14.10 Mortgage Amounts, Contingency and Escrow

A. Transfer of Ownership. Section 223(f) applications for Tax Credit projects that involve transfers of ownership to IOI purchasers may be treated either as acquisitions or refinancing transactions for purposes of sizing the mortgage. Lenders may use either Criterion 7 or 10 on form HUD-92264-A.

B. Substantial Rehab Contingency. Generally, unspent contingency funds in an FHA-Insured loan project may be deposited into a Reserve for Replacement Account (R4R) or applied to pay down the mortgage, or do further improvements, betterments or upgrades to the property. One exception to this rule applies to Low Income Housing Tax Credit properties with affordability restrictions that meet HUD’s definition of “Affordable Housing” and obtain FHA mortgages not sized using the cost criterion. In such cases, HUD allows contingency funds included in the FHA mortgageable cost, but not needed for repairs, appropriate betterments, or deposits to R4R, to be used to pay the Developer Fee (deferred or otherwise) or any other HUD-approved project-related expense (e.g., relocation costs) or reimbursement item. Unused contingency funds may be used after issuance of the Final Trip Report, form HUD-95379.

C. Relocation Escrow. Unused Relocation funds, if escrowed from FHA loan proceeds, may also be released in accordance with guidance above including payment of Developer Fee (deferred or otherwise.)

D. Initial Operating Deficit Escrow. Initial Operating Deficit escrow requirements are outlined in Chapter 3, Section 3.10, Chapter 7, Section 7.14, and Chapter 8, Section 8.14. For LIHTC projects only (New Construction, Gut Rehab or Adaptive Re-Use), HUD will allow the HUD required Borrower’s Initial Operating Deficit to be contributed after Initial Endorsement but no later than the point in time when HUD signs the Permission to Occupy form, HUD-92485.

E. Working Capital Escrow. The 2% Working Capital Escrow requirement for substantial rehabilitation projects with Section 8 rental assistance covering more than 90% of the units is not required when the Lender can demonstrate there will be sufficient income generated by the property during the rehab period to cover items typically funded by the Working Capital Escrow and when Interim Income is not being used as a source of financing. A Waiver of the Working Capital Escrow is only available for LIHTC properties with 90% greater rental assistance (LIHTC only is not sufficient) and can be approved by the Regional Production Division Director.

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Chapter 14 LIHTC and Other Tax Credit Programs 14.11 Structuring of Secondary Debt

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