The future of the Sec. 202 program is in doubt, as the 61-year-old program suffers budget cuts and a proposed moratorium on new construction. Sec. 202, which provides subsidies and grants for the construction of housing for very low-income seniors, was one of the losers of the Department of Housing and Urban Development's (HUD) proposed 2011 budget, getting cut by $551 million to just $273 million. That figure is earmarked only for subsidies, meaning 2011 may be the first year that no new Sec. 202 housing is built.

What's more, HUD's projected budget proposes not funding any new construction of Sec. 202 properties through 2015. Many longtime Sec. 202 developers now wonder if this is the beginning of the end of the program.

HUD's 2010 budget had funding for about 3,400 units to be built nationally, but in the program's heyday, tens of thousands of units were built annually. “This is my 18th year doing this, and every single year, it's a few units less. But they need to adequately fund the program,” says Robin Keller, who leads the Sec. 202 development efforts for Alexandria, Va.- based nonprofit Volunteers of America (VOA). “The baby boomer generation is moving forward fast, increasing the number of people that will need affordable housing, yet the government's response is to decrease the number of units available.”

One of the most prolific builders of Sec. 202 properties, VOA broke ground on five Sec. 202 developments last year and hopes to start another seven in 2010. But 2011 is another matter, as HUD takes new construction off the table. “We're very concerned that once they stop, it will be years before, if ever, they fund it again,” says Keller.

National Church Residences (NCR), another active Sec. 202 developer, once started on seven to nine Sec. 202 projects a year, good for between 500 and 700 units. Now, the company starts between one and four projects annually, at most, for about 100 units. HUD's funding formula allocates a certain number of units that can be built annually in each metro area: 20 units for Columbus, Ohio, for instance.

“We need to be preserving these assets, because you can't build fast enough,” says Michelle Norris, senior vice president of development at Columbus-based NCR. “If you can only build 20 units in Columbus in a year, but an older 150-unit 202 becomes obsolete, then you're nowhere.”

In a recent interview with AFFORDABLE HOUSING FINANCE, HUD Secretary Shaun Donovan indicated that the low-income housing tax credit (LIHTC) program was an adequate stand-in for the Sec. 202 program. “Today, we produce 10 times more seniors housing ”¦ with the LIHTC than we do with the 202,” Donovan said. And the fact that tax credits are often used to rehab the properties means that the program “no longer produces something unique, because the tax credit is there.”

But Sec. 202 advocates disagree. There is one crucial difference between the two programs: namely that you don't need any income to live at a Sec. 202 property, whereas LIHTC units are targeted to area median income levels that many seniors can't afford. “The huge difference is there's no Sec. 8 contract that comes with the tax credit,” says Norris. “Somebody who only has Social Security cannot afford most tax credit units.”

And current supply can't keep up with demand. “The last stat I saw was that for every one 202 unit, there are 10 people waiting to get in,” says Nick Gesue, a senior vice president and director at Columbus-based lender Lancaster Pollard. “No other program allows you to serve such a low-income population. You can earn a dollar a year and still move into a 202 property.”

Plugging the gaps

Even at its current funding levels, the Sec. 202 program presents developers with budget shortfalls. To maximize its diminishing funds, HUD tries to spread out the Sec. 202 money among as many projects as possible, which lowers the per-unit amount of any one project. “The complaint I hear from developers is that it's impossible to build a quality product with the amount of money HUD is willing to commit,” says Gesue.

Both NCR and VOA concur. Of the seven projects that VOA hopes to start this year, six of them will need additional funds to complete the build. For NCR, about three in every four Sec. 202 developments have funding shortfalls that necessitate gap financing.

“Often, before you even put the application in, you know you don't have enough money,” says Keller.

Two popular programs for plugging the gaps are the Community Development Block Grant and HOME programs. HUD will not provide additional “amendment” funds unless a developer tries to get those funds elsewhere first. But the process of securing these funds is difficult. Developers don't know how much they'll need until after plans and specs are finished, which can take six months to a year.

And then, “if you go through HOME money or HUD amendment money, it takes a long time to get those approved,” says Norris. “So it delays the start of the construction, and quite often during that time, the construction costs can go up.”

A substantial rehabilitation of a Sec. 202 property is also difficult to pencil out. For light rehabs, owners can refinance through HUD's Sec. 223(f) program, but that may only provide $10,000 to $12,000 per unit. So, a substantial rehab needs an equity infusion, but given the state of the tax credit market, owners are having a hard time. NCR is working on a rehab that marries tax credit exchange dollars with a traditional equity investment and debt refinancing to generate $40,000 per unit.

But another substantial rehab deal in Connecticut hasn't been so lucky. A few years ago, NCR sought to marry 4 percent tax credits with a loan from the Connecticut Housing Finance Authority. “We were just getting ready to apply for our bond allocation when the markets fell apart,” says Norris. “So we're still sitting there with that one undone.”