Preserving Federally Assisted Housing An Overview

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Preserving Federally Assisted Housing- An Overview

• May 23, 2007

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Presenters

• Kate Allen- Portland Office Director, Enterprise
  Community Partners
• Lynn Schoessler- Housing Finance Manager, Oregon
  Housing and Community Services Department
• Leon Laptook- Director, community Development Law
  Center

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• This Cyber Café is sponsored by the Neighborhood
  Partnership Fund with funding provided by
  Enterprise Community Partners.

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Preserving and Revitalizing Oregons Assisted
Housing

• Of the nearly 170,000 Extremely Low Income
  Households in Oregon, 108,000 (64) spend more
  than 50 of their income for housing.
• About 23,300 Oregon households live in project
  based federally assisted housing.
• Oregon had a net loss of 1000 subsidized units
  between 1995-2003

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Why the Stock of Assisted Housing is At Risk

• Expiring Contracts, Use Agreements
• Escalating market values-properties more valuable
  for different populations or different use
• Aging owners
• Owners tired of dealing with federal bureaucracy
• Aging physical assets- insufficient funds/and or
  owner attention to maintain properties to decent
  standards
• RD portfolio- small projects, rural locations,
  partial RA
• Federal budget constraints and fed. commitment to
  fund preservation activities.

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Importance of Preserving this Assisted Housing

• Serves the poorest Oregonians those least able
  to compete in private market
• Once project-based assistance is lost, it will
  not be replaced many generations of low-income
  Oregonians will be affected
• Preservation, on average, is 40-50 less
  expensive than new construction

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Federally Assisted Housing

• Low-Income Public Housing-HUD
• 6,600 units
• Older Assisted Housing-HUD
• Newer Assisted Housing- HUD and State
• 11,500 units (total older and newer)?
• Rural Assisted Housing- USDA Rural Development
  (RD)?
• 5,200 units

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Low Income Public Housing

• First federal affordable housing program
• Units developed and owned by local governments
  and public housing authorities
• Residents pay 30 of income for rent HUD pays
  difference needed to operate properties
• Threats HUD payments less than cost of
  operations Aging properties- large backlog of
  capital improvement needs.
• Hope VI- redevelopment/replacement program for
  distressed PH properties

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Older Assisted Housing

• 1960s- HUD programs provided direct federally
  insured loans or mortgage subsidies to develop AH
  projects combined with project-based Section 8
  contracts to keep tenant rents at 30 of income
• Section 221(d)(3)-direct federal loan at 3
• Section 236- federal subsidizes loan interest
  rate down to 1
• Section 202 and 811- capital grants/loans with
  project based Section 8 serves special needs
  populations

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Older Assisted Housing- Contd

• Programs require limited owner investment and
  provide for limited returns. Owners required to
  rent to LI tenants
• Threats Expiring Use Agreements Owners deciding
  to opt-out insufficient funds to maintain aging
  properties.
• Opportunities Mark-to Market Program, HUDs MF
  preservation program

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Mark to Market Program (M2M)?

• Older Section 8 properties used above market
  rents (exception rents) as a primary subsidy
  mechanism
• Current contracts if renewed will exceed HUDs
  budget. Congress mandated that as contracts
  expire rents needed to be reduced to market.
• Reduction in rents, without reduction in debt
  service, jeopardizes property operations and FHA
  insured mortgage.
• M2M provides restructuring tools to size debt and
  debt terms to market rents

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M2M Program (Contd)?

• Eligible properties
• Section 8 Contract and
• FHA insured loan and
• Rents above market
• Restructure plans developed by Participating
  Administrative Entities (PAEs)?
• Kitsap County Housing Authority covers NW

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M2M Process

• 1. 120 days before HAP contract expiration HUD
  and/or Owner determines rent above market
• 2. HUD refers property to PAE
• 3. PAE develops restructure plan
• Third party Rent study
• Third party CNA, environmental screening
• PAE determines (in consultation with owner, HUD,
  others) market rents, rehab needs, operating
  expenses, new supportable debt, replacement
  reserves, etc

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M2M Process (contd)?

• 4. PAE submits restructure plan to HUD
• 5. Owner signs Restructuring Commitment
• 6. Transaction closed or processing discontinued

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M2M Restructures

• Involves breaking up mortgage new 1st sized to
  be supported by street rents, 2nd and 3rd if
  needed supported by percentage of surplus cash.
• Owner required to provide 20 of capital for
  project rehabilitation
• Owner Incentive Package
• Capital Recovery Payment for owners portion of
  costs- pro forma expense
• Incentive Performance fees from cash flow
• Cash flow split

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M2M- Role for Nonprofits

• Can acquire projects from existing owners and
  take project thru M2M.
• Developer fee permitted
• Forgiveness of all or part of subordinate debt
  allowed
• All owner incentives apply
• Longer affordability restrictions apply -50 years
• Projects can be transferred to NP sponsors after
  M2M
• Debt forgiveness allowed if transfer within 3
  years of M2M closing

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Mark Up to Market

• Used to facilitate transfer of HUD housing to a
  NP or to fund capital improvements for existing
  NP owned HUD property.
• Applicable when project rents less than street
  rents (20 projects with rents below 80 FMR, 70
  with rents at 80-100 FMR)?
• 20 year restricted use agreement
• Nonprofits not entitled to distributions but may
  seek waiver from HUD

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Newer Assisted Housing

• 1970s and early 1980s- Section 8 New
  Construction, Section 8 Substantial Rehab
• HUD provided rental subsidy through long-term
  project based Section 8 Contract
• Project Development through non-federal sources-
  Oregon State Bond Program
• Threats same as Older Assisted Housing
• Not eligible for Mark to Market program

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Preserving Newer Assisted Housing

• 6,800 units in Oregon with Section 8 contracts
  expiring between now and 2011. Majority funded
  through State Bond Program
• Oregon, NJ, NY and RI first states to extensively
  use SHFA bonds and Section 8 to develop AH.
• These states will be testing ground for the
  development of preservation strategies for
  uninsured Section 8 properties

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Oregon Has the Tools in Place- Scale is the Issue

• 9 LIHTC- limited resource QAP preservation
  set-aside
• 4 LIHTC and tax exempt bonds- plentiful
  resource need for greater amount of gap
  financing high transaction costs
• CDBG, HOME
• Housing Trust Fund-limited compared to other
  states
• Tax abatements
• Challenges Acquisition, bridge financing
  strategy, multiple property transfers,
  involvement of national partners

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Rural Rental Housing

• RD Section 515 Program
• Started in 1961 for communities of less than
  20,000
• Provided Federal loans at 1 interest (30 year
  loans, 50 year amortization) combined with
  projectbased Rental Assistance (RA) to keep
  tenant rents at 30 of income.
• Pre-1989 loans had no prepayment restrictions

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Rural Rental Housing-Contd

• 1980-1986 Prepayments of loans escalated
• 1986 Congress placed moratorium on prepayments
• 1988 Congress passed Emergency Low Income
  Housing Preservation Act (ELIHPA)- restricted
  rights of owners to prepay
• 2004 Court of Claims awards damages to owners
  resulting from prepayment restrictions
• 2006 Claims from 800 owners for damages
• 2006 ELIHPA upheld by U.S. 9th Circuit Court of
  Appeals

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RD Section 515 Revitalization

• 4 main Processing Tracks
• Prepayment Process (ELIHPA)?
• Transfer of Ownership
• Subsequent rehab loans
• Restructuring Demo (thru annual NOFA)?
• Principal RD regulations for Loan Processing,
  Servicing, Asset Management
• 7 CFR Part 3560
• Handbooks 1,2,3 to 3560

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Prepayment Process

• Owner requests prepayment
• RD offers owner incentives (equity loans,
  additional RA, etc.) to remain in program and
  continue restrictions
• If owner rejects incentives, project offered to
  nonprofit buyers for 150 days
• If no NP offer, RD determines impact on
  minorities
• If no impact, owner prepays without restrictions
• If impact, owner prepays with restrictions

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Transfer Process

• RD assessment of community need for project
• Evaluation of owner eligibility
• Evaluation of project capital needs
• Evaluation of post transaction rents- not to
  exceed comparable market rents
• Owner equity, project value, rents identified
  through market appraisal
• Impact on tenants-minimizing displacement
• Processing and closing
• Often relies on 3rd party funding

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Subsequent Rehab Loans

• Applications submitted to RD National Office
  annually (November). Selections announced
  generally in February/ March
• Selection based on needs criteria- health/safety,
  code violations, accessibility, etc.

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Restructuring Demo Program

• Annual application process- 2007 preapplications
  due May 30
• Primary Tool- 20 year debt deferral
• Cash flow redirected to reserves to help met
  physical needs of property
• Other Tools
• Grants up to 5,000 per unit
• 515 rehab loan at 0, 30 years
• Second mortgage paid from excess cash flow
• 3rd party debt/equity encouraged
• Transfers, consolidations permitted

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Legislative Proposals

• S.B. 1318 Senators Smith and Schumer and
• H.R. 1419-
• Eliminates depreciation recapture (exit tax)
  for owners who sell assisted housing to State
  approved preservation entity. Entity agrees to
  additional 30 years affordability.
• Intent is to preserve and revitalize existing
  stock of assisted housing provide incentive to
  old owners who feel stuck to move out of
  program expectation that sales prices will be
  reduced.

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Legislative Proposals (contd)?

• An extensive list of national legislative
  proposals is available on the National Housing
  Trusts website at www.nhtinc.org in a report
  titled Legislative Provisions to Support the
  Preservation of Affordable Housing.

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Legislative Proposals (contd)?

• Housing Alliance Proposal (HB 3551)?
• 100 million for affordable housing
• Funded by document recording fee, lottery funds,
  general fund and utility public purpose funds

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Attributes of Good State Preservation Policy

• Early knowledge or warning system and coordinated
  response
• Meet and share knowledge
• Share data
• Determine properties most at risk
• Commitment at highest level, meaning hire someone
  to coordinate
• Flexibility to meet owners/nonprofits needs
• Stressing the cost effectiveness of preservation
• Providing an array of preservation resources

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Whats Next?

• Working group of funders, CDLC and AOCDO/CDN
  representative meeting to rough out a systems
  approach to statewide preservation strategy.
• Early goals emerging
• Describe full scope of preservation challenge
  over five year period from 2008-2013
• Attract local and national foundation funding
  for
• Searchable comprehensive database of at-risk
  projects (HUD, RD, LIHTC)?
• Technical assistance
• Rapid Response Preservation Fund
• Achieve changes to systems at state and federal
• Effective utilization of OHCS funds for
  preservation
• Identify and affect HUD barriers via local office
  and legislative changes

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More Information on Preservation

• CDLC- Leon Laptook, 503-471-1180,
  leon.laptook_at_lasoregon.org
• OHCS- Lynn Schoessler, 503-986-2073,
  lynn.schoessler_at_state.or.us
• OHCS- Shelly Cullin, 503-986-2118,
  shelly.cullin_at_hcs.state.or.us
• Enterprise- Kate Allen, 503-553-5641,
  kallen_at_enterprisefoundation.org

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Additional Resources

• National Housing Trust- www.nht.org
• Housing Assistance Council- www.ruralhome.org
• National Housing Law Project-www.nhlp.org
• HUD-Office of Affordable Housing Preservation
• /www.hud.gov/offices/hsg/omhar/
• USDA RD- Section 515 properties
• http//rdmfhrentals.sc.egov.usda.gov/RDMFHRentals
  /
• California Department of Housing and Community
  Development- /www.hcd.ca.gov/hpd/hrc/tech/presrv/
  
• Washington State Housing Finance Commission
• www.wshfc.org/preservation/index.htm