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Multifamily Document Reform Implementation Frequently Asked Questions

 

Construction Contract (and Supplement)

you have a question related to this document, please submit it to MultifamilyDocumentReview@hud.gov.

 

  1.  In the construction contract, we require the disclosure of all side agreements between the owner and contractor. Should these side agreements be listed in Article 2 (“Identification of Contract Documents”)? Does Field Counsel have any role in reviewing these side agreements?

 

  1. 3/15/2012
    What is the Retainage Reduction Rider referenced in both the Building and Loan Agreement and the Construction Contract?
  1. 3/16/2012
    How are liquidated damages calculated? Is there a formula that is used for calculation?
  1. 4/13/2012
    The language in Article 9 begins with "In jurisdictions where permitted by law,".  What exactly is the clause referring to as "permitted by law"? The ability to file a lien, or the ability of the Owner to restrict the Contractor's right to file a lien? Since most subcontractors would not be willing to sign a document taking away their lien rights before they have been paid for the work they completed, it seems unreasonable to require the Contractor to pass this requirement down. The result would be that the Contractor would have difficulty in finding subcontractors willing to sign subcontracts. Are there any alternatives to this statement or any allowable modifications?

  1. 4/24/2012
    In construction disputes, some states by statute award attorney fees to a successful contractor but do not award attorney fees to a successful owner. In order for the owner to claim attorney fees, a provision for the fees must be in the construction contract. I do not see a provision for attorney fees in our construction contract documents.
    The A201 does not seem to meet this need. This situation creates a substantial imbalance between the owner and contractor and could encourage marginal or frivolous claims by the contractor. Most modern commercial contracts provide for attorney fees to a prevailing party in a dispute. Is it reasonable to allow such a provision as a modification based upon local law? Would the same logic apply to the Architect's Agreement?

  1. 6/18/2014
     For projects where advances for building components stored offsite are not applicable, may paragraph A of Article 5 (Requisition and Payment Procedures) of the Construction Contract (Form HUD-92442M) be modified to strike the provisions relating to payment for the value of components stored offsite? The revised paragraph would read as follows: "A. Each month after the commencement of Work hereunder . . . plus (2) the value of materials and equipment not incorporated in the Work, but delivered to and suitably stored at the site; less (3) ten (10) percent holdback [as this percentage may be reduced in accordance with the provisions of the Retainage Reduction Rider attached hereto, if applicable](or as reduced by HUD in writing) and less (5) prior payments. The "values" of (1), and (2) shall be computed in accordance with the amounts assigned to classes of Work in HUD-92328."

  1. 5/13/2015
     Article 1 of the HUD Construction Contract requires the disclosure of all "Side Agreements" to HUD. What is the definition of a Side Agreement? Article 2 of the HUD Construction Contract requires prior written approval from HUD for any changes to the "Contract Documents". What happens if a "Side Agreement" changes the terms and conditions of the "Contract Documents", was never reviewed by HUD and HUD did not provide written approval?

  1. 1/14/2016
     The Supplement to the Construction Contract makes reference to “HUD Special Conditions” that are to be attached in Exhibit A. What are those special conditions supposed to be? I have a deal where the Lender’s Counsel argued those conditions should be as set forth in the language provided by them. I haven’t seen that language before and I have seen nothing in the MAP or Closing Guide to indicate that the language they proposed is necessary. I asked Lender’s Counsel to remove the language, but she rebutted that she has been using this language all over the country. She also pointed to this link as the source of the language: http://www.hud.gov/local/shared/working/r10/mf/sp-cond.pdf. I still told counsel to remove the language. But I can’t help but ask, am I missing something?

 

 

 

 

 
1.  In the construction contract, we require the disclosure of all side agreements between the owner and contractor. Should these side agreements be listed in Article 2 (“Identification of Contract Documents”)? Does Field Counsel have any role in reviewing these side agreements?

Disclosure of side agreements is required by Article 1 of the Construction Contract. To the extent the Borrower and contractor have entered into written agreement of any sort or oral arrangement related to payment that have not been listed as a contract document or otherwise disclosed to HUD, such agreements must be disclosed to HUD. Field counsel do not have a role in reviewing these side agreements.

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2.   3/15/2012
What is the Retainage Reduction Rider referenced in both the Building and Loan Agreement and the Construction Contract?

The retainage reduction rider is not a HUD form.  The owner and contractor create the rider to describe how the retainage will be reduced in accordance with Program Obligations.  For additional guidance, see Section 12.15.D of the MAP guide.

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3.  3/16/2012
How are liquidated damages calculated? Is there a formula that is used for calculation?


The narrative expression is: 1 cent for each ¼ per cent of construction interest rate for each $1000 of mortgage amount.
Written arithmetically and expressed in dollars (not cents) the formula should read:
$.01 x construction rate/.0025 x mortgage amount/1000 = $ per day
This may be restated as:
$4 x construction rate x mortgage amount/1000 = $ per day
We calculate the liquidated damages per unit as follows:
Total $ Liquidated Damages Per Day/ # units in project = $ Liquidated Damages per unit per day.

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4.  4/13/2012
The language in Article 9 begins with "In jurisdictions where permitted by law,".  What exactly is the clause referring to as "permitted by law"? The ability to file a lien, or the ability of the Owner to restrict the Contractor's right to file a lien? Since most subcontractors would not be willing to sign a document taking away their lien rights before they have been paid for the work they completed, it seems unreasonable to require the Contractor to pass this requirement down. The result would be that the Contractor would have difficulty in finding subcontractors willing to sign subcontracts. Are there any alternatives to this statement or any allowable modifications?

"In jurisdictions where permitted by law" refers to the enforceability of restrictions on the contractors' or subcontractors' rights to file liens. In those jurisdictions where such provisions are not enforceable, such restrictions were removed in the previous version of the construction contract. The current contract makes clear that the requirement only applies where permitted under state law.

While the phrase "in jurisdictions where permitted by law" is new to the construction contract, the requirements of Article 9 are not. Modifications of this requirement are not permitted.

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5.  4/24/2012
In construction disputes, some states by statute award attorney fees to a successful contractor but do not award attorney fees to a successful owner. In order for the owner to claim attorney fees, a provision for the fees must be in the construction contract. I do not see a provision for attorney fees in our construction contract documents.
The A201 does not seem to meet this need. This situation creates a substantial imbalance between the owner and contractor and could encourage marginal or frivolous claims by the contractor. Most modern commercial contracts provide for attorney fees to a prevailing party in a dispute. Is it reasonable to allow such a provision as a modification based upon local law? Would the same logic apply to the Architect's Agreement?

Changes may be made if they (1) are mandated by state law or (2) are deal-specific and have been submitted and approved by the OGC Office of Insured Multifamily Housing. If the changes do not fall into those categories, they must go through the notice and comment process pursuant to the
Paperwork Reduction Act. Systematic changes may not be made until the form is revised.
 

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6.  6/18/2014
For projects where advances for building components stored offsite are not applicable, may paragraph A of Article 5 (Requisition and Payment Procedures) of the Construction Contract (Form HUD-92442M) be modified to strike the provisions relating to payment for the value of components stored offsite? The revised paragraph would read as follows: "A. Each month after the commencement of Work hereunder . . . plus (2) the value of materials and equipment not incorporated in the Work, but delivered to and suitably stored at the site; less (3) ten (10) percent holdback [as this percentage may be reduced in accordance with the provisions of the Retainage Reduction Rider attached hereto, if applicable](or as reduced by HUD in writing) and less (5) prior payments. The "values" of (1), and (2) shall be computed in accordance with the amounts assigned to classes of Work in HUD-92328."

In the case of the proposed construction contract changes, to the extent that there are no advances to be made for building components stored offsite, the calculated value of the deleted language would equal zero. Thus, there would be no substantive impact in revising the language as proposed and as such, no changes will be made to the language.

 

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7.  5/13/2015
Article 1 of the HUD Construction Contract requires the disclosure of all "Side Agreements" to HUD. What is the definition of a Side Agreement? Article 2 of the HUD Construction Contract requires prior written approval from HUD for any changes to the "Contract Documents". What happens if a "Side Agreement" changes the terms and conditions of the "Contract Documents", was never reviewed by HUD and HUD did not provide written approval?

Article 1 of the Construction Contract defines side agreements as agreements between the Owner and the Contractor. Section 3.4 of the Closing Guide adds that these agreements include documents defining business agreements between identity of interest parties on transactions involving BSPRA. Although HUD does not anticipate that there would be any side agreements outside of the BSPRA context, any agreement between the Borrower and General Contractor that relates to the project must be disclosed to HUD. The Closing Guide requires that all side agreements contain language that in the event of a conflict between the side agreement and the Construction Contract, the Construction Contract will prevail. The Borrower is responsible for submitting any side agreements to the HUD Closing Attorney, who will review only to ensure that the conflict language is included. HUD will not review the substantive terms of the agreement. In sum, the parties must disclose the agreement, and the agreement must include the conflict language and cannot modify the terms and conditions of the Contract Documents. Regulatory Agreement Section 3 requires the Borrower to disclose all contractual obligations of Borrower. If the Borrower enters into any agreement that is not disclosed to HUD, then there would be a violation of the Regulatory Agreement for which HUD could declare a default. In 221(d)(4) deals, Housing may add a special condition requiring the Borrower to certify in Section 14 of the Agreement and Certification that all side agreements as defined in the Construction Contract have been disclosed to HUD and that the Borrower will reconfirm the certification at final endorsement.

 

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7.  1/14/2016
The Supplement to the Construction Contract makes reference to “HUD Special Conditions” that are to be attached in Exhibit A. What are those special conditions supposed to be? I have a deal where the Lender’s Counsel argued those conditions should be as set forth in the language provided by them. I haven’t seen that language before and I have seen nothing in the MAP or Closing Guide to indicate that the language they proposed is necessary. I asked Lender’s Counsel to remove the language, but she rebutted that she has been using this language all over the country. She also pointed to this link as the source of the language: http://www.hud.gov/local/shared/working/r10/mf/sp-cond.pdf. I still told counsel to remove the language. But I can’t help but ask, am I missing something?

Rather than the Supplementary Conditions of the Contract for Construction (HUD-92554M), it is actually Article 2, Section A.4 of the Construction Contract (HUD-92442M) that provides for the attachment of a “Special Conditions” exhibit. The purpose of this exhibit is to address circumstances that are unique to a particular project, or its local jurisdiction, and which are not otherwise adequately resolved by the construction documents. HUD policy does not identify any specific issues to be addressed in the exhibit or mandate the inclusion of any boilerplate language. Practical experience has in fact shown the need to identify special construction conditions in the exhibit will be rare. To avoid any later confusion on this point, lender’s counsel may prepare the exhibit to simply state “there are no special conditions” or “none.” Alternatively, Section A.4 may be struck through as inapplicable. In the event special construction conditions are determined to be necessary, the conditions placed on the exhibit should be drafted in consultation with the HUD closing attorney and in every instance must be approved by the Multifamily Hub.

 

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