Section 236 (e)(2). Otherwise known as a "decoupling transaction", this is where the owner prepays the mortgage but retains IRP subsidy and applies it to a new mortgage.

Section 236 (b). In this case, an approved state or local mortgagee purchases the insured Section 236 mortgage, terminates the insurance, keeps the Section 236 mortgage in tact and provides the additional financing for the remainder of the transaction.

Owners can obtain rent increases via a budget-based rent increase or a Section 8 Mark Up to Market increase (if eligible). In the case of a budget-based rent increase, "appropriate added debt service" can be included in the budget, subject to rent increase limitations. In addition to the maximum rents being limited to market comparable rents less IRP, the Notice further limits rents to a 10% increase over the current rents. Though not explicitly stated, it appears as if this 10% limit applies only to the non-Section 8 units in a project. In the case of a Mark Up to Market, the Notice clearly states that Section 8 rents will be increased in accordance with 99-36 (which does not limit the percentage increase). Owners should confirm with HUD that the 10% rent increase cap applies to non- Section 8 units only since this distinction is not made in the Notice. HUD will retain regulatory approval over future rent increases (even if it is processed by a public agency.)

First, the Notice implies that, for either a Section 236 (e)(2) or 236 (b) transaction, limitations on distributions from surplus cash are prescribed by 24 CFR 236.50. This regulation states that dividends are limited to 6% of the mortgagors initial equity investment unless distributions were increased via a Title II or VI preservation deal. However, the Notice also indicates that the return on equity calculation for transactions where there will be new FHA insurance or a risk sharing loan and equity from tax credit syndication proceeds will be based on a 10% return on 10% percent of the amount of the new mortgage debt after the Section 236 (e)(2) or 236 (b) transaction. And to make matters more confusing, the Notice further indicates that where the transaction will keep the mortgage in tact (a 236 (b) transaction), the original 6% of initial equity is used. In contrast, the Section 236 (b) IRP Agreement seems to indicate that distributions are governed by the public agency’s Regulatory Agreement. These agreements tend to allow for 10% equity distributions, where the equity component is periodically revalued. Alternatively, the Section 236 (e)(2) IRP Agreement indicates that distributions are limited to 6% of the initial equity except in the case of transactions with existing Section 236 state-agency, non-insured mortgages. In these cases, distributions would be controlled by state law.

Assuming that the IRP Agreements control the equity distributions (rather than the Notice guidelines), it would seem that for any Section 236 property that either (i.) has an existing non-insured, state-agency mortgage, or (ii.) is acquired by a state or local mortgagee as part of a Section 236 (b) transaction, should have its equity distributions determined by that state or local mortgagee. For existing Section 236 FHA-insured deals that contemplate Section 236 (e)(2) transactions with conventional financing, distributions may be limited to 6% of the initial equity distribution.

Our experience has shown that HUD will allow increased dividends when an owner refinances with FHA mortgage insurance, obtains new financing with a state agency, or uses Low-Income Housing Tax Credits. The dividend limit for FHA deals have been 1% of the new mortgage amount, considerably higher when owners have used state agencies for the new financing, and 10% of the syndication proceeds in LIHTC transactions. We have also been successful in obtaining distributions for nonprofits equal to 6% of equity. Given the Notice’s ambiguity regarding owner distributions and HUD’s discretion in this area, owners should confirm the applicable equity distribution allowances with HUD on a case-by-case basis.