8.15.3 Tax-Exempt Loans and/or Bonds

A. Tax-exempt loans and/or bonds may be sold at a premium to investors, whereby the investor pays an amount in excess of the face value of the tax-exempt loans and/or bonds. The premium results from the tax-exempt financing carrying a higher rate than is generally available in the marketplace.

1. Any premium raised by a transaction is considered part of the mortgagee, bond Underwriter, and/or issuer’s profit, as applicable. However, if a mortgagee gives something of value without the expectation of being repaid, HUD considers this to be a kickback. The one exception involves taxexempt financing transactions where the issuer of loans and/or bonds permits the Borrower to receive some portion of the premium to offset the cost of issuance so that the mortgagee, bond Underwriter and/or issuer, as applicable are simply conduits for the transfer of funds.

2. If any of the premium is remitted to the Borrower, it will be considered excess investment income, treated as project income, and used to reduce the total allowable cost of the project.

3. On tax-exempt financed projects, the premiums may be treated as project income under the following conditions:

The Sponsor/Borrower cannot benefit monetarily from the excess investment income.

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Chapter 8 Mortgage Credit 8.15 Bond Financed Projects and Tax-Exempt Agency Loans

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• The premium, if accessible to or given to the Sponsor/Borrower, is considered as excess investment income.

• Closing documents must detail the amount of the premium being given to the Sponsor/Borrower.

• The premium may be used to pay for additional cost associated with the cost of issuance and may be applied to other recognizable cost overruns.

• The Borrower’s accountant or the Borrower must detail in the notes to the financial statement the amount of excess income received.

4. For nonprofit applications, excess income generated from premiums may be applied to recognizable cost overruns. Any excess income over and above that used towards recognizable cost overruns must be transferred to the reserve for replacement account.

5. On Section 223(f) applications, excess income generated from premiums must be transferred to the reserve for replacement account.