C.W. Early
C.W. Early

The U.S. fiscal 2014 budget includes $20 billion for the Housing Choice Voucher (HCV) program to help more than 2.2 million low-income families afford decent housing in neighborhoods of their choice. This funding level supports all existing vouchers and provides 10,000 new vouchers targeted to homeless veterans. The budget also includes $10.3 billion for the project-based rental assistance (PBRA) program to maintain affordable rental housing for 1.2 million families and provides $6.6 billion in operating and capital subsidies to preserve affordable public housing for an additional 1.1 million families.

When financing projects with HCVs, the projects are treated similar to other multifamily projects, but the rents are generally underwritten at the lesser of the contract rent or market rent for the project. Projects receiving PBRA, through Housing Assistance Payment (HAP) contracts, are viewed differently. HAP contracts that cover a large majority of the property, typically 90 percent, are seen as less risky to lenders from a financial perspective due to the typically high demand for the subsidized units resulting in generally strong occupancy and consistent rental revenue. Because of the risk profile, there are certain benefits to be had when financing these projects. Projects with partial HAP contracts may not receive the same benefits.

The purpose of this article is to lay out the basic financing terms available for projects with HAP contracts and some of the issues that are unique to financing these properties.

Loan Parameters

Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) incentivize owners of projects with HAP contracts to refinance their projects using their loan products by providing greater leverage. Additional benefits are given for projects that are done in conjunction with low-income housing tax credits (LIHTCs). To qualify for Freddie Mac’s lower LIHTC standards, there must be at least seven years remaining in the 10-year tax credit period. For Fannie Mae, there must be at least eight years left of the initial 15-year compliance period. Fannie Mae also has an interim “preservation” category, which is meant for properties with restrictions for the loan term, for which projects with HAP contracts would qualify.

FHA does not require new tax credits for its affordable incentives. In order for a project to use the Department of Housing and Urban Development (HUD) 90 percent or greater rental assistance parameters, the project must have a HAP contract on at least 90 percent of the units and meet the definition of affordable housing. For the requirements to be met, either the HAP contract must have a remaining term of at least 15 years or there must be restrictions in place for at least 15 years. The restrictions must be at least the minimum LIHTC restrictions of 20 percent of units at 50 percent of area median income (AMI) or 40 percent of units at 60 percent of AMI, with economic rents (i.e., the portion paid by the residents) on those units no greater than LIHTC rents; or on other mixed-income projects, the restrictions must meet the minimum low-income unit rent and occupancy restrictions and term mentioned in the above criteria.

This increased leverage is due to the lower perceived risk and their desires to promote and preserve affordable housing. Below is a summary of the standard refinancing parameters of each agency. Of note, these are general guidelines, and variances may be available depending on project specifics.

1. 35-year amortization is available on a waiver on a case-by-case basis. 2. 35-year amortization requires a remaining economic life of at least 47 years (75 percent of remaining economic life). For projects over 30 years old, invasive testing may be required to garner the longer amortization period.
1. 35-year amortization is available on a waiver on a case-by-case basis. 2. 35-year amortization requires a remaining economic life of at least 47 years (75 percent of remaining economic life). For projects over 30 years old, invasive testing may be required to garner the longer amortization period.


HAP contracts may have rents that exceed LIHTC or market rents. LIHTC rents are statutorily defined limits based on the property’s location and mandated utility allowances. Market rents are based on the estimated rent that the units could receive if there were no restrictions or HAP contract in effect, typically determined by an appraisal.

When the HAP contract rents exceed the LIHTC or market rents, typically called ”HAP overhang,” it poses a problem for the lender because the HAP contract may expire and most HAP contracts are subject to annual appropriations. Each lender handles this perceived risk differently:

Fannie Mae: HAP contract rents may be underwritten at the debt-service coverage ratio (DSCR) levels in the table, but Fannie Mae limits the underwritten rent to the concluded market rent. In the event that the HAP contract expires prior to the loan maturity date, Fannie Mae requires a secondary test, that the DSCR assuming the LIHTC rents is at least 1.05x at the time of underwriting and 1.10x upon expiration of the HAP contract (assuming standard 2 percent rent and 3 percent expense trending to that time).

Freddie Mac: If the HAP contract has a remaining term of less than the proposed mortgage, rents must be underwritten to the lower of HAP, market and LIHTC rent. If the HAP contract has a remaining term of at least 10 years and the loan term is at least 10 years, Freddie Mac will allow the HAP overhang to be underwritten so long as the property passes an exit test at 1.20x at market rents at the end of the loan term. If the underwritten rents are above LIHTC levels, Freddie Mac will require that the restrictions be terminable upon foreclosure.

HUD/FHA: HUD requires that the lower of market or HAP contract rents be underwritten. For projects that include LIHTC restrictions, HUD notes that the LIHTC rent must be recorded, but it is not used as a limiting criterion. Instead the limiting criterion will be the lesser of market or HAP contract rents. For instances where the HAP contract rent is greater than market, the HAP overhang can be used to size a second loan, a ”B Tranche,” which must amortize over the remaining term of the HAP contract. This bifurcated loan structure would be underwritten so that the “A Tranche” loan is sized assuming the market rents and an amortization term of up to 35 years at the DSCR levels above. Generally speaking, the ”B Tranche” loan is sized at the same DSCR levels with a shorter amortization so that when the HAP contract expires that debt has been paid off.

These are general guidelines, each project is different and waivers on the above policies may be possible, especially if the HAP contract was renewed under Option 4. (Option 4 is one of the types of HAP contract extensions that is available for exception projects including Sec. 202s, Sec. 515s, non-FHA state and local financed projects, and FHA-insured state or local government financed projects, which cannot be prepaid due to state or local law; their rents are not subject to being marked down to market during the term of the HAP contract.)


There are no significant variances when underwriting a project with a HAP contract from a standard multifamily project. All lenders will focus on historical operations to determine appropriate expense levels. Management fees may be higher as well as tenant compliance or legal, while marketing and turnover costs may be lower.


While HUD does not require any reserves to be funded in the event the HAP contract was ever terminated or annual appropriations were not made, both Fannie Mae (Restabilization Reserve) and Freddie Mac (Transition Reserve) do require a reserve of at least six months of debt service or the amount needed to re-tenant the property if the contract was ever lost or unfunded. Fannie Mae may waive the Restabilization Reserve on projects where the HAP contract exceeds the loan term. For both Fannie Mae and Freddie Mac, sponsorship with a strong financial condition and experience may be eligible for a waiver or reduction of this reserve requirement.


Fannie Mae, Freddie Mac, and HUD are committed to providing and preserving affordable housing. All three offer good financing solutions for projects with HAP contracts and should be explored when acquiring or refinancing these projects. The above limitations are not absolute, but rather general guidelines on how HAP contracts are viewed by these lenders and subject to change without notice.

C.W. Early has extensive experience in the technical aspects of multifamily and affordable housing capitalization. He. has underwritten, structured, and screened billions of affordable housing debt transactions over the past decade. Early previously served as deputy chief underwriter for the Fannie Mae DUS program, FHA-insured commercial project loans, and the Freddie Mac TAH programs for Oak Grove Capital and as a senior underwriter at MMA Financial.