12.15.5 Amount of Contractor's Retainage and Release

A. Purpose. Retainage provides an incentive for the General Contractor and mortgagor to promptly complete the project, submit cost certification and reach final closing.

B. Amount of retainage. The Building Loan Agreement allows for the possibility of a reduced holdback amount as set forth in a retainage reduction rider when the project reaches 50% completion. The rider is not a HUD form. The owner and the General Contractor will create a rider, to attach to the Building Loan Agreement, which describes how the retainage is reduced according to the guidance below. The construction contract also provides for a 10% holdback from the contractor's monthly payments for acceptably completed work, acceptably stored materials, and where applicable, components acceptably stored offsite. The requirements for reduction of the retainage after 50% completion are as follows:

1. The Contractor has no identity-of-interest with the owner that is greater than a 5% equity interest in the ownership entity,

2. Prior written consent from the Surety must be obtained and attached to the request for reduction, and

3. There can be no questions regarding the contractor’s performance concerning the quality of work, compliance with the contract and with any change orders or work in progress. The Regional Production Director or his designee must make the decision to reduce the retainage based on the recommendation of the HUD CA and/or the HUD inspector.

4. Assuming the above conditions are met, 10% retainage will be required only until 50% completion. After 50% completion the retainage may be reduced from 10% to 5% until 75% completion, and then may be reduced further to 2.5% retainage until the loan reaches Final Endorsement.

C. Release of retainage for identity of interest contractors. Except as provided in Section 12.15.5.D.4 and Section 12.15.5.D.5 below, the retainage may not be released, in whole or in part, until Final Endorsement for a contractor with an identity of interest that is greater than 5% equity interest in the ownership entity.

D. Release of retainage for non-identity of interest contractor. The contractor's retainage, or the remaining balance in the retainage, may be released at the next to last advance, when requisitioned on form HUD-92403, Application for Insurance of Advance of Mortgage Proceeds, subject to compliance with the following:

1. Contractor's cost certification, where required, has been reviewed and the necessary adjustments made to form HUD-92451, Financial Record and Mortgage Loan Transaction (or similar format in an Excel worksheet);

2. Contractor has disclosed its final obligations on form HUD-92023M, Request for Final Endorsement of the Credit Instrument;

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Chapter 12 Construction Period 12.15 Escrowed Funds, Letters of Credit, Deposits, Holdbacks and Related Matters

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3. All work under the construction contract has been inspected and approved by the controlling jurisdictions and/or authorities;

4. Certificates of occupancy or other required approvals for the dwelling units and non-dwelling facilities, where applicable, have been issued by governmental authorities having jurisdiction. (Separate buildings for community rooms, rental offices, laundry rooms, etc., commonly require separate certificates of occupancy.);

5. Permission to Occupy, form HUD-92485 has been issued by HUD for all units;

6. All Davis-Bacon payroll requirements have been satisfied;

7. Surveyor's Certificate, form HUD-91073M, and survey showing the location of all improvements, utility easements and site utility distribution lines have been submitted to HUD, and

8. Retain, where applicable, an adequate amount to cover the following:

   • Items of delayed completion in an amount equal to 150% of the HUD CA's cost estimate for completion,

• Any owed or contested amounts indicated by mechanics, subcontractor, supplier, or equipment lessor liens, etc.

The lesser of the liquidated damages or actual damages computed at cost certification, and

The net effect of all change orders if said effect is negative.