FINANCE

SEC. 202

Refinancing Tips for 202s

BY BENDIX ANDERSON

AFFORDABLE HOUSING FINANCE • JANUARY 2008

Owners of Sec. 202 affordable seniors housing are in the catbird seat these days. As federal policymakers trim interest rates, refinancing— already a good deal for owners of second-generation Sec. 202 properties— has become even more attractive.

About 200,000 apartments were built between 1974 and 1992 under the second generation of the Department of Housing and Urban Development’s (HUD’s) Sec. 202 program, which finances seniors housing. The vast majority of those properties have loans with interest rates at least two percentage points higher than current market rates, said housing advocate Bill Kelly, president of Stewards of Affordable Housing for the Future, based in Washington, D.C.

With a lower interest rate, the properties can usually afford to take out a bigger loan, said Kelly, allowing them to renovate and upgrade older apartments.

Only about 10 percent of these apartments have had their loans refinanced so far, said Kelly, leaving the remaining 90 percent with a great opportunity to improve their bottom lines.

Evaluate the property’s needs

To decide how much work an old Sec. 202 property will need, owners should do a full assessment of their properties’ needs for the next 20 years, said Nick Gesue, senior vice president for lender Lancaster Pollard & Co.

Owners of Sec. 202 properties are already required to do capital needs assessments if they take out new loans from the Federal Housing Administration (FHA). About half of the roughly 1,000 Sec. 202 properties that have been refinanced so far have used FHA program loans, according to Gesue.

However, those FHA capital needs evaluations don’t include things like improvements in energy efficiency or the addition of features aimed at helping tenants age in place. A fuller evaluation that includes such things should be the owner’s first step, said Gesue. “We end up spending almost the bulk of our time with clients identifying that work scope,” he said.

Going beyond a capital needs assessment revealed energy-efficiency improvements that could be made at Council Tower, a 145-apartment Sec. 202 complex in the Roxbury neighborhood of Boston, said David Keene, manager of portfolio preservation for MassHousing. The property recently converted from an inefficient electric heating system to gas heat as part of its refinancing, he said.

Polling residents is an important part of identifying what renovations a property needs to make in order to keep occupancy rates high. That could range from expanding the size of existing apartments to widening doorways or installing roll-in showers for older, less mobile residents. The average female Sec. 202 tenant is now 79 years old, much older than the over-55 or over-65 tenants the properties were originally built for, said Gesue.

Start early

Before talking to HUD about refinancing a Sec. 202 property, owners should apply to the agency for a budget-based rent increase, said Gesue. Higher rents will allow the property to support a larger loan. Also, HUD is much less likely to approve a rent increase after a property refinances its debt; officials tend to assume the property shouldn’t need any more new subsidy.

Owners should also give themselves more than enough time to meet the deadlines for all of the subsidy programs that they plan to use—or face the consequences.

For example, at press time, ACTION-Housing, Inc., a Pittsburgh, Pa.-based nonprofit developer, was anxiously waiting for HUD approval to refinance three Sec. 202 seniors properties. If the deals don’t close by Dec. 12, the Pennsylvania Housing Finance Agency could take back its reservations of the tax-exempt bonds that would fund the mortgage, effectively killing the deal and forcing ACTION-Housing to start the process again from scratch.

ACTION-Housing submitted the last of the three loan applications to HUD in October, fairly late in the year. To keep the deal alive, HUD will have to approve ACTION-Housing’s application in less than 60 days, breaking its own time limit.

The most time-consuming parts of a HUD application are the third-party reports like appraisals and market studies that are required.

“Those reports drive the deal,” said Jennifer DiNardo, a seniors housing developer for ACTION-Housing. Owners shouldn’t wait to get on the calendars of the experts that will write these reports, since they often book their time long in advance.

Consider LIHTCs

For many Sec. 202 properties, refinancing makes more sense if the new loans are blended with subsidy from another program, such as the lowincome housing tax credit (LIHTC) program.

The extra subsidy will pay for more improvements to the property. In addition, the LIHTC program provides more generous developer’s fees than a simple Sec. 202 refinancing, according to DiNardo, whose organization refinanced five Sec. 202 properties without LIHTCs in 2006.

The three Sec. 202 properties ACTION-Housing was aiming to refinance by the end of 2007 would use lowinterest tax-exempt bond mortgages coupled with equity from the sale of 4 percent federal LIHTCs.

The nonprofit plans to spend between $6,500 and $10,000 per unit to renovate 135 apartments at those properties, about three times its budget for the five 2006 deals. Some of those properties didn’t get new windows or furnaces, even though that equipment is roughly 20 years old and will eventually need to be replaced.

Also, with LIHTCs, ACTIONHousing’s fee will total 15 percent of the amount spent on renovations, compared to the 8 percent fee provided by a simple Sec. 202 refinancing. With triple the rehabilitation budget and twice the fee, ACTION-Housing was set to earn about six times as much on the 2007 deals as those closed in 2006.

Some Sec. 202 owners, like CommonBond Communities in St. Paul, Minn., have packaged several properties together in a single deal. Deals involving several properties are more complicated, but they allow owners to feasibly recapitalize smaller properties because the transaction costs are spread over more units.

Sec. 202 properties can have as few as 10 apartments, said Gesue. But even a simple refinancing costs tens of thousands of dollars to close.

Typical tax-exempt bond financing rarely works for properties with less than 100 apartments because of the cost of issuing the bonds. Packing projects together can bring new money to these smaller deals.

For a few properties, a simple refinancing without extra subsidies can produce enough income to do the renovations that are needed, especially if the property is in a market where the HUD fair market rents are set high enough to support a large loan, said Kelly. Most other properties will need more money.

A simple refinancing could also create problems later on when the property eventually needs more work, Kelly said. That’s because the new loan could come with a prepayment lockout for five or 10 years. Also HUD might not approve bringing new money into a project so soon after a refinancing.

“If you want to later do something more thorough, you might not be able to,” said Kelly.