13.2.1.3 Treatment of Operating Income Generated During Construction

A. The Borrower must account for all operating income generated during construction and ending three months before the originally-scheduled date of the first principal payment under the mortgage. In cases such as new construction with partial occupancy approval (as described in Chapter 12, Section 12.14.4), or a substantial rehabilitation tax credit project without significant resident displacement, there may be considerable net operating income (NOI) (or interim income) generated during the construction period. This interim income may be used to pay for mortgageable and non-mortgageable items.

B. Therefore, the Borrower must prepare an Operating (Income and Expense Statement) Statement covering the period from first occupancy (see Chapter 12, Section 12.14.4 if occupancy occurred during construction), or from the date of substantial completion, through the period ending three months before the date of the first principal payment of the originally-scheduled mortgage. The Borrower may include in the operating statement all soft costs incurred up to 60 days beyond this date, which will establish the cut-off date and the date for the operating statement. See Section 13.6 and Section 13.10.2.A.5.j as a cross reference. The day after the cut-off date is the commencement of operations and the project’s first year of reporting annual audited financial statements.

C. Borrowers with project based rental assistance must submit a CPA-prepared audited operating statement to meet FASS reporting and auditing requirements.

D. The Lender must submit the Borrower’s operating statement to HUD at least 30 days before the final endorsement scheduled date. If the operating statement evidences receipt of NOI during this period, the Borrower can apply the interim income according to the following:

1. If the replacement cost mortgage (Criterion 3) is not the controlling mortgage, any NOI generated during construction may be applied to cover shortfalls in mortgageable soft costs, change orders, initial operating deficit and escrows. At final endorsement, the balance of funds may be distributed to the Borrower, deposited to the project’s Reserve for Replacement account, or applied toward the amortization of the mortgage principal, subject to HUD approval.

2. If the replacement cost mortgage (Criterion 3) is controlling, the Mortgage Credit staff will do a calculation and determine if the interim NOI is equal to or greater than 1% of the original mortgage. If the interim NOI is greater than 1% of the original mortgage amount, the total amount of interim NOI is deducted from the certified replacement cost amount. When the NOI does not meet this 1% threshold, the Borrower will apply the amount toward shortfalls, etc. as instructed in number 1 above. The Lender must deposit any remaining balance into the project’s Reserve for Replacement account or apply it toward the amortization of the mortgage principal at final endorsement. There is no distribution to the Borrower.

3. See Section 13.15.3 on the distribution prohibition for a Borrower’s affiliate or principal.

E. In those cases where interim income is not generated, or the Borrower opts not to set a cost cut-off date, it is not necessary for a Borrower to submit an operating statement. The Regional Center or Satellite Office will notify the Lender, Borrower, and General Contractor in writing of the 100% final completion date from the final form HUD-95379, HUD Representative’s Trip Report. The Production staff will enter “The Date of Visit” date from the final form HUD-95379 into the HUD data system as the cost cut-off date. The day after this date will begin project operations and FASS reporting.

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Chapter 13 Cost Certification 13.2 Projects Exempt from Cost Certification

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