A.12.5.3 Defaults During Construction

A. HUD Construction Manager will consider alternative actions that can be offered to avoid foreclosure and hardship to all concerned parties regardless of the cause.

B. Request field counsel to provide legal guidance and participate in meetings to discuss the consequences of default and possible preventive actions.

• C. Contact MAP Lender:

1. Speak to a responsible official and obtain an opinion on the cause of default, methods of cure, and probability of cure.

2. Advise the Lender:

   • To preserve its rights against the surety by giving prompt oral and written notification of the contractor's lack of performance or default, and by demanding performance under the contract of surety (see Appendix 12, Section A.12.5.3.D below),

• To consult with its attorney and to secure HUD approval before entering into any formal or informal agreement with the surety.

D. The MAP Lender must send a notice to the bonding company with a copy to the General Contractor for all conditions affecting the bonding company's interests. The notice should be sent to the bonding company's principal office, and its regional or branch office, attention: Claims Department.

1. Conditions requiring notification include:

   • A sustained work stoppage,

• Nonpayment of subcontractors, suppliers, workmen, etc., and

• Failure to maintain satisfactory progress.

2. Conditions that require obtaining surety's approval in advance include:

   • Approving a change order or aggregate of change orders that exceed 10 percent of the contract price, and

   • Extension of the bond by surety where there is a compelling reason why the contractor cannot remedy a latent defect before the bond's expiration date.

3. The Borrower is responsible for requesting the surety's performance, the MAP Lender must act to protect its and HUD's interests, and HUD must take the final action to protect its interests under conditions in Appendix 12, Section A.12.5.3.D.1 above.

• E. Advise the Borrower of the contractor's violation, and/or lack of performance by the Architect or Borrower and give 30 days for correction.

• F. Assess the situation by considering:

1. Percentage of construction complete,

2. Occupancy (including current estimates of income, expenses and occupancy projections),

3. Type of assurance of completion (bonds, cash escrow),

MAP Guide, March 2021 Go to beginning of Appendix 12

Bookmarked Version Go to Acronym and Abbreviation List, Glossary, Index

Appendix 12 Page A12-15

To return to this page after clicking a link, press ALT + Back Arrow

Appendix 12 Construction Period A.12.5 Projects Experiencing Difficulties Before Final Closing

Go to Table of Contents

4. Status of escrow deposits,

5. Undrawn dollar amount of letters of credit (including working capital), and

6. Any other pertinent information.

G. HUD staff should meet to assess available options and prepare a position to present to interested parties. The meeting should include the Reginal or Satellite Office Director, Field Counsel, and a representative from Asset Management. Separate meetings by staff with one or more of the non-HUD parties may be helpful before holding a general meeting with all interested parties.

H . Convene a general meeting of all interested parties with either a direct or indirect interest in the project to explain the consequences of default. Hold such meetings even where there is no possibility of HUD granting a mortgage increase or other form of relief.

1. Emphasize that all non-HUD participants must make a meaningful contribution before HUD will assume any additional risk. Such contributions include:

   • Infusion of new capital through adding partners, syndication or other investments, and/or

   • Concessions by the MAP Lender to avoid a loss (e.g., deferral or forgiveness of interest, taking a partial assignment of the partnership interest, etc.).

2. State firmly and unequivocally that the non-HUD parties must work out the remedy if the default is to be cured.

3. Clarify that unless a written firm proposal for a workout is developed; assignment or foreclosure of the mortgage will be the consequence.

4. Address the remedies covered in Appendix 12, Section A.12.5.4 below, as appropriate.

I. Extension of MAP Lender’s election period to assign a loan for insurance benefits should not be granted where a workout proposal is not developed. Thirty days should be the maximum extension in most cases.