Three key changes are poised to make a big impact on the preservation of existing affordable housing developments.
These new moves—two new programs and one policy change— arrive at time when the affordable housing stock is shrinking.
“Preservation is absolutely critical,” says Richard F. Burns, CEO of The NHP Foundation in New York City.
There is a serious shortage of affordable housing in the country today, he says, citing a recent Harvard Joint Center for Housing Studies report that estimates a deficit of 6.4 million affordable housing units in the country for people making less than 50 percent of the area median income. To make matters worse, more than 18 million households are spending more than half of their income on housing.”
At the same time, a large number of affordable housing units is being lost because owners cannot afford adequate maintenance and/or the properties are being sold to conventional developers and converted to market-rate communities. According to an analysis of Department of Housing and Urban Development (HUD) housing data by the National Housing Trust, 800,000 HUD-assisted apartments will reach the end of their affordable-use restrictions over the next five years, giving property owners the ability to opt out of their restrictive contracts. This amounts to nearly 60 percent of units with federal project-based rental assistance.
The third part of the equation is the changes occurring in the conventional apartment market, Burns says. Overall demand for rental units is growing because of the emerging population of young echo boomers as well as people who have been foreclosed upon or are afraid to buy a home because of the recent financial climate.
“It's a perfect storm in many ways,” Burns says.
The new tools you need to know are:
1. RENTAL ASSISTANCE DEMONSTRATION
Authorized by Congress at the end of 2011, the Rental Assistance Demonstration (RAD) looks to be a breakthrough in preserving properties that have utilized the Sec. 8 Moderate Rehab, Rent Supplement, and the Sec. 236 Rental Assistance Program (RAP).
These platforms have been known as the “orphan” rental assistance programs because they have not benefitted from the usual renewal provisions of expiring project-based Sec. 8 contracts and have been unable to take advantage of a normal recapitalization cycle. As a result, these buildings often need signifi- cant rehabilitation and a stable source of rental assistance in order to leverage new debt. Approximately 50,000 units are assisted under these programs, in-cluding about 25,000 units under the Mod Rehab program.
Under the legislation, a demonstration program has been created that allows certain public housing and Sec. 8 Moderate Rehab properties to voluntarily convert to a long-term Sec. 8 rental assistance as a means of preserving these units. They could convert to either a project-based rental assistance contract administered by HUD and be eligible for renewal under the Multifamily Assisted Housing Reform and Affordability Act or a project-based contract with a local public housing authority. As many as 60,000 units of public housing and Sec. 8 Mod Rehab housing may be converted under a competitive selection process.
A final notice on this part of RAD is expected in June, according to Vince O'Donnell, vice president of the Affordable Housing Preservation Initiative at the Local Initiatives Support Corp. (LISC).
Under HUD's proposal, the department plans to impose a limit that only 50 percent of the units in eligible buildings can be supported by project-based vouchers. Advocates oppose this cap.
A second part of the legislation created provisions allowing owners of Rent Supplement, Sec. 236 RAP, and Sec. 8 Mod Rehab properties to convert tenant protection vouchers to project-based vouchers upon contract expiration or termination occurring after Oct. 1, 2006, and no later than Sept. 30, 2013. This authority was granted for fiscal 2012 and 2013 and is under way.
2. FHA PILOT PROGRAM
The Federal Housing Administration (FHA) has recently launched a pilot program that aims to speed up the processing time for FHA-backed deals that use lowincome housing tax credits (LIHTCs).
In the past, developers have had difficulty using the FHA because they faced tight deadlines under the tax credit program and couldn't wait for the FHA's slow turnaround time. The goal will be to close loans within 90 to 120 days of submission.
Twenty lenders had been approved for the program at press time.
The pilot is significant for preservation deals, according to Tracy Peters, senior managing director at Red Mortgage Capital, explaining that the program is geared toward rehabilitation projects such as existing Sec. 8 and LIHTC deals that will be receiving new tax credits.
The first deals are expected to close by the end of the year.
3. NONPROFIT SALES PROCEEDS
Near the end of 2011, HUD issued a notice that clarified the department's policy on the use of sale proceeds of a multifamily project sold by a nonprofit owner that has an FHA-insured mortgage.
During the 1960s and 1970s, HUD worked with nonprofits to finance thousands of properties under its mortgage insurance programs, including Sec. 221(d)(3), Sec. 231, and Sec. 236 of the National Housing Act. Financed some 40 years ago, these properties are approaching their mortgage maturity dates and are in need of repair and recapitalization.
HUD reports that nonprofits own 39 percent of all Sec. 236 and 221(d)(3) properties with maturing mortgages.
More than 700 of these properties have mortgages that will mature within the next 10 years, representing roughly 80,000 affordable housing units, including 42,000 with project-based rental assistance. As the mortgages mature, the affordability restrictions also expire, placing the long-term affordability of these properties at risk.
Historically, there have been restrictions on nonprofit owners receiving proceeds from the sale of FHA-insured properties. This had a “chilling effect” on nonprofits interested in selling their developments to purchasers who could better preserve the properties for the long term, says Stephen Whyte, managing director of Vitus Group.
In Notice 2011-3, HUD opens up the opportunity for nonprofits to retain the proceeds as long as key requirements are met.
“Nonprofits are able to receive appropriate sales prices for their projects and use their proceeds to continue their mission elsewhere,” Whyte says. “They have the assurance from us and the business plan we put in front of them that the project will receive the attention it needs, the residents are going to be well treated, and the property will continue to be an affordable asset in the community.”
Vitus Group, a for-profit company, has several acquisitions in its pipeline, including one that most likely would not have been offered for sale under the prior treatment.
“We're beginning to see more activity from nonprofit sellers,” agrees attorney Stephen Wallace, partner and leader of the affordable housing practice at Nixon Peabody in Washington, D.C., which worked on getting a clarification on the issue for years.
Observers add that they are seeing strong sales activity this year.
“The market is probably as strong as I have ever seen it,” says Mark Carbone, president of Related Affordable, a division of Related Cos. in New York City.
His firm recently announced the renovation and preservation of Lakeside Apartments in Woodbury, N.J. The deal will provide about $1.8 million in renovations.
Related Affordable is also undertaking about $3.7 million in renovations and preserving affordability for 40 years at River Run Apartments in New Haven, Conn.