8.14 Determining Cash Requirements for Completion

A. The MAP Lender has the obligation to collect and hold all funds, escrows, and deposits (initial draw, mortgage proceeds) specified for the transaction; this includes all other funds held by or at the order of the Lender in connection with the loan transaction. All funds are held by the Lender or a depository institution satisfactory to the Lender and must be pursuant to any applicable escrow agreement(s).

B. The MAP Lender must evaluate the Borrower’s and its Principals’ financial strength and creditworthiness, including their ability to meet the financial requirements for completing a project. The Lender’s Underwriter is responsible for completing the form HUD-92264-A and the form HUD-92013-C, LIHTC Summary Report required only for applications with LIHTCs to present their analysis of cash requirement to close the transaction.

• C. To calculate the financial requirements, the Lender must total the following:

1. Total estimated development cost, including the amount by which the:

   • Contractor’s and/or Borrower’s estimate for construction exceeds Lender’s estimate;

• Owner/Architect Agreement for design and/or supervisory services exceeds Lender’s estimate; or

Consultant’s contract for services exceeds Lenders estimate.

2. Amount necessary to clear all debts on the land (or property if substantial rehabilitation). The Lender must verify all indebtedness that must be paid off at endorsement. In purchase transactions, include other costs associated with the acquisition that will not be recoverable from mortgage proceeds, such as zoning expenses.

3. Estimated cost of offsite improvements and demolition.

4. Cost of equipping and furnishing a project with non-realty items, if applicable. Use the higher of Lender’s estimate or the Borrower’s estimate.

5. Working capital deposit, if required.

   • The working capital escrow requirement for new construction transactions is 4% of the mortgage amount, half of which is a construction contingency for cost overruns and approved change orders. Separate provisions within the working capital escrow will govern the remaining 2% construction contingency. Any unused portion of the construction contingency escrow is refunded to the Developer at Final Endorsement. Construction funded from the contingency portion of the working capital escrow may be considered as the basis for a request for an increased mortgage amount. A waiver of the 2% Working Capital Escrow requirement for substantial rehabilitation transactions with Section 8 rental assistance covering 90% or more of the units (with or without LIHTC restrictions), may be granted when the Lender is able to demonstrate there will be enough income generated by the project during the rehabilitation

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period to cover items typically funded by the Working Capital Escrow. See Chapter 3, Section 3.2.10 of the MAP Guide.

• Working capital funds are not mortgageable and the unused portion may be released to the Borrower. See Chapter 12, Section 12.15.5 for release of the escrow.

• For LIHTC projects with a funded working capital reserve held by the partnership (even though controlled by the syndicator or investor and not by HUD or the Lender), the funded reserve will be credited towards the increased construction reserve requirement, although the Lendercontrolled account must still meet the 2% working capital escrow requirement.

• The working capital escrow requirement for substantial rehabilitation projects is 2% of the mortgage amount.

• Use form HUD-92412-M, Escrow Agreement for Working Capital. The Lender will deposit said funds in an account insured or guaranteed by a federal agency. See Handbooks 4350.4, Insured Multifamily Mortgagee Servicing and Regional Office Director/PC for the depository requirements.

6. Operating deficit escrow.

   • For all new construction and for substantial rehabilitation projects in which there will be significant resident displacement resulting in negative cash flow during the rehabilitation period, the operating deficit escrow will be the greater of:

• 1. What the appraisal and underwriting analysis determines to be appropriate; or
• 2. 3% of the mortgage amount; or
• 3. 4 months debt service (Principal & Interest and Mortgage Insurance Premium) if the property is a garden apartment, or 6 months debt service (Principal & Interest and Mortgage Insurance Premium) if the property is an elevator building where a single Certificate of Occupancy will be issued before any of the units or any of the entire floors can be rented.

• HUD will consider Lender requests for operating deficit escrow draws during lease-up based on the adequacy of the remaining amount of operating deficit escrow on deposit with the project. See Chapter 12, Section 12.15.5 for further mitigation and release guidance.

• The amount of the operating deficit escrow for substantial rehabilitation projects with at least 90% Project-Based Rental Assistance shall be based only upon the conclusions of the appraisal and underwriting analysis and need not be the higher of 3% of the mortgage amount or 4 months of debt service. The underwriting presentation should provide a detailed estimate of the projected cash flow through the period of the rehabilitation to support the lower escrow amount.

• For LIHTC projects with a funded operating deficit reserve held by the partnership (even if controlled by the investor and not by HUD or the Lender), the funded reserve will be credited towards the increased reserve requirements of 3% of the mortgage amount or 4 months of debt service, although the Lender-controlled account must still meet what the appraisal and underwriting analysis determines to be an appropriate operating deficit amount.

• Use form HUD-92476a-M, Escrow Agreement for Operating Deficit. The Lender will deposit said funds in an account insured or guaranteed by a federal agency. See Handbook 4350.4, Insured Multifamily Mortgagee Servicing and Regional/Satellite Office for the depository requirements.

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7. Commitment, marketing fees, and discounts must be paid out-of-pocket by the Sponsor/Borrower and may not be paid from the operating deficit escrow.

8. For tax-exempt or taxable bond financing, cost of issuance must be paid out-of-pocket by the Sponsor/Borrower and may not be paid from the operating deficit escrow.

9. The operating deficit escrow may be used to pay relocation expense that was not included in MAP Lender’s estimated replacement cost on form HUD-92264-A.

10. Calculate the cash investment required. The Lender must deduct from the estimated development cost: the maximum insurable mortgage, any grant/ loan funds or tax credit equity attributable to replacement cost items, and fees not to be paid in cash. The remaining balance is the estimated financial requirements to complete the project. Record this calculation on form HUD-92264-A Line 7.

11. Cash-Out Escrow from Land Equity. If land, or the “as is” property value for a substantial rehabilitation project, is contributed to meet the Borrower’s equity requirement, any cash-out from the excess land value above what is required at initial endorsement must be deferred until the project is complete and has demonstrated to the satisfaction of the Regional Office that it has achieved 6 consecutive months of break-even occupancy (or 12 months break-even occupancy for transactions meeting Large Loan parameters). The Borrower may apply any excess land value to fund the operating deficit, the working capital escrow (including the construction contingency escrow) or other (i.e. nonmortgageable) cash requirements at initial endorsement. To the extent that excess mortgage proceeds remain after capitalizing the required escrows, any remaining balance may be used for the purposes described in Appendix 12, Section A.12.1.4. See also Chapter 12, Section 12.8 and Section 12.15 of the MAP Guide for specific instructions. After all escrows and cash requirements are established at initial endorsement, any balance shall be escrowed with the Lender until the project has achieved the occupancy thresholds described above. After these minimum thresholds have been met, the balance of the escrow may be released to the Borrower. (See Chapter 12, Section 12.15.3 for working capital details and Chapter 12, Section 12.15.4 for the IOD details).

12. Employment-Based Fifth Preference.EB-5 Equity Source. EB-5 is a U.S. Citizenship and Immigration Services (USCIS) program created in 1990 to stimulate the U.S. economy through job creation and capital investment by foreign investors and is used to raise equity. See the U.S. Citizenship and Immigration Services (USCIS) website at: https://www.uscis.gov/eb-5. Any contribution of EB-5 equity must be available at the time of initial closing, therefore, an equity deferred pay-in schedule cannot be applied. Projects that propose EB-5 investments as debt rather than equity are subject to the limitations on secondary financing. HUD will only consider waivers only if there are significant affordable rent and income restrictions and there is some public interest motivation (beyond the EB5 program incentive itself.)

13. Assurance of Completion. Performance Bond and Payment Bond. The General Contractor must provide for the protection of HUD and Lender and to meet state and local requirements protecting material suppliers, mechanics, and subcontractors. The General Contractor’s assurance of completion must provide:

• For non-elevator buildings, or elevator buildings with four (4) stories or less, where the cost of construction or rehabilitation is more than $500,000, the assurance shall be in the form of corporate surety bonds for payment and performance, each in the amount of 100% of HUD’s estimated cost of construction or rehabilitation including an assumed builder's profit on BSPRA

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transactions (see Section G Line 50, form HUD-92246, less Architect’s design and supervisory fee and mortgagor’s other fees). Alternatively, the completion assurance agreement may be secured by a cash deposit or Letter of Credit in the amount of 15% of the HUD estimated cost of construction or rehabilitation.

• For elevator buildings of five (5) stories or more, the assurance shall be in the form of corporate surety bonds for payment and performance, each in the amount of 100% of HUD’s estimated cost of construction or rehabilitation including an imposed builder's profit on BSPRA transactions. Alternatively, the completion assurance agreement may be secured by a cash deposit or Letter of Credit in the amount of 25% of the HUD estimated cost of construction or rehabilitation.

• The Completion Assurance Agreement, form HUD-92450 is secured by a cash deposit (or unconditional, irrevocable letter of credit).