Policy Priorities: Legislative Proposals
Drawing upon the experiences of its membership as not-for-profit owners and preservation practitioners, SAHF has developed a set of policy proposals that would facilitate the ability of not-for-profit entities to take preservation to scale and in particular to preserve properties within the HUD inventory. Detail about each policy proposal is provided below.
Congressional Update
On July 30, 2008 the Housing and Economic Recovery Act of 2008 became law. The Act makes important changes to law governing affordable housing; we're happy to provide the full text. To help understand the Act, see our summary of the Act's provisions and detailed summary of selected provisions. On sections related to the Tax Code, see the House Report on the tax provisions, and this explanation by the Joint Committee on Taxation.
Preservation Update
On June 19, 2008 SAHF was invited to testify before the House Committee on Financial Services. Read SAHF's testimony on major preservation issues, delivered by Dr. Laverne Joseph, President and CEO of Retirement Housing Foundation.
1. In the case of a preservation transaction, permit owners to replace fully funded Sec. 8 contracts with new, long-term contracts subject to annual appropriations.
Authorize owners, or purchasers at the time of acquisition, to terminate the remaining portion of 40-year project-based Sec. 8 contracts, provided that they (1) enter into new 20-year project-based Sec. 8 contracts subject to annual appropriations, (2) enter into commitments to preserve the affordability of the housing for at least 40 years, assuming continued rental assistance, and (3) receive the approval of any state or local lender that will continue to hold a loan secured by the property after the termination.
Data on Sec. 8-Assisted, State Housing Agency-Financed Properties
EXPIRING UNITS BY STATE AND FISCAL YEAR
Expiring units by state and fiscal year
Expiring units by fiscal year (compact version)
EXPIRING UNITS BY FISCAL YEAR FOR PARTICULAR STATES
Explanation
In the 1970s, HUD entered into contracts to provide 30 to 40 years of project-based assistance to nearly 173,000 affordable apartments in connection with properties on which state or local instrumentalities provided debt financing, of which approximately 150,000 remain. These contracts expire with respect to approximately 47,000 units by 2012 alone. At that point, the first mortgage debt will have been fully amortized. Although owners have the right to renew their Sec. 8 contracts at expiration, they will be equally free to convert their properties to market-rate apartments or condominiums, further depleting the supply of affordable rental housing.
If we are to preserve the affordability of these apartments, we must take affirmative steps well in advance by giving preservation-minded owners and purchasers the key tools to recapitalize properties and position them for long-term affordability. To attract lenders and equity investors, an owner or purchaser seeking to preserve the long-term affordability of the housing typically must have a Sec. 8 contract of sufficient duration to amortize most of the mortgage debt and to assure that a property will have Sec. 8 support through at least the 15-year tax credit compliance period. Typically lenders and equity investors require a 20-year contract and are willing to accept contracts that are subject to appropriations. As a result, replacing funded 30- or 40-year contracts with 20-year contracts subject to appropriations would preserve the affordability of the properties well beyond the initial term of affordability.
2. Permit access to distributions of excess cash flow and access to equity for not-for-profit housing providers.
Override HUD regulations that restrict distributions to not-for-profit parent organizations (including 24 CFR 880.205 and 24 CFR 881.205), and specifically authorize a nonprofit housing provider to place any proceeds from the sales of properties it owns into a trust fund for the use of the seller or its nonprofit parent in furtherance of its affordable housing mission. Permit the HUD Secretary the discretion to authorize sellers to retain proceeds as they exit the field of affordable housing and transfer ownership to preservation purchasers.
Explanation
Many housing not-for-profits have evolved from small, local entities to regional and national mission-driven businesses. As they have evolved, they have moved from a reliance on 100 percent financing to participation in the same programs used by other developers. In addition, there is substantial embedded equity in their properties, in large part because of their stewardship of the properties as the mortgages have amortized.
HUD's regulatory structure has failed to keep pace with the evolution of high-capacity, not-for-profit organizations and therefore constrains their ability to address the needs of their portfolios and to unlock this equity. For example, HUD regulations generally prohibit distributions of excess cash flow from single-purpose nonprofit organizations to their parent nonprofits, even in circumstances where a for-profit could distribute cash to its owners for their personal use. Similarly, when a nonprofit organization recapitalizes a property using state-allocated bonds and tax credits, it often is not permitted to use sales proceeds for affordable housing, even though a for-profit could distribute its proceeds to its investors. The net effect of these regulations is to lock up the embedded equity in these properties that could be a significant resource for housing development and preservation.
Many smaller-scale, nonprofit owners should leave the field, because the needs of their projects have outstripped their capacities. The inability of these smaller nonprofit organizations to receive some proceeds from a sale causes them instead to retain ownership. At the end of their required affordability period, these organizations will be able to sell the properties and retain any proceeds, bringing about a net loss of apartments from the affordable inventory. Instead, these smaller-scale owners should be permitted to receive some proceeds from the sale for their charitable missions, in return for selling to organizations that commit to meeting the properties' rehabilitation needs and renewing their long-term affordability.
3. Extend the period of eligibility for not-for-profit purchase incentives and clarify that HUD may not require repayment of any portion of junior M2M debt in transactions deploying such incentives.
Modify the Mark-to-Market statute to extend the period of eligibility for not-for-profit purchase incentives and to clarify that HUD may not require a repayment of any portion of junior M2M debt in cases of acquisitions by not-for-profit purchasers using purchase incentives and state or locally allocated housing resources.
Explanation
When the Mark-to-Market (M2M) program was reauthorized for five years in 2002, the program was amended to permit the HUD Secretary to assign junior M2M debt to not-for-profit purchasers or to forgive that debt entirely. These not-for-profit “purchase incentives” recognize the value of not-for-profit stewardship, the stifling effect of this otherwise burdensome debt, and fact that the incentives would enable not-for-profit purchasers to raise funds to buy out old owners and to leverage significant outside resources for rehabilitation, primarily Low Income Housing Tax Credits (assigned debt can be counted in acquisition basis). Two informal policies at HUD undermine the value of the not-for-profit purchase incentives and are addressed by this section:
HUD has limited to three years (after the initial restructuring) the period of time during which the HUD Secretary may assign or forgive M2M junior debt. In reality, sellers often require more than 3 years to decide to sell. Thus, HUD's limit undermines the utility of the incentives. According to HUD, as of February 1, 2007, 65 percent of the closed portfolio is already beyond the eligibility window, and the number will increase to 75 percent by the end of FY 2007.
In May of 2006, HUD issued a draft policy requiring not-for-profit purchasers to pay HUD a percentage of the assigned/forgiven debt, prior to its being assigned or forgiven, if the transfer in question involved seller proceeds, a developer fee, or any third-party fee. This policy directly undermines the not-for-profit purchase incentives put in place by Congress in 2002. Most nonprofit purchasers are utilizing state or local resources to effectuate the transfers. HUD's policy of requiring repayments in connection with these transfers is doubly problematic, in that it ultimately results in the absorption of these state and local resources by HUD. The proposed change prohibits HUD from requiring prepayment where state or locally allocated resources are being used to support a transfer under the M2M non-profit transfer program. The public entities overseeing the allocation of these resources will be less inclined to support committing resources to these projects if HUD is the ultimate beneficiary of a portion of that allocation.
4. Authorize preservation project-based assistance in lieu of enhanced voucher assistance.
Authorize project-based assistance in lieu of enhanced vouchers to make it possible both to protect existing tenants in a project and to preserve the affordability of units at the project where an owner or purchaser seeking to preserve affordability at the property chooses to do so.
Explanation
Enhanced vouchers are provided to protect existing tenants from displacement upon the occurrence of an “eligibility event” in a multifamily housing project — generally prepayment of the subsidized mortgage or termination of an insurance or rental assistance contract. Upon turnover, these vouchers move with the tenant, and the housing is lost as a resource for future low-income families. Project-basing the assistance will provide a financeable revenue stream for preservation-oriented owners and purchasers, without which many worthwhile projects, especially in strong markets, have been forced to exit the affordable program. The assistance would be provided at the request of the owner, subject to the approval of the PHA, and would cover all existing tenants in the project who would otherwise receive enhanced vouchers.
Preservation project-based assistance would be subject to the general rules for project-based voucher assistance, except that it would be exempt from the 25 percent cap on project-based units, it would be disregarded for the purpose of calculating the 20 percent limitation on attaching PHA funding to structures, and it would be subject to a special preservation review standard and approval process.
In addition to preserving affordable units needed in the local community, this provision may result in reduced Sec. 8 subsidy costs, because maximum rents for project-based voucher assistance (generally 110 percent of fair market rent) in strong market areas may be less than the market rent levels that would otherwise apply for enhanced voucher assistance.
5. Convert Rent Supp / RAP contracts to project-based Sec. 8.
Congress should permit owners to convert Rent Supp and RAP subsidies to project-based Sec. 8 assistance. This action would protect low-income tenants in danger of losing their homes, save valuable rental housing, and in some cases make it possible to mark rents up to market to facilitate rehabilitation. This proposal has been scored by the Congressional Budget Office as creating a $410 million savings in fiscal year 2007 and a $292 million savings in fiscal year 2008. The savings is derived from the cancellation of long-term contracts and their replacement with one-year contracts subject to annual appropriations. This proposal is retroactive with respect to elderly housing projects to October 1, 2006.
Rent Supp / RAP Data
EXPIRING UNITS BY STATE AND FISCAL YEAR
TABLE: Rent Supp/RAP-assisted units by state Description: Table that provides extensive information about each Rent Supp/RAP-assisted unit, grouped by state.
MAP: Rent Supp/RAP-assisted units by state
Sums of Rent Supp/RAP-assisted and total units by state
Sums of Rent Supp/RAP-assisted and total units by state and fiscal year of expiration
TABLES: Rent Supp/RAP-assisted units for particular states:
Explanation
There are approximately 35,000 apartments with Rental Supplement (Rent Supp) and Rental Assistance Payment (RAP) contracts. Over the next 10 years, the contracts on 21,433 of these apartments will expire. By 2029, all of the apartments will have been lost to contract expiration. These contracts exist in 35 states, but the majority of them are located in California, Illinois, Massachusetts, Michigan, New Jersey, New York, Virginia, and Washington State.
Under current law, at the expiration of a contract issued with Rent Supplement (Sec. 101 of the Housing and Urban Development Act of 1965 (12 U.S.C. Sec. 1701s)) or Rental Assistance Payments (Sec. 236(f)(2) of the National Housing Act (12 U.S.C. 1715z-1)), an owner has no right to renew the contract, and tenants are eligible for enhanced vouchers only in limited circumstances. Not only are all of the assisted apartments at risk of loss, but tenants are inadequately protected against potential rent increases. This proposal would resolve an impending bad outcome by converting the assistance to a renewable resource.
Any authority that is recaptured as a result of conversion of Rental Supplement and Rental Assistance Payments program contracts should be utilized by the Secretary for the purpose of making assistance payments with respect to the initial 12-month term of the new Sec. 8 contract, and the balance should be used to fund other preservation initiatives under this Act.
6. Preserve the affordability of older properties without project-based Sec. 8 rental assistance.
Award 15-year project-based preservation assistance, as a matter of right, to a qualified preservation owner/buyer who (1) agrees to enter into a commitment to preserve the affordability of the housing for at least 40 years, assuming continued rental assistance, and (2) receives state or locally allocated housing resources, including but not limited to low income housing tax credits, state or local funds, or tax-exemption.
Data on Maturing Mortgages
TABLE: Maturing mortgages by state | Compact version
MAP: Maturing mortgages by state
Note: Numbers in map legend refer to assisted units in properties with maturing mortgages.TABLE: High-risk properties, by state | Compact version
Note: A U.S. Government Accountability Office study published in April 2007 found that owners of properties with rental assistance on fewer than 50 percent of the units were more likely to opt out. We have therefore characterized these properties as being at "high risk."MAP: High-risk properties, by state
Note: Numbers in map legend refer to assisted units in properties with maturing mortgages.TABLE: Highest-risk properties, by state | Compact version
These are properties with maturing mortgages and no rental assistance on any units.MAP: Highest-risk properties, by state
Note: Numbers in map legend refer to total units in the properties. None of these units has rental assistance of any kind.Data on Maturing Mortgages for Particular States
Explanation
Many properties that were financed in the 1960s, 1970s, and 1980s with subsidized capital serve very–low income persons and lack any form of rental assistance. These include properties financed under the Sec. 221(d)(3) below market interest rate (BMIR) program, the Sec. 236 program, and the Sec. 202 program before the advent of Sec. 8. According to GAO, mortgages maturing before 2013 will leave the residents of more than 102,500 of these apartments without rental subsidy and the apartments themselves without use restrictions (more than 100,000 additional apartments face the same scenario after 2013). Although the residents of approximately 134,000 apartments will be eligible for vouchers, the apartments themselves will be without long-term use restrictions. Moreover, the properties are in great need of rehabilitation and modernization, requiring that they be recapitalized if they are to continue to serve as decent housing for low-income people. The recapitalization, in turn, will be dependent upon a significant increase in rental income, which will be unaffordable to current residents. HUD is without any statutory requirement to offer tenant protections at the point of mortgage maturity, meaning that residents are not entitled to any sort of voucher.
7. Permit HUD to assign Flexible Subsidy loans.
The Flexible Subsidy program provided financial assistance to several types of federally assisted housing from the late 1970s through 1996. This proposal envisions using this debt as a tool to promote the sale of properties to nonprofits and to attract state and local resources to support preservation. It does so by authorizing HUD to forgive such debt or transfer it to nonprofits in connection with a transfer of the property to a nonprofit, just as the HUD Secretary is authorize to forgive or assign subordinate mark-to-market debt. This proposal also prohibits HUD from requiring any repayment in connection with that forgiveness or assignment if the purchaser is utilizing any state or locally allocated resources in connection with the transfer.
Explanation
The Flexible Subsidy Program was created in Sec. 201 of the Housing and Community Development Amendments of 1978, and, until its discontinuance in 1996, provided financial assistance to prevent financial and regulatory defaults (and foreclosures that would have resulted in claims on the FHA mortgage insurance funds) to certain HUD-assisted properties. The loans evidencing this assistance are in many cases impeding the ability of projects to be sold to preservation-minded owners and/or recapitalized and rehabilitated.
In order for a project to be eligible for a Flexible Subsidy loan, HUD was required to determine, among other things, that the assistance was necessary to maintain the financial or physical soundness of the project and that the assistance was less costly to the government than other available measures. As a result, most projects receiving Flexible Subsidy assistance are located in economically challenged neighborhoods, and the existence of Flexible Subsidy debt is often an impediment to employing typically available recapitalization strategies. By making the debt forgivable and/or assignable in connection with nonprofit transfers, Congress will encourage state and local governments to allocate their resources to help preserve and protect these properties for the long term.
8. Extend permanently HUD's authority to approve transfers of project-based rental assistance as a means of preserving affordability for the nation's lowest-income renters.
In instances in which preservation owners wish to transfer project-based rental assistance from one property to another in order to preserve the physical or financial viability of the transferring property; to create affordable housing opportunities in areas served by employment, educational, or similar amenities; or to deconcentrate poverty, the HUD Secretary should be authorized to permit the transfer of such assistance. This authority should be permanent.
Explanation
Sec. 318 of the FY 2006 TTHUD Appropriations Act (Public Law 109-115) provided authority to transfer project-based Sec. 8 if HUD finds that the transfer meets 10 conditions. These 10 conditions and narrow administrative interpretations stemmed from a concern over possible misuse of transfer authority to allow developers to sell buildings in prime locations and transfer the Sec. 8 authority to poor locations. For example, Sec. 318 requires that the transferring property be physically obsolete or economically nonviable. In some conditions, a property that does not quite meet these conditions may still be in a socially distressed area in which using new resources for rehabilitation at the same scale in the same location would be unwise. Another provision contains mandates regarding subordination of new debt to transferred debt that are unworkable in most situations. Moreover, HUD interprets Sec. 318 to require the transfer of all Sec. 8 units or none, clearly not the best public policy result where a reconfiguration of efficiencies results in a unit reduction, and only half or fewer of the units need be transferred to another site. As a result, the transfer authority has been used only once.
Preservation would be better served if the ability to transfer project-based rental assistance were made flexible in support of the following goals:
Reconfiguring the unit mix. Much of the assisted housing (particularly the senior housing) built decades ago included a significant number of efficiency apartments. In many areas, especially outside the hottest urban markets, those efficiencies are unmarketable, resulting in persistent vacancies. Obsolescence in a few units can put whole developments in jeopardy. To prevent a net loss of project-based rental assistance, the HUD Secretary should be authorized to permit the partial transfer of such assistance from properties undergoing a unit reconfiguration to properties that have unassisted apartments.
Creating mixed-income communities. Many of the early siting decisions for assisted housing led to the geographic concentration of poor families. Most of these older assisted properties now require significant rehabilitation. While simply rehabilitating the properties would perpetuate the concentration of poverty, permitting the owners instead to transfer project-based rental assistance to other properties would enable them to provide housing for poor families in areas better served by employment, educational, and other opportunities. This same practice has been employed successfully under the Moving to Work program with regard to (project-based) public housing assistance.
Specifically permitting partial transfers. Because the language enacting Sec. 318 makes reference to “projects,” HUD insists that all units must be transferred from a “transferring” project. In the two instances described above, preservation would be better served if Congress clarified that HUD may permit the partial transfer of units from a project. Further, Congress should clarify that transferred units may be dispersed among various receiving projects. Preservation-minded owners might use this authority, for example, to acquire or recapitalize properties in which not all units are covered by contracts for project-based assistance.