MARKET OPPORTUNITIES

PRESERVATION

HUD Hurdles Threaten Affordable Housing Stock

BY BENDIX ANDERSON

AFFORDABLE HOUSING FINANCE • SEPTEMBER 2007

More than 760,000 apartments that now serve some of the nation’s poorest tenants are at risk of being lost as affordable housing in the next three years.

That’s because the contracts that provide project-based Sec. 8 rental subsidy to these 763,095 apartments will expire by the end of fiscal 2010, giving the owners of these properties the opportunity to leave their affordable housing programs, according to the National Housing Trust, a group dedicated to the preservation of affordable housing.

The apartments that could opt out of their affordability agreements represent more than half of the entire 1.5 million apartments in the portfolio of privately owned affordable housing properties originally financed by the Department of Housing and Urban Development (HUD). Within 10 years, nearly all the properties in the portfolio will have reached the end of their original mortgage terms, giving any that haven’t already extended their agreements to provide affordable housing the opportunity to convert to market-rate housing.

Given this looming threat to the affordable housing stock, HUD should be doing everything in its power to help preserve all these properties as affordable housing. Instead, it’s doing the opposite, erecting barriers that discourage owners from keeping their apartment properties affordable.

HUD now insists that many nonprofits forfeit proceeds from the sale of their properties in exchange for HUD’s approval, even when the new buyer plans to keep the apartments affordable. The agency also often delays making decisions on waivers or rent increases, causing crucial rehab work to be put off for months or even years.

“HUD fatigue is the biggest risk to these properties,” said Denise Muha, executive director of the National Leased Housing Association (NLHA). “They [the owners] cannot deal with the HUD bureaucracy.”

HUD’s no-profit motive

Over the last three years, HUD has been increasingly reluctant to let nonprofits receive proceeds from the sale of their affordable HUD properties, though this informal ban has never been clearly articulated in the agency guidelines and its implementation is uneven, advocates say.

In June 2006, HUD informed Jewish Community Housing for the Elderly (JCHE), a Boston-based affordable housing owner and developer, that the nonprofit would have to give up the proceeds from the sale of 254 affordable apartments at Leventhal House. Otherwise, HUD said it would not approve JCHE’s plan for the property, which involved decoupling a stream of interest reduction payment subsidy from Leventhal’s original Sec. 236 mortgage to help underwrite a new loan to preserve and rehab the 30-year old property. A rehab is crucial to help lower the property’s 30 percent vacancy rate.

HUD eventually agreed to let JCHE take $3.75 million from the sale to build a community center next door to Leventhal House. But another $2.75 million from the sale could have helped rescue a separate Sec. 202 seniors development JCHE is now building in Framingham, Mass., that has gone $10 million over its construction budget. Instead, the $2.75 million must go into a reserve bank account, HUD said, to help pay for future increases to the Sec. 8 rents at Leventhal House.

“It certainly dampens the enthusiasm to try to do this a second time,” said Allan Isbitz, chief financial officer for JCHE. The nonprofit owns another two HUD properties next door to Leventhal House totaling more than 400 apartments. JCHE could work with HUD to rehab these properties, but given its negative experience on Leventhal House, the organization is considering avoiding HUD on these deals, Isbitz said.

Even when HUD has agreed to let nonprofit sellers take a gain, the agency often drags out the process. One Connecticut nonprofit held out for three years in a stare-down with the agency. HUD had demanded that this nonprofit, the owner of a 118-unit affordable seniors property, forfeit any proceeds from the sale of its apartments to a partnership led by Eagle Point Enterprises, an affordable housing developer based in Portland, Maine.

But the nonprofit refused. “They were unwilling to sell it for no money,” said Laura Burns, founding partner and president of Eagle Point.

Though the apartments clearly needed work, the nonprofit seemed willing to wait to rehabilitate the property until its Sec. 236 mortgage expired in 2015. Finally, HUD approved the transaction this summer, allowing the nonprofit, which declined to be identified in this story, to receive more than $2 million from the sale of the apartments.

“We are thrilled that HUD has made this happen,” Burns said. But deals like this have left Burns and other affordable housing developers uncertain of what the rules really are.

How foot-dragging snarls deals

HUD delays also afflict affordable developers seeking waivers from the agency. Low-income housing tax credits are the main source of new capital subsidy for many of these projects, but they often don’t work with the rules of the old HUD programs that originally paid for the construction of these buildings. “Every deal seems to need a waiver,” said Michelle Norris, senior vice president of development for National Church Residences.

Such waivers are increasingly difficult to get as experienced HUD staffers quit and retire, leaving the agency understaffed and with fewer employees capable of making these complicated decisions.

That’s led to all kinds of delays. For example, Evergreen Partners, an affordable housing developer based in Portland, Maine, needs HUD’s estimate of how much the agency might raise the rents it pays at The Urban Park Apartments, a 254-unit property in Rochester, N.Y., once the property is rehabbed.

All of the apartments at Urban Park receive project-based Sec. 8 rental subsidy. After the renovation, the Sec. 8 program will pay Evergreen the difference between what tenants can afford to pay and a rental amount decided by HUD, based on rents in the surrounding market. HUD’s estimate of these rents would not be a commitment—it would not even have to be a big increase over the current Sec. 8 subsidy, according to Evergreen. The estimate would simply reveal how HUD viewed the market. Evergreen’s lenders could then use this estimate, or “comfort” letter, to size a loan for the project.

All of the other pieces of the $20 million deal have been in place for more than a year to pay for a $33,000-perunit renovation that will provide new siding, roofing, carpets, and paint. “Everything a tenant sees or touches gets replaced,” said Brian Poulin, principal with Evergreen. But construction can’t start until HUD provides that estimate.

In the meantime, Urban Park nearly failed its last HUD inspection, Poulin said, as capital needs continue to go unmet despite dedicated managers at the cash-starved, 30-year-old property. About 30 percent of the apartments are vacant.

Because of uncertainty like this and the difficulty in receiving proceeds from sales, Muha of the NLHA predicts that many nonprofit owners will simply wait to rehab their properties until their HUD mortgages expire, so that they can spend the proceeds—often millions of dollars—however they like.

That’s especially true for nonprofit owners whose mission is not centered on housing. “There’s a lot of churches out there that own properties,” Burns said. “It might be more important to them to get the proceeds and fulfill their mission by building a new church.”

The opting out option

Already, an average of 10,200 units a year continue to opt out of their project- based Sec. 8 contracts, in part to allow their owners to raise rents to market rates, but also to escape HUD’s other restrictions. That’s a decline from the late 1990s, when at least 20,000 Sec. 8 apartments per year were lost, but still much too high, housing advocates said.

“I see owners that are choosing to opt out of the programs in some measure out of frustration with HUD,” said David Buchwalter, president of AdCar Associates, Inc., an affordable housing consulting firm based in Bayside, N.Y.

For some developments, waiting to do renovations may mean the property deteriorates so much that HUD decides to foreclose and cancel its Sec. 8 contracts, effectively removing the units from the affordable housing stock.

About 150,000 affordable apartments with HUD mortgages are at risk of such action. That’s because those properties have failed at least one recent HUD inspection, indicating they’ve deteriorated substantially, according to advocates.

Housing advocates like Muha are pushing Congress to intervene on their behalf by passing legislation that would give nonprofits the freedom to use sale proceeds. A bill known as H.R. 2930 that will remove many hurdles to recapitalizing some HUD properties, including allowing owners to receive equity from the sale of their properties, is moving through the House of Representatives.

Congress already acted to help affordable housing preservation this June, passing a law that directs HUD to spare passive corporate investors from the rigors of the agency’s dreaded 2530 previous participation certification process.

That intervention shows Congress is willing to take action aimed at making HUD more user-friendly, Muha said. And it means H.R. 2930 has a solid chance of passing.

In the meantime, the waiting game for HUD projects continues.

Non-HUD Affordable Housing Preserved in NYC

FBHC bought the six buildings in July using a package of loans from Enterprise Community Partners, Inc., through the New York City Acquisition Fund, administered by the city’s Department of Housing Preservation and Development. The sale is the first preservation deal using the fund.

The $23 million, one-year loan will cover 110 percent of the of $21.4 million value of the six properties. The interest rate on the loans will float at 60 basis points below the prime rate.

FBHC’s buildings were never part of a formal affordable housing program; they’re simply located in markets overlooked by the city’s real estate boom—for now. In the Bronx, the average rent throughout the borough has risen from $758 a month in 2000 to more than $900, according to Reis, Inc., an apartment research firm based in Manhattan.

The $230 million Acquisition Fund provides short-term loans for the acquisition of privately owned land and buildings. Major banks and financial institutions originate the loans, which are guaranteed by $32.6 million in foundation funding and $8 million in city funds. This guarantee lowers the interest rates and allows the loans to cover up to 110 percent of the value of the real estate, providing pre-development financing for the purchasers.