Congress has allocated the first few million dollars for what advocates hope will become a massive new program to refinance aging rural housing projects.
In a few years from this modest beginning, the U.S. Department of Agriculture’s Rural Development (RD) housing programs plan to be recapitalizing as many as 1,000 properties a year. “There’s going to have to be money put into this portfolio in a significant way,” said RD administrator Russell T. Davis.
In November, President George W. Bush signed the first parts of this program into law as part of the fiscal year 2006 budget, giving RD $9 million to restructure the existing mortgages on aging Sec. 515 properties so that the properties can support new financing. This is in addition to $3 million that RD will have available to give to nonprofit intermediaries to make low-interest, 30-year loans to Sec. 515 project owners.
“Obviously that’s not a lot of money,” said Gideon Anders, executive director of the National Housing Law Project, “but it lays the foundation.”
The Sec. 515 program is the main housing program run by RD. There are now 17,000 properties in the Sec. 515 program with a total of about 450,000 units, and about two-thirds of those are more than 20 years old. “The overwhelming majority have rehab needs or will have rehab needs,” Davis said.
RD is adamant that the loan-restructuring program be voluntary for the owners of Sec. 515 properties. RD will lure these owners to their program with a mix of subsidies from RD and other agencies, including debt deferment, debt forgiveness, new low-interest debt, capital advances and low-income housing tax credits. In return, the owners will agree to extend the affordability restrictions on their projects for another 20 years.
“Because there are a lot of moving parts, there are going to be a lot of possible structures,” Davis said. “There is no one formula that we are going to push.” One of these structures will include recapitalizing whole portfolios of Sec. 515 properties at a time, though single properties will also be encouraged to recapitalize, he added.
The RD program may also use some of the structures developed under the Mark-to-Market program to recapitalize older project-based Sec. 8 housing originally built by the Department of Housing and Urban Development (HUD). “We don’t want to reinvent the wheel,” Davis said.
However, some preservation tools that work well on larger HUD properties, such as low-interest tax-exempt bond debt, with its high closing costs, will probably not work well with smaller Sec. 515 deals, which average fewer than 25 units.
More than 45,000 units
may leave the program
But RD doesn’t intend to preserve all of the Sec. 515 apartments in its portfolio. Some housing advocates are particularly upset about the 10% of the Sec. 515 inventory that is located in markets that have become very expensive as suburban sprawl has reached out to surround the projects.
The owners of the housing may be tired of managing properties with growing maintenance needs on a fixed operating income. They may also have exit-tax liability that they would have to repay if they sold a property. The rising values of their properties tempt these owners to prepay their mortgages and leave the program.
For now, Sec. 515 properties financed before 1979 are not allowed to prepay, thanks to a law passed by Congress called the Emergency Low-Income Housing Preservation Act (ELIHPA). But a few owners feel that ELIHPA is illegal. They have sued RD for damages, and they have won in some cases.
To protect itself from more lawsuits and an uncertain amount of damages and lawyers fees, RD has proposed removing the ELIHPA restriction, which would let these properties, totaling more than 45,000 units, leave the program.
Some advocates think that RD should not give up on these properties, especially now that the apartments have become islands of affordability in increasingly expensive suburban areas. “We shouldn’t throw up our hands,” said Moises Loza, executive director of the Housing Assistance Council.
But to lure these owners into its voluntary program, RD would have to offer very attractive terms. The agency thinks that it would be much more cost-effective to protect the tenants by providing them with rental subsidy than it would be to preserve the projects. “In certain markets the cost has gone beyond what the federal government’s share can be,” Davis said. If these project are going to be preserved, “there is a need for local input and resources,” he said.
The tenants at projects that prepay would receive a rental subsidy similar to an enhanced Sec. 8 voucher. These vouchers would be portable, though the amount of rental subsidy would be based on comparable units nearby. Congress has already allocated $16 million for the RD vouchers.
Unfortunately, the vouchers “will not meet demand if Congress lifts the prepayment restriction,” according to Anders. He also points out that RD’s proposal for vouchers does not give tenants the right to remain at their properties.
Another 6% to 8% of the 450,000-unit Sec. 515 inventory has physical problems so severe that they may prove to be too expensive to fix, either because the structures were poorly built to begin with or because they have been badly managed, or both.
The tenants at Sec. 515 projects are especially vulnerable. Their average income is only about $9,075; 90% of tenants earn less than 50% of the area median income, and 58% are elderly or disabled.n
The new program planned by the U.S. Department of Agriculture’s Rural Development housing programs will eventually recapitalize as many as 1,000 Sec. 515 properties a year, such as Nevada City Senior Apartments.