Transcript – PART 1 SECTION 202 SUMMARY OF SECTION 202 PREPAYMENT ISSUES

SECTION 202 – PART 1
SUMMARY OF SECTION 202 PREPAYMENT ISSUES
Richard T. Washington
VP, Business Development
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SECTION 202
 Passed as part of Housing Act of 1959.
 Federal government's principal program for production
of affordable elderly multifamily housing since 1959.
 The physical condition of many of these projects has
deteriorated over time and they are in need of
recapitalization to replace/repair systems, units,
building structures, common areas, etc. Also,
additional supportive services are needed to meet
changing needs of an aging in place population.
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PRE AND POST 1990 PROGRAM
 1977 to 1990 – Section 202 projects were funded with 40
year direct HUD loans, and subsidized with projectbased Section 8 HAP contracts.
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Loans made at then-prevailing interest rates (often 10% or higher)
Restricted to non-profit ownership
HUD approved budget-based rents
No owner distribution allowed
Allocation of funding authority to each State
HUD approval required for prepayment of many 202 loans
 1990 to Present.
- Since 1990 the program has provided a capital advance combined
with rental subsidy under a multi-year Project Rental Assistance
Contract ("PRAC")
- Awards of 202 capital advance now made annually through NOFA
process
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AGING 202 PORTFOLIO – CONGRESSIONAL
RESPONSE
 Congress passed legislation in 2000 to address aging
202 portfolio greatly in need of rehab.
- Goal was to allow for refinancing with or without FHA insurance, and
use of tax exempt bonds, low income housing tax credits, etc. to
rehab and stabilize properties.
- Statute allowed for-profit limited partnerships to participate so long
as sole GP is a qualifying nonprofit or a corporation wholly
owned/controlled by qualifying nonprofit
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HUD HOUSING NOTICE 2002-16, AS REVISED BY
HOUSING NOTICE 2004-21
 Establish procedures for prepayment of direct HUD 202
loans.
 202/Section 8 projects restructured pursuant to the
Notices retain their exemption from Mark-to-Market after
prepayment. Rents may be initially renewed at lesser of
budget-based rent or current rents adjusted by OCAF
(future adjustments generally based on OCAF).
 Address two types of prepayment scenarios:
- 202 loans that do not require HUD approval for prepayment
(generally applies to loans made 1977 through 1982) and may be
prepaid on 30 days notice to HUD.
- 202 loans that require HUD approval for prepayment.
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HUD HOUSING NOTICE 2002-16, AS REVISED BY
HOUSING NOTICE 2004-21
 Principal purpose of Notices was to address those
loans that require HUD approval for prepayment.
Requirements for prepayment include the following:
- At least 30 days prior to the proposed prepayment date, the 202
owner must issue a letter to all tenants informing them of its intention
to prepay. The notice must describe to the tenants why prepayment
is advantageous to them. In addition, the owner must submit to HUD
a detailed plan explaining such benefits.
- The owner must agree to execute a Use Agreement that requires,
among other things, (1) the project to be operated until the maturity
date of the original Section 202 Loan in a manner that will provide
rental housing for the elderly and persons with disabilities on terms
at least as advantageous to existing and future tenants as the terms
required by the original loan, and (2) the project to accept Section 8
subsidy for the life of the Use Agreement.
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HUD HOUSING NOTICE 2002-16, AS REVISED BY
HOUSING NOTICE 2004-21
 Permitted Use of Existing Project Residual
Receipts/Replacement Reserves
- Amounts in excess of $500 per unit held in Residual Receipts
Account may be used to pay portion of supportive tenant services.
- Amounts in excess of $1K per unit held in Replacement Reserve
Account may be used for rehabilitation, modernization or retrofitting
of project.
 Permitted Distributions
- Maximum annual distribution is 6% of owner's equity (including
LIHTC equity) paid at refinancing of project.
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HUD HOUSING NOTICE 2002-16, AS REVISED BY
HOUSING NOTICE 2004-21
 Section 8 Savings
- If Section 8 savings are realized from the refinancing, up to 50% of
such savings may be used for the benefit of the tenants (e.g., pay
a portion of increased cost for supportive services; rehabilitation,
modernization or retrofitting of project).
 Development Fees for LIHTC Projects
- Permits development fees at the lesser of (1) 15% of approved
development cost, and (2) the maximum fee allowed by applicable
State's QAP.
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HUD HOUSING NOTICE 2002-16, AS REVISED BY
HOUSING NOTICE 2004-21
 Equity Take-Out
- Mortgagor not permitted equity take-out. However, potential equity
take-out in purchase transaction (seller limited to equity take out
based on lesser of purchase price or unassisted market value of
property).
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SECTION 202 – PART 2
A. TRANSFER OF HUD SECTION 8 HAP CONTRACTS
B. CONVERSION OF EFFICIENCIES INTO ONE-BEDROOM UNITS
Richard T. Washington
VP, Business Development
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TRANSFER OF HUD SECTION 8 HAP
CONTRACTS
Section 213 as enacted in the Transportation, Housing and Urban
Development and Related Agencies Appropriations Act, 2009 authorizes
owners to transfer some or all project-based assistance, debt and
statutorily required low- and very low-income use restrictions, with one or
more multifamily housing project to another multifamily housing
project(s). While this provision has been in place for four years now, HUD
has authorized only a handful of projects to transfer some or all of the
Section 8 authority.
Section 213 creates an opportunity for developers to deconcentrate
poverty in high-density buildings through the transfer of some or all of its
Section 8 authority. Further, where a building has deteriorated beyond
compare and/or the surrounding location has become economically
nonviable, as in the case of parts of post-Katrina New Orleans, Section
213 provides an opportunity to save the Section 8 subsidy through a
transfer rather than losing the subsidy outright. Preserving the Section 8
is a valuable national asset that should be a priority of all affordable
housing owners, developers and policy makers.
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TRANSFER OF HUD SECTION 8 HAP
CONTRACTS
However, in some circumstances it is no longer cost-effective to preserve
the physical structure where a building is in vast disrepair or obsolete in
design. In these rare instances, it is important that an affordable housing
developer have the flexibility to transfer the Section 8 project-based
subsidy in order to provide high-quality, stable affordable housing for the
residents, de-concentrate poverty, and in the long-term preserve the
Section 8 subsidy that would otherwise be lost if a transfer were not
approved.
Yet as drafted, the ten conditions which must all be met in order for HUD
to authorize a Section 213 transfer remain overly restrictive and have
proven to be prohibitive.
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THE 10 CONDITIONS FOR HUD TO AUTHORIZE
A SECTION 213 TRANSFER
 (b)(1)
The number of low-income and very low-income units
and the net dollar amount of Federal assistance provided by the
transferring project shall remain the same in the receiving project or
projects.
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THE 10 CONDITIONS FOR HUD TO AUTHORIZE
A SECTION 213 TRANSFER
 (b)(2)
The transferring project shall, as determined by the
Secretary, be either physically obsolete or economically non-viable.
The transferring project (i) shall be either physically obsolete or
economically non-viable or in a case involving a partial transfer of
project-based assistance, shall require reconfiguration of units
because the units to be reconfigured are physically obsolete or
economically non-viable, all as determined by the Secretary or (ii)
shall in its present configuration represent an over-concentration of
poverty and social problems that could be ameliorated by a reduction
in density, all as determined by the Secretary, provided that any
transfer pursuant to determination under this subsection (b)(2)(ii) shall
be a partial transfer and that any receiving project shall, as determined
by the Secretary be of such character and in such location(s) as are
likely, in the determination of the Secretary, to improve the lives of the
tenants.
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THE 10 CONDITIONS FOR HUD TO AUTHORIZE
A SECTION 213 TRANSFER
 (b)(3)
The receiving project or projects shall meet or exceed
applicable physical standards established by the Secretary.
 (b)(4)
The owner or mortgagor of the transferring project shall
notify and consult with the tenants residing in the transferring project
and provide a certification of approval by all appropriate local
governmental officials.
 (b)(5)
The tenants of the transferring project who remain
eligible for assistance to be provided by the receiving project or
projects shall not be required to vacate their units in the transferring
project or projects until new units in the receiving project are available
for occupancy.
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THE 10 CONDITIONS FOR HUD TO AUTHORIZE
A SECTION 213 TRANSFER
 (b)(6)
The Secretary determines that this transfer is in the best
interest of the tenants.
 (b)(7)
If either the transferring project or the receiving project or
projects meets the condition specified in subsection (c)(2)(A), an lien
on the receiving project resulting from additional financing obtained by
the owner shall be subordinate to any FHA-insured mortgage lien
transferred to, or place on, such project by the Secretary, provided,
however, that the Secretary may waive this requirement upon
determination that such waiver is necessary to facilitate the financing
of acquisition, construction or rehabilitation of the receiving project.
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THE 10 CONDITIONS FOR HUD TO AUTHORIZE
A SECTION 213 TRANSFER
 (b)(6)
The Secretary determines that this transfer is in the best
interest of the tenants.
 (b)(7)
If either the transferring project or the receiving project or
projects meets the condition specified in subsection (c)(2)(A), an lien
on the receiving project resulting from additional financing obtained by
the owner shall be subordinate to any FHA-insured mortgage lien
transferred to, or place on, such project by the Secretary, provided,
however, that the Secretary may waive this requirement upon
determination that such waiver is necessary to facilitate the financing
of acquisition, construction or rehabilitation of the receiving project.
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THE 10 CONDITIONS FOR HUD TO AUTHORIZE
A SECTION 213 TRANSFER
 (b)(8)
If the transferring project meets the requirements of
subsection (c)(2)(E), the owner or mortgagor of the receiving project or
projects shall execute and record either a continuation of the existing
use agreement of a new use agreement for the project where, in either
case, any use restrictions in such agreement are of no lesser duration
than the existing use restrictions.
 (b)(9)
Any financial risk to the FHA General and Special Risk
Insurance Fund, as determined by the Secretary, would be reduced as
a result of a transfer completed under this section.
 (b)(10)
The Secretary determines that Federal liability with
regard to this project will not be increase.
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THE 10 CONDITIONS FOR HUD TO AUTHORIZE
A SECTION 213 TRANSFER
 Issues:
- Many owners/sponsors have encountered overly stringent HUD
interpretations of “physically obsolete” and “economically
nonviable” which have made their attempts to transfer some or all
of the section 8 assistance to other properties very difficult, if not
prohibitive.
- Provision should be made to warrant temporary relocation of the
tenants in the case of a partial transfer where rehabilitation of the
dwelling units in the transferred building cannot be done without
temporarily relocating tenants.
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THE 10 CONDITIONS FOR HUD TO AUTHORIZE
A SECTION 213 TRANSFER
 Issues (Continued):
- It is not altogether clear whether the Secretary must transfer the
debt, and if so, that could unnecessarily complicate a new
financing. No superior debt to the transferred HUD debt has often
been a ‘deal killer’ for those working to transfer Section 8
assistance to other properties. HUD should revise this language to
state: If either the transferring project or the receiving project or
projects meets the condition specified in subsection (c)(2)(A), any
lien on the receiving project resulting from additional financing
obtained by the owner shall be subordinate to any FHA-insured
mortgage lien transferred to, or placed on, such project by the
Secretary, provided, however, that the Secretary may waive this
requirement upon determination that such waiver is necessary to
facilitate the financing of acquisition, construction or rehabilitation
of the receiving project.
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CONVERSION OF EFFICIENTS INTO
ONE-BEDROOM UNITS
On February 1, 2008, Acting Deputy Assistant Secretary for Multifamily
Housing Programs, John L. Garvin, issued HUD’s “Policy and Procedures
on the Conversion of Efficiencies into One-Bedroom Units” in a
memorandum to all multifamily hub directors and their staff.
The policy outlined in this long-awaited memorandum (the “Memo”)
applies to many properties seeking to complete preservation
transactions, but are not feasible because they need to convert efficiency
units into one-bedroom units, including Sections 202, 811, 236 (insured
and non-insured), and 221(d)(3) properties, to name a few. The Memo
also applies to properties with project-based Section 8 HAP contracts,
with or without an accompanying FHA-insured mortgage loan.
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CONVERSION OF EFFICIENTS INTO
ONE-BEDROOM UNITS
The new policy outlines seven programmatic requirements that any
application to convert efficiencies into one-bedroom units must satisfy.
Among the criteria are the requirements that:
(i)
the average vacancy in the efficiency units be at least 25% for at
least 24 months of the preceding 36-month period;
(ii) on completion of the unit conversion, the project debt service
coverage ratio must be 1.1 or greater;
(iii) the proposed conversion must only involve units of the same
subsidy type;
(iv) the proposal must not result in an increase in the amount of existing
budget authority available to the subject property;
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CONVERSION OF EFFICIENTS INTO
ONE-BEDROOM UNITS
(v)
the owner must be in compliance with all business agreements
with HUD, and in the event of non-compliance the owner believes
it will be cured through a conversion describing how and when
compliance will be achieved. The Hub must concur that this will
be the case;
(vi) a market study must be submitted to prove that efficiencies are
not in demand in the market area and the converted units will be
in demand; and
(vii) the proposed conversion must not result in any violation of Section
59444 of the Rehabilitation Act of 1973 or HUD's implementing
regulations at 24 CFR Part 8 and 24 CFR Section 8.23.
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CONVERSION OF EFFICIENTS INTO
ONE-BEDROOM UNITS
The new policy outlines additional program-specific requirements whose
applicability depends on the type of subsidy available at the subject
property. For example, in the case of a property with a project-based
Section 8 HAP contract, post conversion rents must be established at the
lesser of (i) the current one-bedroom rent or (ii) the combined unit rents of
the two converted efficiency units. Future rent setting pursuant to MAHRA
may be based on the new unit size. In addition, the Memo states that if
Low-Income Housing Tax Credits (LIHTCs) are used in the proposed
financing, the rents may not exceed the lesser of LIHTC rents or
comparable market rents. This Section 8 rent cap marks a dramatic
change in HUD’s Section 8 rent-setting policy and is at odds with
MAHRA.
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CONVERSION OF EFFICIENTS INTO
ONE-BEDROOM UNITS
Section 236 properties are also singled out for special treatment under
this new policy. The Memo requires that in the case of a Section 236
property that receives interest reduction payment (IRP) subsidy, the IRP
must be reduced in a manner proportional to the reduction in units, but
the reduction does not take into account unit size, which will have an
adverse impact on properties with larger-sized units. The Memo notes
that whether the IRP must be reduced depends on the requirements in
the original Section 236 mortgage.
Finally, the new policy requires that owners submit a conversion request
application, in accordance with the requirements set forth in the Memo,
including evidence of a notice, a comment period provided to residents, a
sources and uses statement, and evidence of local government support.
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