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Section 202

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SUMMARY OF SECTION 202 PREPAYMENT ISSUES Richard T. Washington VP, Business Development * ... – PowerPoint PPT presentation

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Title: Section 202


1
Section 202 part 1
  • SUMMARY OF SECTION 202 PREPAYMENT ISSUES

Richard T. Washington VP, Business Development
2
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.

3
Pre and Post 1990 Program
  • 1977 to 1990 Section 202 projects were funded
    with 40 year direct HUD loans, and subsidized
    with project-based Section 8 HAP contracts.
  • 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

4
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

5
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.

6
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.

7
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.

8
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.

9
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).

10
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
11
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.

12
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.

13
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.

14
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.

15
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.

16
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.

17
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.

18
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.

19
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.

20
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.

21
CONVERSION OF EFFICIENTS INTO One-bedroom units
  • On February 1, 2008, Acting Deputy Assistant
    Secretary for Multifamily Housing Programs, John
    L. Garvin, issued HUDs 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.

22
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

23
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.

24
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 HUDs Section 8
    rent-setting policy and is at odds with MAHRA.

25
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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