12.7.8 Keeping the Mortgage in Balance

A. Soft cost overruns (such as interest, taxes, mortgage insurance premium [MIP], and property or liability insurance) that result from a construction delay before completion of the project and is the fault of the General Contractor, (i.e. due to poor performance), are funded according to the liquidated/actual damages clause in the construction contract. This clause is not intended to penalize the contractor, but to provide a source of funds for the increased soft cost.

• B. The interest allocation is considered over expended when:

1. The percent of the expended interest allocation exceeds by 10% or more the percentage of completion indicated by the Construction Progress Schedule, form HUD-5372; or,

2. The budgeted interest allocation remining is demonstrably insufficient to carry the loan through Final Endorsement.

• C. The Lender must notify HUD immediately, and HUD will advise the Lender of the following procedures:

1. When the interest allocation is insufficient, have the Architect and the HUD inspector estimate an expected completion date.

   • Compute the minimum liquidated damages for the period between the completion date specified in the construction contract, as adjusted by approved change orders, and the estimated completion date.

• When the interest allocation has been exhausted, the non-profit Developer’s fee, if applicable, or the working capital escrow should be used to keep interest current.

• Transfer the computed liquidated damages amount from column I, Construction, to Column G, Carrying Charges and Financing, on form HUD-92451 (or similar format in an Excel worksheet) and:

  • 1. Allocate the full amount to interest, initially.
  • 2. Funds may be used for MIP, taxes, or insurance payments, if requested, after the funds for these line items and non-profit Developer’s fee, if applicable and working capital escrow are exhausted. However, funds transferred from the construction account may be used to cover only the cost of those items attributable to the period between the completion date specified in the construction contract as adjusted by any approved change orders, and the estimated completion date.

2. Notify the Borrower, contractor, HUD and the surety, if any, by certified mail of the amount and the reason for the transfer.

3. Require written acknowledgment from HUD and surety, if any, before transferring funds.

4. The amount of transferred funds must be reflected on subsequent forms HUD-92448 as a decrease to item 7, Sum of Cost Breakdown Items Plus Inventories of Materials.

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Chapter 12 Construction Period 12.8 Change Orders – HUD Duties

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5. After review of the cost certification documents, if the full amount of transferred funds was not needed to cover the cost of interest, MIP, taxes, and insurance attributable to the period identified, the balance will be transferred back to the construction account.

6. In processing form HUD-92448, before releasing the General Contractor’s holdback, make adjustment for the lesser of actual or liquidated damages determined in the cost certification review.

7. This procedure should be used only if, in consultation with the Regional Center Director, it is determined that the problems causing the delay will be remedied within the near future.

D. In the event the project continues to sustain an imbalance between sources and uses of funds, the Regional Production Office will inform the Regional office of Asset Management about the issues and the status of any release of IOD funds.