CAREY, OHIO—Talk about a deferred developer fee: The Woda Group put more than $400,000 of its own money into the rehabilitation of an old rural housing property here while the developer waited to close the last piece of the $3.8 million project’s permanent financing.

That’s more than twice Woda’s $183,000 developer fee.

The workers finished renovating the 50 apartments at Meadow Glen in 2005, and by mid-2006 the development’s construction loan had been replaced with equity from the sale of 9 percent low-income housing tax credits and a loan from the Ohio Housing Finance Agency.

But at the start of 2007, Woda still hadn’t filled the $400,000 hole in the project’s budget. The developer could have simply taken out a conventional loan, probably with an interest rate of roughly 7 percent. Paying that much in interest would have forced Woda to take out a smaller loan, probably of around $300,000, according to the developer. But Woda had something more dramatic in mind.

At the time, no one had ever used a loan guaranteed by the U.S. Department of Agriculture Rural Development’s (RD) Sec. 538 program to rehabilitate one of the thousands of rural properties originally built with RD’s Sec. 515 loans. Woda originally pitched the idea to the federal agency four years ago and was shot down.

This February, Woda closed on a $400,000 Sec. 538 loan from Huntington National Bank with an interest rate of just 4.79 percent. Meadow Glen is one of the first rural developments ever to make its old Sec. 515 loan subordinate to a new Sec. 538 loan.

It took roughly $2 million, or $40,000 per unit, in hard construction costs to transform Meadow Glen’s long, barn-like building by carving out space for balconies, adding masonry to the outside, and enlarging the apartments.

All of the units are reserved for tenants earning no more than 60 percent of the area median income, with a handful held back for households earning up to 50 percent or even 35 percent. That makes for rents of no more than $420 a month. Three-quarters of these apartments will also receive rental assistance from RD until the original Sec. 515 loan is finally paid off in the early 2030s.

Big plans for Sec. 538

Assuming that Congress fully funds the program, Sec. 538 should receive $200 million a year that can be used to guarantee loans. The average loan will cover 30 percent of the project’s costs, with the rest of the financing coming from private investors, according to an RD estimate.

The program will make a limited pool of funding go a long way. But it’s still not enough. As of April, there were 16,880 properties in the Sec. 515 program.

About two-thirds of these properties are more than 20 years old, and many could potentially leave the Sec. 515 program by either prepaying or defaulting on their loans.

Meanwhile, the Sec. 538 program, which used to focus on new construction, is just ramping up as a rehab program. At press time, RD had made 10 commitments so far in 2007 to guarantee rehab loans through the Sec. 538 program.