of the second mortgage, pursuant to paragraph (b)(5) of this section. (3) With respect to the second mortgage required by paragraph (a) of this section, any additional mortgage must: (i) Be junior in priority; (ii) Bear interest at the same rate; and (iii) Require no payment until the second mortgage is satisfied, at which time it will be payable upon demand of HUD or as otherwise agreed by HUD. [65 FR 15485, Mar. 22, 2000, as amended at 72 FR 66038, Nov. 26, 2007] § 401.471 HUD payment of a section 541(b) claim. HUD will pay a section 541(b) claim from the appropriate insurance fund to the insured mortgagee on behalf of the mortgagor. The mortgagee must use the claim payment to prepay the principal balance of the insured mortgage, in whole or in part, as provided in the Restructuring Plan. All section 541(b) claims will be paid in cash. Part 207 of this title and sections 207(g) and 541(a) of the NA do not apply to a section 541(b) claim. § 401.472 Rehabilitation funding. (a) Sources of funds Project accounts. (2) Debt restructuring. (3) Section 236(s) rehabilitation grant. (4) Section 8 budget authority increase. (b) Statutory restrictions. (1) Addition of significant features. (2) Cap on owner contribution. (3) Other rehabilitation. (4) Cooperatives. (c) Escrow agent. [65 FR 15485, Mar. 22, 2000, as amended at 72 FR 66039, Nov. 26, 2007] § 401.473 HUD grants for rehabilitation under section 236(s) of NA. HUD will consider a direct grant for rehabilitation under section 236(s) of the NA only if the owner provides an acceptable work schedule and cost-analysis that is consistent with the owner's evaluation of physical condition under § 401.450, as certified by the PAE. The owner must execute a grant agreement with terms and conditions acceptable to HUD. If the PAE is a State or local government, or an agency or instrumentality of such a government, the PAE and HUD may agree that the PAE will be delegated the responsibility for the administration of any grant made under this section. HUD may make grant funding available for the cost of administration if HUD has determined that such funding is available. § 401.474 Project accounts. (a) Accounts from other projects. (1) The projects are included in a Consolidated Restructuring Plan under § 401.401; and (2) The funds are used for rehabilitation or to reduce a section 541(b) claim paid by HUD under § 401.471. (b) Distribution to owner. § 401.480 Sale or transfer of project. (a) May the owner request a Restructuring Plan that includes a sale or transfer of the property? (b) When must the restructuring plan include sale or transfer of the property? (c) Owner's notice of intent to sell or transfer. (2) The owner must cooperate in selling or transferring the property. Failure to do so will result in the PAE's determination to reject the owner's request for a Restructuring Plan. The owner must distribute and publish, in an appropriate publication, a notice to potential purchasers that describes the property, proposed terms of sale, and procedures for submitting a purchase offer. The notice in form and substance must be acceptable to HUD, and must inform potential offerors of a preference for priority purchasers. (3) During a period to be determined by HUD that begins when the owner gives notice of intent to sell or transfer, an owner may accept an offer only from a priority purchaser. (4) No sale or transfer to a non-priority purchaser will be approved without evidence of tenant support. (d) Informing PAE; approval required. (e) Tenant endorsement procedure for priority purchaser status Required meeting. (ii) If the purchaser is acting contemporaneously with the Restructuring Plan, the informational meeting must occur at the second meeting of tenants convened by the PAE to discuss the restructuring plan pursuant to § 401.500(d). (iii) A representative of the purchasing entity must attend the informational meeting to present its plans for the acquisition and improvement of the project and to respond to questions about the purchaser's plans for the property. (iv) Tenants shall have the opportunity, but are not to be required, to vote for or against the acquisition at the informational meeting. (v) For the purpose of obtaining tenant endorsement, a purchaser may conduct additional meetings with tenants in accordance with the notice requirements of paragraphs (e)(2) and (e)(3) of this section. (2) Parties who must receive notice. (3) Notice contents. (4) Tenant endorsement. (ii)(A) If the purchaser has made a reasonable effort to obtain the endorsement of a majority (51 percent) of the tenants and the necessary percentage of votes was not obtained, the purchaser may seek HUD approval to obtain endorsement based on a lower percentage of endorsing tenants. (B) The purchaser must deliver notice to each tenant household that the purchaser is seeking HUD approval of a tenant endorsement based on less than 51 percent of tenant approval and provide tenants with at least 10 days from the date of the notice to submit comments to the purchaser on the approval of endorsement. (C) The purchaser and/or seller must submit, in writing, to HUD an account of the efforts taken to secure tenant endorsement, the number and percentage of tenants voting for and against endorsement, and any comments received from tenants regarding the approval of endorsement. (D) HUD will determine whether or not to approve endorsement on the basis of all the information available to HUD and will promptly notify the purchaser of HUD's determination. [65 FR 15485, Mar. 22, 2000, as amended at 72 FR 66039, Nov. 26, 2007] § 401.481 Subsidy layering limitations on HUD funds. (a) PAE subsidy layering certification required for Restructuring Plan. (b) Purpose of subsidy layering certification. e.g., (c) Relationship to section 102(d) of HUD Reform Act. (d) Certification under existing HUD guidelines. (e) Other procedures. § 401.500 Required notices to third parties and meeting with third parties. (a) General. (b) Notice of intent to restructure and consultation meeting. (i) The project, including its name and FHA Project Number; (ii) The responsible PAE and contact person, including the address and telephone number; (iii) The owner's notice of intent to restructure through the Mark-to-Market Program; and (iv) The date of expiration of the project-based assistance. (2) This notice must state how comments may be provided to the PAE regarding any of the following: the physical condition of the property, whether the rental assistance should be tenant-based or project-based, any proposed sale or transfer of the property, and other matters regarding the property and its management. The notice must establish the date, time, and place for a public meeting to be held no sooner than 20 days and no later than 40 days following the date of this notice. The public may provide written comments up to the date of the meeting. (c) Access to Restructuring Plan. (2) As soon as the PAE determines that the Restructuring Plan is substantively complete and ready for submission to HUD, notice of the following must be provided: (i) The location of the Plan for inspection and copying; and (ii) The date, time, and place of a public meeting to be held at least 10 days before the PAE submits the Plan to HUD. (3) When the PAE gives notice under this section, it must make the Plan available during normal business hours at the management office of the project, or if there is no such office, at another location specified by the PAE that is convenient to the tenants. (d) Meeting to discuss the Restructuring Plan. (e) Disposition of comments. (f) Notice of completion of Restructuring Plan. (2) Within 10 days after a determination that the Restructuring Plan will not move forward for any reason, HUD or the PAE shall provide notice to affected tenants that describes the reasons for the failure of the Plan to move forward and the availability of tenant-based assistance under § 401.602(c). [65 FR 15485, Mar. 22, 2000, as amended at 72 FR 66040, Nov. 26, 2007] § 401.501 Delivery of notices and recipients of notices. (a) Whom must the owner or PAE notify? (b) Whom must the PAE notify? (1) The Chief Executive Officer of the unit of local government and the Executive Director of the Public Housing Authority with jurisdiction over the project location; (2) The recipient of any Outreach and Training Grant (OTAG) or Intermediary Technical Assistance Grant (ITAG) for the project location; and (3) Other appropriate neighborhood representatives and other affected parties. [65 FR 15485, Mar. 22, 2000, as amended at 65 FR 53900, Sept. 6, 2000] § 401.502 Notice requirement when debt restructuring will not occur. (a) PAE responsibility. (1) The availability (as provided in § 401.500(c)(3)) of the following information: (i) The owner evaluation of physical condition (OEPC), or a comprehensive needs assessment (CNA) if used instead of an OEPC, as required by § 401.450 and § 402.6(a)(3) of this chapter; (ii) The market analysis required by § 402.6(a)(2) of this chapter, but without addresses (or other specific information indicating location) for comparable properties; and (iii) The items identified in § 401.500(b)(1)(i), (ii), and (iv); and (2) A procedure for submitting public comments regarding this information. (b) Expense and profit/loss information. (c) Consideration of comments. [65 FR 15485, Mar. 22, 2000, as amended at 65 FR 53900, Sept. 6, 2000] § 401.503 Access to information. (a) PAE responsibilities. (1) Owner evaluation of physical condition (OEPC), or a comprehensive needs assessment (CA) if used instead of an OEPC, as required by § 401.450; (2) Owner-prepared 1-year project rent analysis; and (3) As directed by HUD. (b) Information on expenses and profit/loss. Subpart D—Implementation of the Restructuring Plan After Closing § 401.550 Monitoring and compliance agreements. (a) Compliance agreements. (b) Periodic monitoring and inspection. (c) HUD acting instead of PAE. (1) The project is subject to a PRA with a PAE that is not qualified to be a section 8 contract administrator; or (2) The project is not currently subject to a PRA. (d) Regulatory agreement. [65 FR 15485, Mar. 22, 2000, as amended at 65 FR 53901, Sept. 6, 2000] § 401.552 Servicing of second mortgage. HUD or its designee will be responsible for servicing the second mortgage, including determining the amounts receivable by the owner under § 401.461(b)(3)(ii)(A). HUD may designate the PAE, with the PAE's consent, as servicer for the second mortgage. § 401.554 Contract renewal and administration. HUD will offer to renew section 8 contracts as provided in each Restructuring Plan, subject to the availability of appropriations and subject to the renewal authority available at the time of each contract expiration. The offer will be made by HUD directly or through a PAE that has contracted with HUD to be a contract administrator for such contracts. HUD will offer to any PAE that is qualified to be the section 8 contract administrator the opportunity to serve as the section 8 contract administrator for a project restructured under a Restructuring Plan developed by the PAE under the Mark-to-Market Program. Qualifications will be determined under both statutory requirements and requirements issued by the appropriate office within HUD, depending on the type of section 8 assistance that is provided. [65 FR 15485, Mar. 22, 2000, as amended at 65 FR 53901, Sept. 6, 2000; 89 FR 14590, Feb. 28, 2024] § 401.556 Leasing units to voucher holders. A Restructuring Plan must prohibit any refusal of the owner to lease a unit solely because of the status of the prospective tenant as a section 8 voucher holder. § 401.558 Physical condition standards. The Restructuring Plan must require the owner to maintain the project in a decent and safe condition that meets the applicable standards under this section. As long as project-based assistance is provided, the applicable standards are the physical conditions standards for HUD housing in § 5.703 of this title. At any other time, the applicable standards are the local housing codes or codes adopted by the public housing agency if such codes meet or exceed the standards in § 5.703 of this title and do not severely restrict housing choice or, if there are no such local housing codes or codes adopted by the public housing agency, the standards in § 5.703 of this title will apply. In addition, any unit in which the tenant receives tenant-based assistance must comply with the housing quality standards of the section 8 tenant-based programs. [65 FR 15485, Mar. 22, 2000, as amended at 65 FR 53901, Sept. 6, 2000] § 401.560 Property management standards. (a) General. (b) HUD guidelines. (1) Protect the physical integrity of the property over the long term through preventative maintenance, repair, or replacement; (2) Ensure that the building and grounds are routinely cleaned; (3) Maintain good relations with the tenants; (4) Protect the financial integrity of the project by operating the property with competitive and reasonable costs and maintaining appropriate property and liability insurance at all times; (5) Take all necessary measures to ensure the tenants' physical safety; and (6) Comply with other provisions that are required by HUD, including termination of the management agent for cause. (c) Conflicts of interest. Subpart E—Section 8 Requirements for Restructured Projects § 401.595 Contract and regulatory provisions. The provisions of chapter VIII of this title will apply to renewal of a section 8 project-based assistance contract under this part only to the extent, if any, provided in the contract. Part 983 of this title will not apply. The term of the contract renewals under this part will be determined by the appropriate HUD official. [65 FR 53901, Sept. 6, 2000] § 401.600 Will a section 8 contract be extended if it would expire while an owner's request for a Restructuring Plan is pending? (a) If a section 8 contract for an eligible project would expire before a Restructuring Plan is implemented, the contract may be extended at rents not exceeding current rents: (1) For up to the earlier of one year or closing on the Restructuring Plan under § 401.407; or (2) For such period of time beyond one year as HUD may approve, up to the closing of the Restructuring Plan. (b) Any extension of the contract beyond one year for a pending Restructuring Plan, other than an extension approved under this section, must be at comparable market rents or exception rents. An extension at comparable market rents will not affect a project's eligibility for the Mark-to-Market program once it has been established under this part. (c) HUD may terminate the contract earlier if the PAE or HUD determines that an owner is not cooperative under § 401.402 or if the owner's request is rejected under § 401.403 or § 401.405. [71 FR 2121, Jan. 12, 2006] § 401.601 [Reserved] § 401.602 Tenant protections if an expiring contract is not renewed. (a) Required notices. (ii) An owner who gives the 12-month notice required by paragraph (a)(1)(i) of this section and who determines not to renew a contract must give additional notice not less than 120 days before the contract expiration. (2) The owner of an eligible project who has requested a Restructuring Plan but who has been rejected under §§ 401.101, 401.403, 401.405, or 401.451 must provide 12 months advance notice under section 8(c)(8)(A) of the United States Housing Act of 1937, unless project-based assistance is renewed under § 402.4 of this chapter. (3) Notices required by this paragraph must be provided to tenants and to HUD or the contract administrator. HUD will prescribe the form of notices under this paragraph, to the extent that the form is not prescribed by section 8(c)(8) of the United States Housing Act of 1937. (b) If owner does not give notice. (c) Availability of tenant-based assistance. (i) If the owner of an eligible project does not renew the project-based assistance, any eligible tenant residing in a unit assisted under the expiring contract on the date of expiration will be eligible to receive assistance on the later of the date of expiration or the date the owner's obligations under paragraph (b) of this section expire; and (ii) If a request for a Restructuring Plan is rejected under § 401.101, § 401.403, § 401.405, or 401.451, and project-based assistance is not otherwise renewed, any eligible tenant who is a low-income family or who resides in a project-based assisted unit on the date of Plan rejection will be eligible to receive assistance on the later of the date the Restructuring Plan is rejected, or the date the owner's obligations under paragraph (b) of this section expire. (2) If the tenant was assisted under the expiring contract, assistance under this paragraph will be in the form of enhanced vouchers as provided in section 8(t) of the United States Housing Act of 1937. [65 FR 15485, Mar. 22, 2000, as amended at 65 FR 53901, Sept. 6, 2000] § 401.605 Project-based assistance provisions. The project-based assistance rents for a restructured project must be the restructured rents determined under the Restructuring Plan in accordance with §§ 401.410 or 401.411. § 401.606 Tenant-based assistance provisions. If the Restructuring Plan provides for tenant-based assistance, each assisted family residing in a unit assisted under the expiring project-based assistance contract when the contract terminates will be offered tenant-based assistance if the family meets the eligibility requirements under part 982. Whenever permitted by section 515(c)(4) of MAHRA, the tenant-based assistance will be in the form of enhanced vouchers as provided in section 8(t) of the United States Housing Act of 1937. Subpart F—Owner Dispute of Rejection and Administrative Appeal § 401.645 Owner request to review HUD decision. (a) HUD notice of decision. (i) A decision that the owner or project is not eligible for the Mark-to-Market program; (ii) A decision not to offer a proposed Restructuring Commitment to the owner; and (iii) A decision to offer a proposed Restructuring Commitment. The proposed Restructuring Commitment provided to the owner constitutes the notice of decision for purposes of requesting a review of a HUD decision. (2) The notice of decision will include the reasons for the decision. (3) The notice of decision will also notify the owner of the right to request a review of the decision or to cure any deficiencies on which the decision was based; the date by which the review request must be submitted or the deficiencies must be cured, which will be at least 30 days after the date of the notice of decision; and the address to which the review request is to be submitted. (b) Review request by owner Written statement. (i) Each item of the decision to which the owner objects; (ii) The reasons for the owner's objections; and (iii) All information in support of the objections that the owner wants HUD to consider. (2) Scope of information submitted. (i) Information that could not have been submitted previously; and (ii) New health and safety information. (c) HUD review and final decision. (2) Within 30 days of HUD's receipt of the owner's review request and any additional objections and information, HUD will review the request and, using a standard of what is reasonable in light of all of the evidence presented, issue a final decision. The final decision will: (i) Affirm the notice of decision; or (ii) Modify the notice of decision and, if applicable, modify the Restructuring Commitment, in which event HUD will issue an amended or restated Restructuring Commitment that incorporates the final decision; or (iii) Revoke the notice of decision and, if applicable, terminate the Restructuring Commitment and notify the owner that the owner is not eligible for participation in the Mark-to-Market program or that a restructuring of the property is not feasible. [72 FR 66040, Nov. 26, 2007] § 401.650 When may the owner request an administrative appeal? (a) No review request by owner. (b) Upon receipt of final decision. (c) HUD decision to accelerate the second mortgage. [72 FR 66040, Nov. 26, 2007] § 401.651 Appeal procedures. (a) How to appeal. (b) Written decision. (c) Who is responsible for reviewing appeals? [65 FR 15485, Mar. 22, 2000, as amended at 72 FR 66040, Nov. 26, 2007] § 401.652 No judicial review. The reviewing official's decision under § 401.651 is a final determination for purposes of section 516(c) of MAHRA and is not subject to judicial review.