17.2 Program Eligibility

A. Eligible Borrowers. Eligible borrowers include non-profit Cooperative Ownership Housing corporations or non-profit Cooperative Ownership Housing trusts regulated under state law and regulatory agreements that require membership eligibility and transfer of membership in a manner approved by HUD. Limited profit ownership entities such as those established under the Mitchell-Lama program in New York City may be acceptable pending review by local HUD Counsel.

B. Eligible Projects. The property must contain at least 5 residential units with complete kitchens and baths. Proposed conversions or projects undergoing conversions are not eligible. Projects with a recent or unresolved vacancy history, or a history of shareholders not paying dues, carrying charges and other co-op obligations, will not be considered for mortgage insurance. The project must be fully subscribed prior to endorsement with no units owned by the original developer, and must meet these additional criteria:

1. Project Design . The project must be designed for primary residence only. Guest suites are permitted as an amenity to the extent their use is consistent with the National Housing Act’s prohibition against use of FHA-insured multifamily projects for transient or hotel purposes. However, timeshares, resorts, Cooperative hotels or rental pools are not permitted. Section 513 of the National Housing Act

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prohibits the use of the insurance programs for transient or hotel purposes. The borrower and individual shareholders cannot execute Occupancy Agreements for less than 30 days nor provide occupants with hotel services such as maid service, furnishing and laundering of linens, room service and bellboys. Units may not be sub-leased without the consent of the Cooperative Corporation. See Chapter 3, Section 3.1.15 and Housing Notice 2018-10 Guest Suites in Multifamily Housing under the National Housing Act for the detailed requirements.

2. General Market Conditions . The Property must be located in an area evidencing strong market understanding and acceptance of Cooperative housing. Financing for the purchase of individual shares must be readily available from mortgage bankers/brokers, banks or saving and loan institutions. The Underwriting Summary must cite recent sales within the building and indicate the type of financing utilized.

3. Repair Threshold . A project cannot be processed under Section 223(f) if it meets the current requirements for substantial rehabilitation in Chapter 5, Section 5.10. Projects that are not eligible for mortgage insurance under Section 207 pursuant to Section 223(f) should consider the Section 213(i) program.

4. Fair Housing Act / Equal Opportunity Requirements . All other applicable program requirements for the Section 207 pursuant to Section 223(f) program must be met, including compliance with applicable Civil Rights Laws, including the nondiscrimination and affirmatively furthering fair housing provisions of the Fair Housing Act, and applicable accessibility requirements for persons with disabilities.

   • Affirmative Fair Housing Marketing. The Affirmative Fair Housing Marketing Requirements (24 CFR Part 200, Subpart M) apply to all insured projects of five or more units but projects insured under Section 207 pursuant to Section 223(f) are exempt from the submission of a written plan. However, a Section 223(f) applicant is required to maintain records of its affirmative marketing efforts. The borrower must certify that it will not discriminate against any protected class, which includes race, color, national origin, religion, sex, familial status, or disability.

   • Accessibility for Persons with Disabilities . This is required for properties built after March 13, 1991, containing Fair Housing Act noncompliance. If a project built after March 13, 1991, is submitted for Section 223(f) refinancing and the Capital Needs Assessment (CNA) inspection reveals that it contains noncompliance with the Fair Housing Act design and construction requirements, the Department must require that the owner correct the noncompliance as a condition of insurance. The extent of the noncompliance and the cost of correction will determine whether the project is feasible as a Section 223(f) or whether to resubmit it as a substantial rehabilitation. In no case may the Department insure projects with outstanding Fair Housing Act noncompliance.

5. Elderly Developments . In refinancing of the underlying mortgage for an existing Cooperative project designed for the elderly, the Department defines the term “elderly family ” in the National Housing Act (NHA) as a household composed of one or more persons with the Head of Household (HOH) who is 62 years of age or more at the time of initial occupancy. Waiver of this definition is not permitted under any circumstances.

The Cooperative shall not provide mandatory meals and services such as those associated with retirement service centers. No non-shelter services can be a mandatory condition of occupancy and

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must be reviewed by the lender and approved by the Regional Center or Satellite Office for reasonableness. Non-shelter spaces already constructed for projects with current HUD-insured mortgages may include formal dining areas with meal services to be provided on an optional basis. All Cooperatives may provide modest kitchen equipment in a non-shelter space for the use of occupants or for catering services. The kitchen should be sufficient in size to comply with sanitary requirements. Additional requirements related to the provision of meals are as follows:

Any meal service must be provided on an optional basis.

• The cost of meals may not be included in the residents' maintenance charges.

• The costs associated with the operation of the meals service are the responsibility of the entity that operates the optional meal service.

• The borrower may receive payment from the operator of the meals service. In such cases, this revenue may not be included in the underwriting of the project, as this service is optional for each resident, thereby potentially producing a revenue stream that is both unpredictable and unreliable.

• A determination should be made by the lender that the contract or agreement entered into with a third-party meal provider will not increase the project risk.

  • Any meal service must be operated by a meal provider licensed under State or local law and in compliance with current health and safety requirements for food service providers.

• Local HUD Counsel must determine that the granting or revocation of any licensing required to operate a proposed meal service will not jeopardize the ability of the project to operate as Cooperative Housing in accordance with the requirements of the Regulatory Agreement.

  • Costs associated with the construction of an ancillary building to include meal services may be considered in a mortgage proposed to be insured under Section 223(f) subject to outstanding requirements limiting non-shelter space and commercial areas set forth in Chapter 5 of the MAP guide.

6. Owner Occupancy . At least 75% of the total number of residential units must be owned and occupied by Cooperative members at the time of endorsement, and no more than 25% of the units may be owned by investors.

7. Vacancy Rate . The project should not have a vacancy rate greater than 5% since a higher vacancy rate may indicate a weak or problematic project or market. If an application is presented with a higher vacancy rate, the underwriter must provide convincing market evidence to support the transaction in the Underwriting Summary. The vacancy/occupancy rate used in underwriting the loan should be based on the actual historic performance of the project, which can be 100%. This applies only to Criterion 5 based on actual operation as a Cooperative project.

8. Turnover Rate . The sales history of the complex should display a healthy turnover rate to demonstrate that the project is viable and that there is demand for the units. If the turnover rate is less than 5% of the total number of owner-occupied units per year, the underwriter must determine the reasons for the low turnover rate and why it does not pose an unacceptable risk, which must be documented in the Underwriting Summary. However, it should be noted that a project and/or market area may have a historically low turnover rate due to its popularity as a source of affordable housing.

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9. Adequacy of the Proposed Carrying Charges . The carrying charge must be sufficient to adequately maintain the project at a level that would make it suitable as security for a long-term mortgage. The Underwriting Summary must contain an analysis of the Appraiser’s findings regarding the adequacy of the proposed carrying charge that will be in place after refinancing has occurred and a discussion of the Cooperative project’s policy and history regarding increasing the carrying charge. The Cooperative’s Bylaws or other appropriate organizational documents must contain a provision that requires an assessment and increase of carrying charges annually as may be required based upon operating history or at the direction of HUD, in order to address increases in operating expenses.

10. Carrying Charge Increase . In general, the debt service resulting from the proposed mortgage should not require a carrying charge increase of more than 5%, which may be exceeded, so long as all of the following requirements are met:

• The carrying charge is below market for properly maintained similar projects and is not sufficient to adequately maintain the project.

• The Board of Directors must approve the carrying charge increase in accordance with its By-laws the FHA Model Form of By-laws, FHA Form No. 3245.

• An analysis of the demographic data in the appraisal report must indicate that the new carrying charge would be affordable for the typical resident.

  • Market analysis of the proposed maintenance carrying charge indicates that it is within market limits for similar projects in the subject’s market area.

11. Commercial Space Limitations . The current Section 223(f) parameters must be followed.

12. Ownership of Commercial Space/Parking . Commercial and parking space at a Cooperative Housing project may or may not be owned by the Cooperative. Only those spaces that are owned by the Cooperative may be included as part of the collateral.

13. Ground Leases . Ground Leases must conform to the FHA Lease Addendum Form HUD-92070M. The term of the lease addendum may be varied to conform with applicable State and local law, except that the local HUD Closing Attorney must approve:

The legal need for any proposed lease term changes, and

That any term changes are consistent with the following requirements:

• 1. Term is 99 years and is renewable, or
• 2. Term is at least 50 years from the date the mortgage is executed (where a lease is on trust/other land on a reservation the HUD Closing Attorney must ensure that the lease provisions are coordinated with Bureau of Indian Affairs’ requirements).