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• It must be endorsed by a majority of residents.• It must be financially and legally independent.In exchange for mortgage forgiveness, the nonprofitpurchaser must agree to the followingconditions:• A 50-year use agreement.• A 10-year resale restriction.• A reinvestment obligation, which may requirethat a portion of the cash flow must be usedfor the benefit of the property/residents.Under current HUD policy, there is no formalreinvestment obligation.Qualified purchasers can acquire Mark-to-Market properties up to three years after therestructuring date and still qualify for secondmortgage forgiveness.Congress also recently amended MAHRA to permitassignment of the second mortgage, as analternative to mortgage forgiveness. This maybe a preferable option in cases where there arelimited dividend restrictions associated with theoriginal mortgage or Section 8 contract. Whilethese restrictions are superceded as long as theHUD second mortgage is outstanding, they arereinstated if the HUD debt is forgiven. If theHUD mortgage is assigned to an affiliate of thenonprofit purchaser instead of being forgiven,this problem can be overcome. HUD recentlyrevised Appendix C of the OPG to implementmortgage assignment.PROFORMA 4: NONPROFIT PURCHASE WITH MARK-TO-MARKET DEBTRESTRUCTURINGProforma 4 illustrates how the Mark-to-Market incentives can be used to facilitate a nonprofit purchase inconjunction with Mark-to-Market debt restructuring.In this hypothetical 100-unit HUD-insured Section 8 project, the restructured rents are reduced by 20 percent,from $750 to $600. After deducting operating expenses and the allowable Capital Recovery Payment of$16,721 (based on the purchaser's total contribution of $110,000), approximately $127,400 is available formortgage debt service, leaving a cash flow of $25,480.From this cash flow, the purchaser will receive $20,000 as a priority distribution for the Incentive PerformanceFee, capped at $200 per unit. Since the second mortgage is forgiven (see below), there is no additional debtservice. The balance of the cash flow is available to the purchaser (subject to any limitations on owner distributionsassociated with the original mortgage or Section 8 contract).In total, the purchaser will receive approximately $42,000 in operating revenues from the CRP, the IPF, andthe owner's share of remaining cash flow (from which any amounts borrowed to finance the purchaser's$110,000 contribution will need to be repaid).The total development cost of $2.63 million includes $1.8 million for repayment of the outstanding HUD mortgagebalance, $500,000 for rehab and contingency, $250,000 for reserves and transaction costs, and $76,500in developer fee (2.9 percent of total uses). The sources of funds include $1.28 million in new debt supportableby the restructured rents, $100,000 in existing reserve balances carried forward, and a $110,000 purchasercontribution (20 percent of rehab and transaction costs).The balance of $1.1 million is the HUD contribution or mortgage insurance claim, consisting of a $500,000second mortgage and a $600,000 third mortgage. 27 The HUD contribution is equal to the reduction in firstmortgage debt, plus 80 percent of rehab and transaction costs, plus 100 percent of the initial reserve depositand developer fee, minus the existing reserve balance carried forward.Assuming that the purchaser is a qualified nonprofit, the second and third mortgages are forgiven. Any additionalbuyer costs (acquisition, rehab, transaction) would have to be paid by the purchaser from other additionalsources, with no effect on HUD's $1.1 million contribution, the baseline claim.chapter two: Federal Preservation Tools19