By: Karyn Larko, Esq.

On September 13, 2012,[1]the U.S. Department of Housing and Urban Development (HUD) issued a letter outlining a number of significant, but temporary, changes to the requirements for FHA project approval. These changes, which in most cases became effective immediately, are set to expire on August 31, 2014, unless HUD decides to extend their applicable period or, conversely, decides to further revise these requirements prior to September 1, 2014.

The good news is that HUD’s changes to the requirements for FHA approval should make it easier for associations to obtain FHA project approval. These changes include:

Relaxing the Restriction on Commercial and Mixed Use Projects

Prior to September 13^th, the general requirement was that a maximum of 25% of the floor space within a project or unit could be used for commercial purposes. However, the FHA had the discretion to grant an exception to a project that did not meet this requirement, provided that a) no more than 35% of the floor space was used for commercial purposes, and, b) the project’s use remained primarily residential, homogenous with residential use and free of adverse conditions to the occupants of individual units.

Now, the FHA may grant an exception to a project where up to 50% of the floor space within that project is mixed development (i.e., commercial, retail, office or parking space), provided additional information and documentation is submitted to the FHA so that it can verify that the mixed use does not have a detrimental impact on the residential nature of the project. Moreover, with the approval of the FHA Commissioner or his/her designee, associations comprised of more than 50% commercial space may receive FHA approval.

Relaxing the Restriction on Investor Owned Units

Prior to September 13^th, a project could not be FHA approved if more than 10% of the units within that project were owned by the same investor owner. Excepted from this rule were projects with less than 10 units, where no investor owner could own more than 1 unit.

Now, up to 50% of the units can be owned by the same investor if the remaining 50% of the units are owner occupied or under contract for purchase to an owner-occupant principal residence purchaser.

Relaxing the Restrictions on Delinquencies

Prior to September 13^th, generally no more than 15% of the units within a project could be delinquent in paying assessments by more than 30 days. However, exemptions to this requirement were sometimes granted to projects where more than 15% of the units, but not more than 20% of the units, were delinquent by more than 30 days provided other requirements were satisfied.

Now, no more than 15% of the units may be delinquent in paying assessments by more than 60 days. However, exemptions to this requirement will no longer be granted.

Providing Alternatives to the Management Company Fidelity Bond/Insurance Requirement

Prior to September 13^th, if a project consisted of more than 20 units, the management company was required to maintain a bond or policy for its officers, employees and agents handling the project. The required coverage had to: 1) name the association as an obligee; 2) be in an amount not less than the estimated maximum of funds, including reserve funds, in the custody of the association or management agent at any given time during the term of each bond; and 3) be of an amount no less than a sum equal to 3 months aggregate assessments on all units in the project plus reserve funds (unless State law required a maximum amount of required coverage).

Now, if a project has more than 20 units, one of the following requirements must be satisfied:

• The management company must have a fidelity bond/insurance in an amount no less than the sum equal to 3 months aggregate assessments on all units within the project plus reserve funds (unless State law requires a maximum amount of coverage); or
• The association’s fidelity bond or insurance policy must specifically name the management company as an agent or insured; or
• The association’s fidelity bond or insurance policy must include a “Covered Employee” endorsement that states that a person employed by an employment contractor (i.e., management company) performing services subject to direction and control by the association is covered under the policy.

Certification Requirement

• Prior to September 13th, a signed and dated certification on company letterhead was required by the authorized mortgagee representative, the association representative or the association’s authorized representative. The person signing this certification was required to certify that:
• He/she had reviewed the project and that it met all State and local condominium laws and all FHA condominium approval requirements thereto applicable to the review of condominiums;
• To the best of his or her knowledge and belief, the information and statements contained in the application were true and correct; and
• He/she had no knowledge of circumstances or conditions that might have an adverse effect on the project or cause a mortgage secured by a unit in the project to become delinquent (including, but not limited to: defects in construction; substantial disputes or dissatisfaction among unit owners about the operation of the project of the owner’s association; and disputes concerning unit owner’s rights, privileges, and obligations).

The submitter had to further attest that he/she understood and agreed that he/she was under a continuing obligation to inform HUD if any material information compiled for the review and acceptance of the project was no longer true and correct.

A signed and dated certification on company letterhead is still required by the person submitting the application for FHA project approval (e.g., the association or its representative, the management company or its representative, attorney or lender). The signer is now required to certify that:

• To the best of his/her knowledge and belief, the information and statements contained in the condominium project application are true and correct; and
• He/she reviewed the condominium project application and in reliance upon advice given by his/her attorney, it meets all State, and local condominium laws; and
• He/she has reviewed the condominium project application and it meets all current Federal Housing Administration (FHA) condominium approval requirements; and
• He/she has no knowledge of circumstances or conditions that might have an adverse effect on the project (including, but not limited to, defects in construction; substantial operations issues; or litigation, mediation or arbitration issues).
• However, under the new certification, the signer no longer accepts an ongoing duty to notify the FHA of changes in circumstances that might impact the project’s ability to qualify for FHA.

It is important to know that the penalties for being found to have “knowingly” and “willfully” submitted false information have not changed. In other words, any party deemed to have engaged in this conduct may be subject to a civil penalty of up to one million dollars and/or up to 30 years in prison.

It is also important to know that when preparing this certification, the certification signer should disclose every circumstance, condition, dispute (including homeowner dispute), etc., that currently exists or that the signer thinks may develop that the signer thinks has the potential, however remote, to negatively impact the project, including the value or marketability of the units within the project.

ADDITIONAL FHA APPROVAL REQUIREMENTS

Below is a list of some of the other key FHA approval requirements:

1) At least 50% of the units must be owner occupied.

2) Reserves must be 100% funded or at least 10% of the annual budget must be allocated to reserves.

3) The only kinds of rental restrictions that may be, but are not required to be, contained in the governing documents are as follows:

a) Requirement that all leases must be in writing and subject to the governing documents;

b) Requirement that owners provide the association with a copy of the sublease or rental agreement;

c) Requirement that owners provide the association with the name(s) of all tenants including the tenants’ family members who will occupy the unit;

d) A prohibition on leasing for an initial term of less than 30 days;

e) A maximum allowable lease term, e.g., six months, twelve months, etc.; and

f) A restriction on the maximum number of rental units within the project, provided this percentage does not exceed 50%.

4) There must be “Master or blanket” property insurance in an amount equal to 100% of current replacement cost of the condominium exclusive of land, foundation, excavation and other items normally excluded from coverage. (If the HOA does not maintain 100% coverage, the unit owner may not obtain “gap” coverage to meet this requirement.).

5) A project with more than 20 units is required to obtain and maintain fidelity insurance for all officers, directors, and employees of the association and all other persons handling or responsible for funds administered by the association. This coverage must be no less than a sum equal to three months aggregate assessments on all units plus reserve funds unless State law mandates a maximum dollar amount of required coverage.

6) If the project is all or partially located within a FEMA special hazard flood zone, the association must maintain flood insurance.

If you would like more information on this subject or our assistance in applying for FHA approval, you are invited to contact Epsten.