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may construe the IRP as an "old and cold"subsidy if it continues to be linked to the originalfinancing.EligibilityEligible projects must be assisted under Section236 with insured, HUD-held, or non-insured(HFA) mortgages. Eligible mortgagors includenonprofit, limited dividend, and public entities.Under 236(b), eligible lenders are limited tostate or local public agencies approved by HUD.Under 236(e), eligible lenders may be public orprivate, but a state or local public agency mustprovide regulatory oversight (e.g., IRP subsidyadministration, rent increase processing,inspections, owner compliance monitoring).Alternately, the lender must be an FHAapprovedmortgagee, the mortgage must beHUD-insured, and HUD must perform regulatoryoversight functions.Rents, Contract Terms, and DistributionsThe IRP assistance continues as a monthly subsidystream for the remaining term of the 236mortgage, in accordance with the original subsidycontract. The monthly IRP subsidy may alsobe reduced and stretched over an extendedcontract term, but the monthly and aggregatetotal IRP cannot be increased. The 236regime—including budget-based rents, tenantincome eligibility limits, and other regulatoryoversight—continues for the original mortgageterm, plus five years, pursuant to a new HUDUse Agreement. The owner must also commit torenew any Section 8 contract throughout theextended use period if HUD offers a renewalcontract.Rents can be increased on a budget basis tocover debt service on any new financing foracquisition, rehab, or equity takeout. Upon prepaymentof the mortgage (under 236(e)) or terminationof the HUD mortgage insurance (under236(b)), Enhanced Vouchers are generally providedfor existing eligible tenants who are notcovered by a project-based Section 8 contract. 22Rents are capped at the new budget-based 236Basic Rent. Tenants may not be displaced inconjunction with the 236(b) or 236(e) transaction.In general, the new Section 236 Basic Rent cannotexceed the market-comparable rent minusthe IRP subsidy. Additionally, the Basic Rent fornon-Section 8 units may not be increased bymore than 10 percent. For preservation projects(financed under LIHPRHA or ELIHPA), the BasicRent for non-Section 8 units may not beincreased in conjunction with the transaction,except for operating cost increases.Any Section 8 units in the project may bemarked up to comparable market rents, if theyare eligible under either Mark-Up-to-Market orMark-Up-to-Budget. Again, the maximumSection 8 rent is generally the market comparablerent less IRP.In the past, these rent restrictions created a disincentiveto use decoupling. From a preservationperspective, this result is undesirable sinceIRP retention offers the benefit of continuedbudget-based rents and income restrictions foran extended period. The alternatives provideless long term affordability: Mark-Up-to-Marketwithout IRP retention requires only five years ofmandatory affordability, and Section 8 opt-outoffers no affordability benefits beyond currentresidents' tenure.Importantly, HUD now will consider waiving theIRP deduction for certain sales transactionswhere the project needs significant repairs or islocated in an area with lower market rents, aslong as rents are computed on a budget basis.This waiver is not available for transactionsinvolving equity takeout without a transfer ofownership.In strong markets, this policy change hasenabled nonprofits to combine IRP decouplingwith Mark-Up-to-Market/Budget and to maximizeSection 8 rents at full-market—while keepingnon-Section 8 rents as low as possible.Additionally, it has extended the benefits of IRPdecoupling to projects in weaker market areas.Limitations on owner distributions and theallowable return on equity that can be includedin the budget-based rent are less clear. HUDhas recently clarified that reasonable debt servicecoverage can be included in the budgetbasedrent. Based on past experience, reason-14 chapter two: Federal Preservation Tools14