16.3 General Programmatic Requirements

A. In addition to other program requirements, the following are conditions for projects that use a Master Lease structure:

1. The insured mortgage must be in first lien position with respect to all project collateral. The fee simple ownership in the land and improvements provides the security for the mortgage.

2. All documents should include conflict language giving the HUD documents supremacy over other documents, except as otherwise permitted by HUD, and may not include indemnification provisions. In some cases, HUD may allow non-monetary matters such as affordability use restrictions to be recorded ahead of HUD’s mortgage, but such variances are allowed only on a case by case basis.

3. The Master Tenant and Master Sub-lessees must be single asset entities. Tenant-in-Common structures, Delaware Statutory Trusts, Maryland Business Trusts, Natural Persons, foreign entities are not eligible, though such entities may hold an “upper tier” interest in the single asset entities. The Master Tenant and Master Sub-lessees may not engage in any other businesses or activity, including the operation of any other rental project, or incur any liability or obligation except as permitted by HUD in connection with the project.

4. The Master Tenant and Master Sub-lessees must execute the standard HUD Regulatory Agreement and Rider, to address various ownership and operational responsibilities with respect to the mortgaged property.

5. The Master Tenant and Master Sub-lessees (as well as the Management Agent) must file management certifications and management entity profiles (forms HUD-9839-A, HUD-9839-B, and HUD-9832). HUD may require a management agreement to be terminated, in accordance with the terms and conditions contained in the management certification.

6. Net rentable commercial area as a percentage of gross floor area and income will be determined in accordance with the applicable FHA program limitations.

7. The Master Lease and all Sub-leases (sometimes collectively referred to as “Leases”) shall be subordinate to the insured mortgage and subject to approval by HUD prior to execution. The Leases may not be modified or amended thereafter without the prior written consent of HUD and may be terminated by HUD in the event that the insured mortgage is assigned. Any proposed modifications or amendments to the Leases must be approved by HUD’s Regional Counsel. The Leases must incorporate by reference the Regulatory Agreement, HUD rules, regulations and directives, and contain an agreement to comply with their requirements. The Leases must include an obligation to pay all rent due to the Lender, in the event of a default under the loan documents. The loan documents may be amended to provide notice of default to the Master Tenant contemporaneously with the giving of notice to the Borrower/Lessor, and the acceptance of a cure of such default, during such notice period, from the Master Tenant on behalf of the Borrower/Lessor. Any such cure must occur prior to the assignment to HUD and will be limited to one opportunity to cure during each 12-month time period.

8. Surplus cash determinations will be made in accordance with the Regulatory Agreements and will be made as if the entire project is owned and operated by one single purpose entity.

9. All financial operations and reporting are governed by 24 CFR, Part 5, Subpart H.

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10. The rent paid by the Master Tenant must equal or exceed the monthly principal and interest payments due on the insured mortgage and all required escrows and reserves.

11. All business agreements must be disclosed and are subject to HUD approval during loan underwriting (including, for example, inter- or intra-company loans, investor or outsider loans other than the insured mortgage, investor controls over operations, actions and deliverables that affect regulatory or contractual compliance or performance, etc.). The Firm Commitment will incorporate any conditions imposed by HUD with respect to such agreements.

12. Any proposed payments (equity contributions, fees, income, etc.) to the Borrower, Master Tenant, Master Sub-lessees by a syndicator or investor must be disclosed to HUD and approved during loan underwriting, and thereafter be reflected on the annual financial statement filings and on any required monthly reporting. If such payments are made while any party is in non-compliance with the Regulatory Agreement, enforcement action will be taken against all principals in the organization, subject to the notice and cure provisions in above number 5.

13. Master Leases and Sub-leases must prohibit assignments or subleases (except to the end-users of the commercial spaces and apartment residents), unless previously approved by HUD in writing.