Section 202

1
Section 202 part 1

• SUMMARY OF SECTION 202 PREPAYMENT ISSUES

Richard T. Washington VP, Business Development
2
Section 202

• Passed as part of Housing Act of 1959.
• Federal government's principal program for
  production of affordable elderly multifamily
  housing since 1959.
• The physical condition of many of these projects
  has deteriorated over time and they are in need
  of recapitalization to replace/repair systems,
  units, building structures, common areas, etc.
  Also, additional supportive services are needed
  to meet changing needs of an aging in place
  population.

3
Pre and Post 1990 Program

• 1977 to 1990 Section 202 projects were funded
  with 40 year direct HUD loans, and subsidized
  with project-based Section 8 HAP contracts.
• Loans made at then-prevailing interest rates
  (often 10 or higher)
• Restricted to non-profit ownership
• HUD approved budget-based rents
• No owner distribution allowed
• Allocation of funding authority to each State
• HUD approval required for prepayment of many 202
  loans
• 1990 to Present.
• Since 1990 the program has provided a capital
  advance combined with rental subsidy under a
  multi-year Project Rental Assistance Contract
  ("PRAC")
• Awards of 202 capital advance now made annually
  through NOFA process

4
Aging 202 Portfolio Congressional Response

• Congress passed legislation in 2000 to address
  aging 202 portfolio greatly in need of rehab.
• Goal was to allow for refinancing with or without
  FHA insurance, and use of tax exempt bonds, low
  income housing tax credits, etc. to rehab and
  stabilize properties.
• Statute allowed for-profit limited partnerships
  to participate so long as sole GP is a qualifying
  nonprofit or a corporation wholly
  owned/controlled by qualifying nonprofit

5
HUD Housing Notice 2002-16, as revised by Housing
Notice 2004-21

• Establish procedures for prepayment of direct HUD
  202 loans.
• 202/Section 8 projects restructured pursuant to
  the Notices retain their exemption from
  Mark-to-Market after prepayment. Rents may be
  initially renewed at lesser of budget-based rent
  or current rents adjusted by OCAF (future
  adjustments generally based on OCAF).
• Address two types of prepayment scenarios
• 202 loans that do not require HUD approval for
  prepayment (generally applies to loans made 1977
  through 1982) and may be prepaid on 30 days
  notice to HUD.
• 202 loans that require HUD approval for
  prepayment.

6
HUD Housing Notice 2002-16, as revised by Housing
Notice 2004-21

• Principal purpose of Notices was to address those
  loans that require HUD approval for prepayment.
  Requirements for prepayment include the
  following
• At least 30 days prior to the proposed prepayment
  date, the 202 owner must issue a letter to all
  tenants informing them of its intention to
  prepay. The notice must describe to the tenants
  why prepayment is advantageous to them. In
  addition, the owner must submit to HUD a detailed
  plan explaining such benefits.
• The owner must agree to execute a Use Agreement
  that requires, among other things, (1) the
  project to be operated until the maturity date of
  the original Section 202 Loan in a manner that
  will provide rental housing for the elderly and
  persons with disabilities on terms at least as
  advantageous to existing and future tenants as
  the terms required by the original loan, and (2)
  the project to accept Section 8 subsidy for the
  life of the Use Agreement.

7
HUD Housing Notice 2002-16, as revised by Housing
Notice 2004-21

• Permitted Use of Existing Project Residual
  Receipts/Replacement Reserves
• Amounts in excess of 500 per unit held in
  Residual Receipts Account may be used to pay
  portion of supportive tenant services.
• Amounts in excess of 1K per unit held in
  Replacement Reserve Account may be used for
  rehabilitation, modernization or retrofitting of
  project.
• Permitted Distributions
• Maximum annual distribution is 6 of owner's
  equity (including LIHTC equity) paid at
  refinancing of project.

8
HUD Housing Notice 2002-16, as revised by Housing
Notice 2004-21

• Section 8 Savings
• If Section 8 savings are realized from the
  refinancing, up to 50 of such savings may be
  used for the benefit of the tenants (e.g., pay a
  portion of increased cost for supportive
  services rehabilitation, modernization or
  retrofitting of project).
• Development Fees for LIHTC Projects
• Permits development fees at the lesser of (1) 15
  of approved development cost, and (2) the maximum
  fee allowed by applicable State's QAP.

9
HUD Housing Notice 2002-16, as revised by Housing
Notice 2004-21

• Equity Take-Out
• Mortgagor not permitted equity take-out.
  However, potential equity take-out in purchase
  transaction (seller limited to equity take out
  based on lesser of purchase price or unassisted
  market value of property).

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SECTION 202 Part 2

• A. TRANSFER OF HUD SECTION 8 HAP CONTRACTS
• B. CONVERSION OF EFFICIENCIES INTO ONE-BEDROOM
  UNITS

Richard T. Washington VP, Business Development
11
Transfer of HUD Section 8 HAP Contracts

• Section 213 as enacted in the Transportation,
  Housing and Urban Development and Related
  Agencies Appropriations Act, 2009 authorizes
  owners to transfer some or all project-based
  assistance, debt and statutorily required low-
  and very low-income use restrictions, with one or
  more multifamily housing project to another
  multifamily housing project(s). While this
  provision has been in place for four years now,
  HUD has authorized only a handful of projects to
  transfer some or all of the Section 8 authority.
• Section 213 creates an opportunity for developers
  to deconcentrate poverty in high-density
  buildings through the transfer of some or all of
  its Section 8 authority. Further, where a
  building has deteriorated beyond compare and/or
  the surrounding location has become economically
  nonviable, as in the case of parts of
  post-Katrina New Orleans, Section 213 provides an
  opportunity to save the Section 8 subsidy through
  a transfer rather than losing the subsidy
  outright. Preserving the Section 8 is a valuable
  national asset that should be a priority of all
  affordable housing owners, developers and policy
  makers.

12
Transfer of HUD Section 8 HAP Contracts

• However, in some circumstances it is no longer
  cost-effective to preserve the physical structure
  where a building is in vast disrepair or obsolete
  in design. In these rare instances, it is
  important that an affordable housing developer
  have the flexibility to transfer the Section 8
  project-based subsidy in order to provide
  high-quality, stable affordable housing for the
  residents, de-concentrate poverty, and in the
  long-term preserve the Section 8 subsidy that
  would otherwise be lost if a transfer were not
  approved.
• Yet as drafted, the ten conditions which must all
  be met in order for HUD to authorize a Section
  213 transfer remain overly restrictive and have
  proven to be prohibitive.

13
The 10 Conditions for hud to authorize a section
213 transfer

• (b)(1) The number of low-income and very
  low-income units and the net dollar amount of
  Federal assistance provided by the transferring
  project shall remain the same in the receiving
  project or projects.

14
The 10 Conditions for hud to authorize a section
213 transfer

• (b)(2) The transferring project shall, as
  determined by the Secretary, be either physically
  obsolete or economically non-viable. The
  transferring project (i) shall be either
  physically obsolete or economically non-viable or
  in a case involving a partial transfer of
  project-based assistance, shall require
  reconfiguration of units because the units to be
  reconfigured are physically obsolete or
  economically non-viable, all as determined by the
  Secretary or (ii) shall in its present
  configuration represent an over-concentration of
  poverty and social problems that could be
  ameliorated by a reduction in density, all as
  determined by the Secretary, provided that any
  transfer pursuant to determination under this
  subsection (b)(2)(ii) shall be a partial transfer
  and that any receiving project shall, as
  determined by the Secretary be of such character
  and in such location(s) as are likely, in the
  determination of the Secretary, to improve the
  lives of the tenants.

15
The 10 Conditions for hud to authorize a section
213 transfer

• (b)(3) The receiving project or projects shall
  meet or exceed applicable physical standards
  established by the Secretary.
•  
• (b)(4) The owner or mortgagor of the
  transferring project shall notify and consult
  with the tenants residing in the transferring
  project and provide a certification of approval
  by all appropriate local governmental officials.
•  
• (b)(5) The tenants of the transferring project
  who remain eligible for assistance to be provided
  by the receiving project or projects shall not be
  required to vacate their units in the
  transferring project or projects until new units
  in the receiving project are available for
  occupancy.

16
The 10 Conditions for hud to authorize a section
213 transfer

• (b)(6) The Secretary determines that this
  transfer is in the best interest of the tenants.
•  
• (b)(7) If either the transferring project or the
  receiving project or projects meets the condition
  specified in subsection (c)(2)(A), an lien on the
  receiving project resulting from additional
  financing obtained by the owner shall be
  subordinate to any FHA-insured mortgage lien
  transferred to, or place on, such project by the
  Secretary, provided, however, that the Secretary
  may waive this requirement upon determination
  that such waiver is necessary to facilitate the
  financing of acquisition, construction or
  rehabilitation of the receiving project.

17
The 10 Conditions for hud to authorize a section
213 transfer

• (b)(6) The Secretary determines that this
  transfer is in the best interest of the tenants.
•  
• (b)(7) If either the transferring project or the
  receiving project or projects meets the condition
  specified in subsection (c)(2)(A), an lien on the
  receiving project resulting from additional
  financing obtained by the owner shall be
  subordinate to any FHA-insured mortgage lien
  transferred to, or place on, such project by the
  Secretary, provided, however, that the Secretary
  may waive this requirement upon determination
  that such waiver is necessary to facilitate the
  financing of acquisition, construction or
  rehabilitation of the receiving project.

18
The 10 Conditions for hud to authorize a section
213 transfer

• (b)(8) If the transferring project meets the
  requirements of subsection (c)(2)(E), the owner
  or mortgagor of the receiving project or projects
  shall execute and record either a continuation of
  the existing use agreement of a new use agreement
  for the project where, in either case, any use
  restrictions in such agreement are of no lesser
  duration than the existing use restrictions.
•  
• (b)(9) Any financial risk to the FHA General and
  Special Risk Insurance Fund, as determined by the
  Secretary, would be reduced as a result of a
  transfer completed under this section.
•  
• (b)(10) The Secretary determines that
  Federal liability with regard to this project
  will not be increase.

19
The 10 Conditions for hud to authorize a section
213 transfer

• Issues
• Many owners/sponsors have encountered overly
  stringent HUD interpretations of physically
  obsolete and economically nonviable which have
  made their attempts to transfer some or all of
  the section 8 assistance to other properties very
  difficult, if not prohibitive.
• Provision should be made to warrant temporary
  relocation of the tenants in the case of a
  partial transfer where rehabilitation of the
  dwelling units in the transferred building cannot
  be done without temporarily relocating tenants.

20
The 10 Conditions for hud to authorize a section
213 transfer

• Issues (Continued)
• It is not altogether clear whether the Secretary
  must transfer the debt, and if so, that could
  unnecessarily complicate a new financing. No
  superior debt to the transferred HUD debt has
  often been a deal killer for those working to
  transfer Section 8 assistance to other
  properties. HUD should revise this language to
  state If either the transferring project or the
  receiving project or projects meets the condition
  specified in subsection (c)(2)(A), any lien on
  the receiving project resulting from additional
  financing obtained by the owner shall be
  subordinate to any FHA-insured mortgage lien
  transferred to, or placed on, such project by the
  Secretary, provided, however, that the Secretary
  may waive this requirement upon determination
  that such waiver is necessary to facilitate the
  financing of acquisition, construction or
  rehabilitation of the receiving project.

21
CONVERSION OF EFFICIENTS INTO One-bedroom units

• On February 1, 2008, Acting Deputy Assistant
  Secretary for Multifamily Housing Programs, John
  L. Garvin, issued HUDs Policy and Procedures on
  the Conversion of Efficiencies into One-Bedroom
  Units in a memorandum to all multifamily hub
  directors and their staff.
• The policy outlined in this long-awaited
  memorandum (the Memo) applies to many
  properties seeking to complete preservation
  transactions, but are not feasible because they
  need to convert efficiency units into one-bedroom
  units, including Sections 202, 811, 236 (insured
  and non-insured), and 221(d)(3) properties, to
  name a few. The Memo also applies to properties
  with project-based Section 8 HAP contracts, with
  or without an accompanying FHA-insured mortgage
  loan.

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CONVERSION OF EFFICIENTS INTO One-bedroom units

• The new policy outlines seven programmatic
  requirements that any application to convert
  efficiencies into one-bedroom units must satisfy.
  Among the criteria are the requirements that
• (i) the average vacancy in the efficiency units
  be at least 25 for at least 24 months of the
  preceding 36-month period
• (ii) on completion of the unit conversion, the
  project debt service coverage ratio must be 1.1
  or greater
• (iii) the proposed conversion must only involve
  units of the same subsidy type
• (iv) the proposal must not result in an increase
  in the amount of existing budget authority
  available to the subject property

23
CONVERSION OF EFFICIENTS INTO One-bedroom units

• (v) the owner must be in compliance with all
  business agreements with HUD, and in the event
  of non-compliance the owner believes it will be
  cured through a conversion describing how and
  when compliance will be achieved. The Hub must
  concur that this will be the case
• (vi) a market study must be submitted to prove
  that efficiencies are not in demand in the
  market area and the converted units will be in
  demand and
• (vii) the proposed conversion must not result in
  any violation of Section 59444 of the
  Rehabilitation Act of 1973 or HUD's implementing
  regulations at 24 CFR Part 8 and 24 CFR Section
  8.23.

24
CONVERSION OF EFFICIENTS INTO One-bedroom units

• The new policy outlines additional
  program-specific requirements whose applicability
  depends on the type of subsidy available at the
  subject property. For example, in the case of a
  property with a project-based Section 8 HAP
  contract, post conversion rents must be
  established at the lesser of (i) the current
  one-bedroom rent or (ii) the combined unit rents
  of the two converted efficiency units. Future
  rent setting pursuant to MAHRA may be based on
  the new unit size. In addition, the Memo states
  that if Low-Income Housing Tax Credits (LIHTCs)
  are used in the proposed financing, the rents may
  not exceed the lesser of LIHTC rents or
  comparable market rents. This Section 8 rent cap
  marks a dramatic change in HUDs Section 8
  rent-setting policy and is at odds with MAHRA.

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CONVERSION OF EFFICIENTS INTO One-bedroom units

• Section 236 properties are also singled out for
  special treatment under this new policy. The Memo
  requires that in the case of a Section 236
  property that receives interest reduction payment
  (IRP) subsidy, the IRP must be reduced in a
  manner proportional to the reduction in units,
  but the reduction does not take into account unit
  size, which will have an adverse impact on
  properties with larger-sized units. The Memo
  notes that whether the IRP must be reduced
  depends on the requirements in the original
  Section 236 mortgage.
• Finally, the new policy requires that owners
  submit a conversion request application, in
  accordance with the requirements set forth in the
  Memo, including evidence of a notice, a comment
  period provided to residents, a sources and uses
  statement, and evidence of local government
  support.