Exhibit A to Subpart E of Part 1944 - How To Bring Rental and Cooperative Housing to Your Town

I. Introduction II. Applying for a Loan III. Review of the Preapplication IV. Developing the Loan Docket V. Review of the Complete Docket VI. Construction VII. Open House VIII. Exhibits A-1 Legal Service Agreement A-2 Survey of Existing Rental Housing A-3 Rental Housing Survey A-4 Cooperative Housing Survey A-5 Housing Survey Summary A-6 Housing Allowances for Utilities and Other Public Services A-7 Information to be Submitted with Preapplication for a Rural Rental Housing (RRH) and a Rural Cooperative Housing (RCH) Loan A-8 Outline of Professional Market Study A-9 Administrative Process for Combining FmHA or its successor agency under Public Law 103-354 Assistance with Low-Income Housing Tax Credits A-10 Information to be Submitted with Application for a Rural Rental Housing (RRH) and a Rural Cooperative Housing (RCH) Loan. I. Introduction

A. Most areas in rural America need more adequate rental housing. Some people with modest incomes live in impoverished housing that is cold in the winter and hot in the summer because adequate housing at a reasonable rent is not available. Other households that prefer to rent have the choice of either commuting many miles to work or living in the substandard rental housing that is available in small rural communities. To help reduce this rental housing shortage, the Farmers Home Administration (FmHA) or its successor agency under Public Law 103-354 finances rental housing in rural communities.

B. To augment the choice of living accommodations available to modest income persons, FmHA or its successor agency under Public Law 103-354 also provides financing for cooperative-type housing units. Although this kind of housing units is appropriate only to a particular group of persons, it also serves to help reduce the existing housing shortage in rural communities. Nonprofit organizations, other types of organizations and individuals may qualify for these housing loans. Information about the loans is available at the local FmHA or its successor agency under Public Law 103-354 office.

C. This handbook will assist interested persons and groups in applying for a rural rental or cooperative housing loan. It also briefly explains requirements regarding the construction and operation of the housing.

D. The basic guidelines in this handbook apply to all applicants; however, some procedural requirements will vary depending on the size of the project being proposed and the type of applicant/borrower. However, in no instance will different policies, practices or procedures be utilized in the evaluation or in determination of the creditworthiness of any organization or person(s) in connection with the provision of any RRH or RCH loan or other financial assistance for a project or other financial assistance which is secured by residential real estate because of race, color, religion, sex, handicap, marital or familial status, age, or National origin.

E. The objective of the FmHA or its successor agency under Public Law 103-354 housing loan program is to provide credit for housing that serves the needs of eligible very low-, low-, and moderate-income permanent residents.

F. Successful housing depends on the existence of the following three important conditions:

1. There must be a need for the housing to be built.

2. The housing must fit the needs of prospective tenants or cooperative members from the standpoint of location, design and cost.

3. The applicant for a loan must provide adequate information to FmHA or its successor agency under Public Law 103-354 to show that these basic conditions can be met.

II. Applying for a Loan

A. An individual, organization, or group organizing to provide housing may contact any Rural Development office processing Section 515 loan requests to obtain information and necessary forms. The Section 515 program is administered by Rural Development's Rural Housing Service (RHS).

B. Each funding cycle, RHS will publish in the Federal Register a notice of the availability of funds (NOFA) for Section 515 loans and a list of designated places (communities) for which loan requests may be submitted. The list of designated places is also available from any Rural Development office processing Section 515 loan requests. Designated places are rural places identified by RHS as having the greatest potential need for Section 515 housing. Except in unusual circumstances, places are designated for a period of three years or until a loan has been selected for funding, whichever occurs first.

C. Applicants must submit a loan request by the deadline announced in the Federal Register, and available in any Rural Development office, to be considered in the funding cycle. Section III of this exhibit provides information on the loan review and selection process. In addition, applicants are advised to read this subpart, which provides detailed information on the Section 515 program.

D. The loan request consists of SF-424.2, “Application for Federal Assistance (For Construction),” the supporting material or information listed in exhibit A-7 of this subpart, and any additional information required in NOFA. This information will enable the Agency to determine:

1. The eligibility of the applicant;

2. The feasibility (economic, environmental, and architectural) of the proposed housing;

3. That prospective cooperative members have read and understand their responsibilities as outlined in “What is Cooperative Housing?” (available in any Rural Development office) before agreeing to a cooperative housing project;

4. Whether the proposed housing can appropriately be financed by RHS; and

5. Its Civil Rights impact.

E. This information usually can be furnished by the applicant without hiring extensive professional services. However, fees for professional packaging services rendered to a nonprofit organization can be made a part of loan development costs.

III. Review of the Loan Request

A. Loan requests received by the deadline announced in the NOFA will be reviewed, scored, and ranked based on the loan selection criteria announced in the NOFA. Requests that rank sufficiently high will be reviewed for eligibility and feasibility.

B. Upon completion of the loan review process, applicants will be advised of RHS' decision. Applicants whose loan requests are selected for further processing will be notified of the additional steps that need to be taken. Loan requests not selected for further processing in the current funding cycle will be returned to the applicant.

IV. Developing the Loan Docket

A. When a loan request is selected for further processing, the servicing official will review the items required in exhibit A-9. The amount of information required will vary based on the complexity and size of the proposed project. The servicing official will also provide forms and guides to assist the applicant in recording required information. Some of the guides are included as exhibits in this handbook. The applicant is responsible for providing the information required. The servicing official will assemble this information and complete the docket.

B. The following information will be helpful in developing a loan docket. The first two items are applicable only to nonprofit organizations. The other items apply to any applicant. In addition, the requirements of exhibit A-7 of this subpart must be met when developing a loan request and the requirements of exhibit A-9 must be met for loan requests selected for further processing.

1. Getting organized if applicant is a nonprofit organization and has not adopted articles of incorporation and bylaws. a. Steering committee or sponsor. The group may choose a steering committee or, in the case of a cooperative, a sponsor to act for it. An attorney will usually be required to advise the organization on incorporation and assist in developing the loan application. The steering committee, or sponsor, should select an attorney who is interested in the proposed housing and will render the necessary services promptly for a reasonable fee.

b. Articles of incorporation and bylaws. FmHA or its successor agency under Public Law 103-354 has developed model articles of incorporation and bylaws for nonprofit organizations. The steering committee, or sponsor, should arrange for the servicing official to meet with the attorney. The servicing official will give the attorney copies of the FmHA or its successor agency under Public Law 103-354 model articles of incorporation and bylaws and explain FmHA or its successor agency under Public Law 103-354 requirements. Separate bylaws have been developed for cooperatives and for rental housing organizations.

c. Attorney's fees. Reasonable attorney's fees may be included in the FmHA or its successor agency under Public Law 103-354 loan. A written agreement between the applicant and attorney is required. See exhibit A-1 for a sample copy of an agreement.

d. Board of directors. The steering committee, or sponsor, usually selects the incorporators for the corporation. The board of directors is responsible for conducting the corporation's business, including obtaining the loan and providing overall management after the housing is completed.

2. Obtaining broadly based membership for rental housing. a. A nonprofit corporation applying for a loan must have and maintain a broadly based local membership, including leaders in the community, representing a variety of interests in the community. The members may be individuals or organizations but each member is limited to one vote.

b. The purpose of the broadly based membership requirement is to obtain community support, provide enough members to be able to rotate officers and members of the board of directors, protect the Government's financial interest as mortgagee and provide assurance that the housing will be a success and the purpose of the loan carried out.

c. In RRH loans made to nonprofit organizations and public bodies, there is no profit incentive. The term of the loan may be for as long as 30 years, with an amortization period not to exceed 50 years. Therefore, factors such as the prospect for continuous competent management and supervision, maintenance and adequate community support for the housing project over the expected life of the loan are important.

d. A membership list showing the names and addresses of each member should be maintained by the secretary of the organization.

(1) Number of members required. The organization should have at least 25 members. The number of members may be decreased for projects with less than 25 units.

(2) Contributions by members. Nonprofit corporations may require a membership fee or ask prospective members for a contribution. This is the method often used by nonprofit corporation applicants to raise initial operating capital. However, no such fee or contribution can entitle a member or prospective member to a preference in occupancy of the housing.

3. Cooperative membership. a. Only those persons who will reside in the cooperative housing will be members of the cooperative. The composition of the board of directors will be drawn from that membership, initially by appointment and later by election from the general membership. The board should be composed of at least 5 members.

b. The board of directors, with assistance from the adviser to the board (discussed in a later section), will devise the rules and regulations under which the cooperative will operate. Additionally, the board will be responsible for management of the cooperative.

c. A membership list showing the names and addresses of each member will be maintained by the secretary of the cooperative.

d. Cooperative membership will require the deposit of a membership fee by each member as outlined in § 1944.215(g) of this subpart. The fee will be retained by the cooperative for as long as the person remains a member of the cooperative. The fee will be refunded to the person when membership is terminated.

4. The applicant should communicate with officials of the community early in the development of the proposal to explain the benefits of the proposed housing to the community. This meeting will serve to remove the uncertainty of the impact of the housing on the community and may aid in a timely processing of the loan request. The support of community officials is helpful in obtaining environmental clearances, possible zoning changes, favorable taxation, etc.

5. Initial operating capital. a. All applicants must have enough inital operating capital to get started. When justified, FmHA or its successor agency under Public Law 103-354 may include these funds in a loan made to a consumer cooperative, nonprofit organization or public body. Initial operating capital should be sufficient to pay such costs as property and liability insurance premiums, fidelity coverage premiums when the applicant is an organization, utility hook-up charges and deposits, maintenance and other equipment, lease forms, furnishings, loan payments that may become due during construction and other initial expenses.

b. At least 2 percent of the total development cost of the project is required for initial operation and maintenance costs. The applicant can determine the amount required by working out a detailed budget of income and expenses for the period of time until the housing is ready for occupancy and income will be available. The actual budget may indicate that more than 2 percent is needed.

6. Analysis of market to determine demand for rental housing. a. Applicants should discuss with the servicing official the type of market analysis that will be needed. Applicants must comply with paragraph II of exhibit A-7 when preparing market information.

b. Exhibits A-2 and A-3 are sample forms which may be modified by the applicant to assist in the assembly of the information for the market analysis.

7. Planning to serve the market. a. Planning the housing to serve the market in the community involves more than obtaining a blueprint of the building. It requires a careful evaluation of conditions in the community and careful planning to assure that the result will be good housing designed for independent living at a cost eligible tenants can afford. Well planned housing is:

(1) Convenient, attractive, safe and comfortable.

(2) Easily maintained.

(3) Located where tenants or members can have easy access to the goods and services they require for daily living.

(4) Planned to meet all codes, regulations, and acceptable construction practices.

(5) Priced within an affordable range of its prospective tenants and members.

(6) Energy efficient and complies with FmHA or its successor agency under Public Law 103-354's thermal performance standards.

b. The servicing official and State Office architect can provide information that will help the applicant in planning the housing.

8. Selecting an architect. a. The services of an architect are required for all housing projects which have more than four units. The cost of a registered architect/engineer may be included in the loan.

b. Before anything more than schematic drawings are prepared, the applicant and its architect, the FmHA or its successor agency under Public Law 103-354 architect/engineer and the servicing official should arrange a meeting. This meeting will acquaint the applicant's architect with the purposes of the housing and FmHA or its successor agency under Public Law 103-354's requirements. This will be helpful in eliminating misunderstandings. Among the topics that should be discussed are:

(1) Objectives of the housing program.

(2) Design requirements that will produce good housing at reasonable cost.

(3) Stages at which FmHA or its successor agency under Public Law 103-354 must review plans and specifications.

(4) Services the architect will be expected to perform.

(5) Agreement between architect and applicant.

9. Selecting a site. a. The location of the housing is an important part of planning to serve the market. Occupants should have easy access to required services. A desirable residential setting within a rural community is essential.

b. Site cost is also important. The total cost of the site, including the cost of improvements and the price of the land, must be considered. Both may be included in the loan. However, loan funds made available to purchase land may not exceed the present market value of the land in its present condition as determined by an FmHA or its successor agency under Public Law 103-354 appraisal.

c. Before buying a site, the applicant should consult the architect to determine the suitability of the site for the proposed housing. The applicant must consider the site requirements detailed in paragraph III of exhibit A-7 of this instruction. The applicant should not enter into any firm agreement to buy a site with the expectation of receiving an FmHA or its successor agency under Public Law 103-354 loan without consulting with the servicing official and prior to the Agency's completion of the environmental impact review.

10. Drawings, specifications and cost estimates. The size, complexity and cost of housing projects can vary from a duplex located on a small building lot to a complex of buildings located on a site containing several acres. The applicant must provide drawings and specifications in accordance with paragraph IV of exhibit A-7 of this subpart.

11. Budgets. a. The initial budget should cover the period from the date the first construction expenses are incurred until the end of the applicant's first fiscal year following completion of the housing. After the final cost estimate has been made and the amount of the loan needed has been determined, a budget for a typical year should be developed.

b. This budget should be based on a typical annual operation after the project is occupied. Budgeting is an important part of the management. The applicant should spend enough time working on it to assure that the estimates are realistic. Budgets will be required each year until the FmHA or its successor agency under Public Law 103-354 loan is repaid in full. The budget serves several purposes including:

(1) Helps determine rental or occupancy rates.

(2) Indicates financial soundness.

(3) Serves as a guide for paying expenses.

c. Form FmHA or its successor agency under Public Law 103-354 1930-7, “Multiple Family Housing Project Budget,” and its accompanying exhibit A-6 of this subpart are a sample budget form and utility allowance form.

12. Loan resolution or loan agreement. When the applicant is a corporation or an individual applying for a loan above certain amounts, a copy of the required loan resolution or loan agreement should be obtained from and discussed with the servicing official before the loan docket is developed. Among other things, this document outlines how the income from the housing is to be used. These requirements should be understood at the time the budget is developed.

13. Rental management plan. A detailed management plan will be developed which will outline the basic policies and procedures to be followed and the duties of the officers and employees. The applicant must manage the project in accordance with the requirements of subpart C to part 1930 of this chapter.

14. Rental manager and caretaker. a. A comprehensive management program is essential to the successful operation of the project. A carefully written plan should be developed in accordance with exhibit B of FmHA Instruction 1930-C.

b. The use of an onsite manager should be based on the size of the project. The manager should be readily available to the tenants. The manager might be one of the tenants or a member of the board of directors of a nonprofit corporation. The manager's duties should be specified in the management plan.

c. The board of directors of a corporation is responsible for overall supervision and management of all its affairs. The board should delegate actual operating and management responsibility to committees or individuals and meet often enough to see that enterprise is being managed successfully.

15. Cooperative self-management. a. The success of cooperative housing will depend on how well the members are able to manage the cooperative themselves with assistance from the adviser to the board. The cooperative must first develop and designate those areas of responsibilities to be delegated to committees, a list of the committees, and the functions of the committees. A copy of this information will be provided to each prospective member.

b. It will be necessary for the proposed board of directors to become familiar with how a cooperative is supposed to work before it is able to successfully assume the responsibilities of running the cooperative. This can best be achieved by participating in programs designed for the express purpose of educating potential board members. The prospective board members will be expected to take part in such a training program.

c. Participation on committees by members will be on a voluntary basis. However, if it appears a committee does not have sufficient numbers for it to adequately operate, then additional members will be expected to volunteer their time and talents. Thus, participation on committees is voluntary up to a point. If a member has experience in a particular area, that member should be encouraged to join the committee which will benefit from his/her experience. The cooperative will need a total commitment from the membership in order to assure success of self-management. Examples of the types of committees which may be considered are:

(1) Maintenance

(2) Groundskeeping

(3) Communications

(4) Budget and finance

(5) Rules

(6) Recreation

(7) Home service

d. If the cooperative is not successful in managing itself, professional management will be hired by the cooperative.

16. Occupancy policies. a. Applicants should review carefully the occupancy requirements with the servicing official. Particular attention should be given to the following requirements:

(1) The housing must be open to all eligible persons regardless of race, color, religion, sex, handicap, familial status, age, or national origin.

(2) The incomes of tenants and the initial incomes of cooperative members must be within the maximum income limits approved by FmHA or its successor agency under Public Law 103-354.

b. Additional guidance concerning occupancy in congregate housing projects can be found in exhibit J of subpart C of part 1930 of this chapter.

17. Cooperative board of directors. The board will essentially be the backbone of the cooperative structure. In this capacity it will be responsible for establishing the policies and procedures which will govern the operation of the cooperative and for enforcing those policies and procedures. The board will be composed of members of the cooperative with the same interests and concerns as the general membership. For instance, instituting an increase in the occupancy rates or terminating a member's right to cooperative ownership because of serious repeated violations of cooperative rules and regulations will be the types of actions which are taken by the board. The members of the board will be affected by these same decisions since they must adhere to the same rules and regulations as the rest of the cooperative community.

18. Adviser to the board. Resident(s) of the community who is not a member of the cooperative will serve as an adviser to the board during the period of formation and until the board of directors has effectively demonstrated its ability to manage the cooperative. At that time, the adviser will maintain close contact with the cooperative and provide advice and assistance as needed. The adviser may also be an organization; however, one specific individual will have sole contact with the board to eliminate confusion and to prevent one person from countermanding another's instructions. The adviser will closely monitor the cooperative for at least 2 years after it becomes its own manager. This time may vary, depending on the circumstances. The adviser must be very carefully selected to ensure that adequate guidance is given to the board. The adviser must be able to meet certain criteria in order to provide the best possible counsel. The Qualifications of an Adviser to the Board, Relationship of Adviser to Members, and Adviser Responsibilities, found at exhibits E, E-1, and F of this subpart, should be used in evaluating potential advisers. While it may not be possible to find some one individual or individuals who can meet all the requirements outlined, the criteria should be used as guides in determining the best candidate. FmHA or its successor agency under Public Law 103-354 will provide counsel to the cooperative during the interview period and must approve the selection of the individual(s). We recognize the adviser will require compensation for services rendered, however, the amount paid should not severely limit the amount of patronage capital accruing to the members.

19. Management reserve. The board's ability to manage the cooperative will determine whether members will receive equity from membership in the cooperative. A set rate for professional management will be assessed each month as part of the occupancy rate and will be maintained in a separate reserve account. If the cooperative is successful at managing its own affairs during the year, the amount accumulated in the reserve will be assigned equally to each member at the end of the year as patronage capital. This same procedure will be followed each year, allowing a buildup of patronage capital. If professional management is hired by the cooperative to correct deficiencies which have arisen from poor self-management, further accumulations to the management account will then be used to pay for professional management and the amount being accrued to the members' patronage capital account will be suspended. If the amount being accumulated for management is not sufficient to meet the needs, occupancy rates will be increased to cover the expense of management. When the cooperative begins to again manage itself, the assessment for the management reserve will resume as previously stated. Any other income remaining at the end of the year will also be assigned as patronage capital. Assignment from both of these sources must be accomplished in accordance with the IRS ruling concerning patronage distribution. Careful records must be kept to track the monthly amount being contributed by each member to the management reserve account so that the cooperative will know how much patronage capital the member is entitled to should membership be terminated prior to the end of the fiscal year. FmHA or its successor agency under Public Law 103-354 rental assistance proceeds are not to be used to make the member's contribution to the management reserve account. Therefore, the member must have sufficient income from which to make this payment. If it becomes necessary to hire full-time professional management, then the management fee will be considered part of the shelter cost and thus eligible for RA. FmHA or its successor agency under Public Law 103-354 will assist the adviser to the board in determining if and when professional management will be hired in lieu of self-management. In the event the adviser and FmHA or its successor agency under Public Law 103-354 are unable to reach an agreement regarding the hiring of professional management, the ultimate decision will rest with FmHA or its successor agency under Public Law 103-354. Compensation paid to the adviser will be shared by members through the deduction of equal amounts from their management reserve payments.

20. Rules and regulations. The rules and regulations for tenants and members should be developed by the applicant and a copy included in the loan docket.

21. Lease or occupancy agreement. The applicant should develop an application form for occupancy and a lease or occupancy agreement form in accordance with the requirements of subpart C of part 1930 of this chapter. Exhibit J of this subpart is to be used as a guide for developing an occupancy agreement. Copies of these forms should be included in the loan docket.

22. Affirmative fair housing marketing. In order to promote proper planning for initial rent-up and occupancy, the servicing official will meet with the applicant after loan approval, preferably at the preconstruction and/or the prerent-up or preoccupancy conference to discuss the Affirmative Fair Housing Marketing Plan or other similar agreement approved for the project. In the case of a cooperative, the servicing official will discuss the Plan at the loan request stage.

V. Review of the Complete Docket

A. When the applicant has developed the complete loan docket, it should furnish and discuss the information with the servicing official. SF 424.2, the information and materials listed in exhibit A-9 plus FmHA or its successor agency under Public Law 103-354 forms provided by the servicing official become the loan docket.

B. If the docket is submitted to the State Office for consideration, the State Director will indicate any special requirements that need to be met before loan approval or loan closing.

C. Commercial financing should be used for projects during the interim construction period if available at reasonable rates and terms, FmHA or its successor agency under Public Law 103-354 can make a conditional commitment to the interim lender that will loan the funds to finance the construction of the project. The commitment will be conditioned upon acceptable performance by the builder and payment of all construction bills. After the conditions have been met, the FmHA or its successor agency under Public Law 103-354 loan will be closed to pay the interim construction indebtedness. Draws on interim loan funds will be made only as needed and will require the joint approval of the applicant and the FmHA or its successor agency under Public Law 103-354 servicing official.

D. In other cases FmHA or its successor agency under Public Law 103-354 can make advances of loan funds for construction, the note and mortgage will be signed by the applicant and the loan funds deposited in a joint bank account at loan closing. The loan funds are disbursed from the bank account as needed. Checks on the account must be signed by the borrower and countersigned by the FmHA or its successor agency under Public Law 103-354 servicing official.

VI. Construction

The start of construction is the first physical sign that the housing will become a reality. The construction period is a most critical period of time.

A. Competitive bidding. 1. Competitive bidding is recommended and may be required by FmHA or its successor agency under Public Law 103-354 in some cases. If required, the State Director's letter sent after the loan is authorized will instruct the servicing official to have the applicant or its architect complete the necessary bid documents.

2. The applicant and the architect should invite competent contractors to bid on the housing. If bids are within the estimates, the successful bidder will be selected and the contract for construction will be awarded. During construction, a qualified FmHA or its successor agency under Public Law 103-354 representative and the applicant and its architect will inspect the work to protect their respective interests in the project. Payment will be made from the FmHA or its successor agency under Public Law 103-354 loan funds, or interim loan funds, according to provisions in the contract.

B. Construction without competitive bidding. When competitive bidding is not required, the loan docket will include reliable cost estimates or a firm offer to build from a builder selected by the applicant. A contract concurred with by FmHA or its successor agency under Public Law 103-354 will be executed by the applicant and the contractor. If full architectural services are obtained by the applicant, inspection of the work will be performed by the architect's staff. The applicant and FmHA or its successor agency under Public Law 103-354 will inspect the construction to protect their respective interests in the project. Payments will be made to the contractor in accordance with the terms of the contract.

C. Starting construction. Construction should not be started until the FmHA or its successor agency under Public Law 103-354 loan is closed or the FmHA or its successor agency under Public Law 103-354 commitment has been made to the interim lender.

VII. Open House

Promotion of the housing availability should start at least 90 days prior to completion. The applicant may want to create interest in the housing and build up the list of prospective tenants or members by having a dedication ceremony. This will attract attention and remind the local residents of what the housing means to the community. This is especially recommended for housing developed by nonprofit corporations.

VIII. Exhibits

The following exhibits may be used when applicable and, if necessary, adapted to meet the specific needs of applicants.

Exhibit A-1Legal Services Agreement A-2Survey of Existing Rental Housing A-3Rental Housing Survey A-4Cooperative Housing Survey A-5Housing Survey Summary A-6Housing Allowances for Utilities and Other Public Services A-7Information to be Submitted with a Loan Request for a Rural Rental Housing (RRH) or a Rural Cooperative Housing (RCH) Loan A-8Outline of Professional Market Study A-9Additional Information to be Submitted for Rural Rental Housing (RRH) and Rural Cooperative Housing (RCH) Loan Requests A-10 [Reserved] A-11Processing Guidelines for Loans for Equity to Avert Prepayment A-12Market Study Checklist (Available in Any FmHA or Its Successor Agency Under Public Law 103-354 Office) A-13Work Sheet for Loan Calculation (Available in Any FmHA or Its Successor Agency Under Public Law 103-354 Office) A-14Information To Be Submitted for Subsequent Loans (Available in Any FmHA or Its Successor Agency Under Public Law 103-354 Office)