lis 217 stemming the tide - LISC

LOCAL INITIATIVES SUPPORT CORPORATIONSTEMMING THE TIDE:A Handbook on PreservingSubsidized Multifamily Housing

LOCAL INITIATIVES SUPPORT CORPORATIONLocal Initiatives Support Corporation (LISC) is dedicatedto helping nonprofit community development corporations(CDCs) transform distressed neighborhoodsinto healthy communities of choice and opportunity –good places to work, do business, and raise children.LISC mobilizes corporate, government, and philanthropicsupport to provide CDCs with:■ loans, grants, and equity investments.■ technical and management assistance.■ local, statewide, and national policy support.LISC is a national organization with a community focus.Our program staff are based in every city and many ofthe rural areas where LISC-supported community developmenttakes shape. In collaboration with CDCs, LISCstaff help identify local priorities and challenges, deliveringthe most appropriate support to meet localneeds.Since 1980, LISC has marshaled more than $5.7 billionfrom 3,100 investors, lenders, and donors. In over 300urban and rural communities nationwide, LISC hashelped 2,400 CDCs build or rehabilitate more than147,000 affordable homes and almost 22 million squarefeet of retail, community, and educational space – totalingalmost $13 billion in development. As a result,hundreds of thousands of people have better lives andbrighter futures.Visit www.lisc.org for more informationabout LISC, and www.lisc.org/preservation for moreinformation about LISC’s Affordable HousingPreservation Initiative.

STEMMING THE TIDEA Handbook on PreservingMultifamily Subsidized HousingPrepared byEmily P. AchtenbergEdited byNeil Carlson and Vincent F. O’DonnellPublished by the Knowledge Sharing Initiativeof Local Initiatives Support CorporationSeptember 2002This publication and related resources areavailable at: www.lisc.org/resources.Cover Photo: Interfaith Apartments, Boston, a joint venture ofthe Madison Park Development Corporation and Haley House.Photo used by permission of Mostue & Associates Architects,Somerville, Massachusetts.

ACKNOWLEDGEMENTSThe principle author of this guidebook is EmilyAchtenberg, Housing Policy and DevelopmentConsultant, Boston, Massachusetts.Ann Norton, President of Housing PreservationProject, a public interest law firm in St. Paul,Minnesota, provided a portion of the content forChapter 3.Vincent F. O’Donnell, who directs LISC’s HousingPreservation Initiative, served as advisor to the writer.The work that provided the basis for this publicationwas supported by funding from the US Department ofHousing and Urban Development, the Fannie MaeFoundation and the National Community DevelopmentInitiative. The substance and findings of this work arededicated to the public. The authors and publisher aresolely responsible for the accuracy of the statementsand interpretations contained in this publication.Such interpretations do not necessarily reflect theviews of the government, the Fannie Mae Foundationor the NCDI funders.LISC wishes to thank the Fannie Mae Foundation forits generous support of the LISC Affordable HousingPreservation Initiative.

CONTENTSIntroductioniChapter One 1Subsidized Housing Preservation:An Historical PerspectiveChapter Two 8Federal Preservation ToolsChapter Three 22State and Local PreservationTools and StrategiesChapter Four 32Researching the Property:Towards a Housing Preservation StrategyExhibits 49Affordable Housing 62Preservation GlossaryEndnotes 66

introductionOver the past decade, at least 100,000 units ofprivately owned, federally subsidized housinghave vanished from the nation’s housing inventory.These losses have occurred not only instrong coastal markets like California andMassachusetts, but nearly everywhere—inalmost every state, in small towns, in ruralareas, and in big cities. In many parts of thecountry, a strong real estate market has placedthousands of additional affordable units at riskas owners consider converting to market ratehousing or non-housing use. In weaker markets,subsidized housing is threatened by disinvestment,default, and foreclosure.Community-based nonprofit developmentorganizations often lead the fight to preservesubsidized affordable housing. Most community-basednonprofits have a social mission thatincludes protecting existing low- and moderateincometenants from displacement. In manycommunities, federally subsidized projects arethe sole remaining source of economic diversity—theonly affordable housing left in the townor neighborhood for low-wage workers andmunicipal employees, single parents with children,elderly tenants, and minority households.As building costs rise and the federal governmentretreats from new housing production,existing units, once lost, will never be replaced.Housing preservation represents both a developmentopportunity and a significant challengefor community-based and other nonprofits.While a preservation transaction may offer thechance to move to scale quickly with a high visibilityproject that has significant neighborhoodimpact, as this handbook details, these dealscan be particularly intricate and involved.Community-based developers experienced onlywith small neighborhood revitalization projectswill require specialized expertise to ensure asuccessful transaction that is sustainable and agood investment. The key is to match missionand capacity, and intermediaries such as LISCcan assist with these issues when needed.Projects that are at special risk, those that arelocated in a nonprofit’s target area, or thosethat serve a nonprofit’s constituency group mayhave special appeal. This handbook is intendedas a guide to help community-based and othernonprofit development corporations createpreservation strategies for federally subsidizedhousing projects in their communities. Thishandbook focuses specifically on HUD-assistedmultifamily housing. However, much of thematerial in the chapters on strategies and propertyresearch will also be applicable to housingdeveloped under the U.S. Department ofAgriculture's Rural Development programs.1Chapter One traces the history of key federalhousing subsidy programs and provides anoverview of the subsidized housing preservationproblem. It addresses the two majorthreats to preservation: expiring use restrictions(or subsidized mortgage prepayments)and expiring subsidy contracts (Section 8housing).Chapter Two outlines the tools that are currentlyavailable to preservation advocatesunder federal laws and programs.Chapter Three explores preservation tools andstrategies developed by advocates and practitionersat the state and local level.Chapter Four explains how to research propertiesin order to build the foundation for apreservation strategy.iintroduction

chapter oneSubsidized Housing Preservation: An Historical Perspective 1This chapter provides community developmentpractitioners with the historical backgroundnecessary to understand the nature and scopeof the subsidized housing preservation problem.It reviews the origins of key federal subsidyprograms, outlines the evolution of federallaws and regulations affecting preservation, andhighlights recent policies that influence housingpreservation strategies. It focuses on twoaspects of the preservation problem:1. Expiring use restrictions—prepaymentof mortgages subsidized under theSection 221(d)(3) and Section 236 programs.These programs offer reducedmortgage payments in exchange forlong-term affordability.2. Expiring subsidy contracts in Section 8housing. This program provides deeprental subsidies to enable projects toserve very low income tenants.The historical discussion in this chapter showsa dramatically changing federal role in subsidizedhousing preservation, from an aggressiveposture in the early 1990s to a significantlyreduced level of activity today. As the federalgovernment has retreated from housing preservation,advocates are struggling to preserve atrisksubsidized housing at anywhere near thelevels achieved five years ago, especially instrong market areas.Recently developed federal preservation toolsare playing a significant, if diminished, role inhousing preservation. The challenge for today ishow to use these new tools, however limited, incombination with local and state resources tofacilitate preservation sales and other transactionsthat preserve long-term affordability.1. EXPIRING USE RESTRICTIONS—SUBSIDIZED MORTGAGE PREPAYMENTUNDER THE SECTION 221(d)(3) ANDSECTION 236 PROGRAMS1960s and 1970s: Origins of the ProblemThe problem of expiring use restrictions is thelegacy of the federal government's first attemptto stimulate private sector production of lowandmoderate-income housing under Section221(d)(3) and Section 236 of the NationalHousing Act. Conceived in the Kennedy andJohnson eras, these programs created mortgagesubsidies for private low- and moderate-incomehousing construction.Under the Section 221(d)(3) program, the federalgovernment offered below-market interestrate (BMIR) direct loans at three percent. ForSection 236 projects, the government providedlenders with a monthly interest reduction payment(IRP) subsidy, which effectively reducedthe interest rate to one percent. The "basicrent" payable by tenants was set at the amountrequired to cover project operating expensesand mortgage debt service at one percent. Thedifference between the actual debt service—at,say, seven percent—and the tenants’ one percentpayment was covered by the monthly IRPsubsidy paid directly to the lender. This newapproach enabled private lenders, as well asprivate owners, to participate in the programand spread the federal government's financialobligation over a 40-year term.In addition to mortgage subsidies, the federalgovernment also provided Federal HousingAdministration (FHA) mortgage insurance, aguarantee to lenders that the federal governmentwould pay the outstanding loan in theevent of default. Owners also received substantialtax incentives in the form of accelerateddepreciation and mortgage interest deductionsthat could be used to offset their income tax liabilities.Owner and lender risk in most of theseprojects was negligible to non-existent.chapter one: Subsidized Housing Preservation: An Historical Perspective1

In exchange for mortgage subsidies, tax breaks,and limited risk, developers were required torestrict occupancy to low- and moderate-incomehouseholds at controlled, budget-based rents,which included a limited dividend for the owner.As an added incentive, while the subsidizedmortgages were typically written for a 40-yearterm, in most cases owners were permitted toprepay the note, terminate the low- and moderate-incomeuse restrictions, and convert theproperty to its highest and best use after just20 years. In the late 1960s and early 1970s,these incentives induced the construction ofsome 560,000 units of prepayment-eligiblehousing with so-called "expiring use restrictions."2A quarter-century later, as housing marketsheated up, owners began to realize that, byinvoking their right to prepay and convert theirproperties to market-rate housing, they couldachieve substantial equity gains. For example, ifa typical project cost $20,000 per unit to build,20 years later it might have an outstandingmortgage debt of $15,000 and a market valueof $40,000, leaving the owner with a residualequity value of $25,000.At the same time, with depleted depreciationand mortgage interest deductions no longer offsettingtaxable income, the typical prepaymenteligibleproject had also become a tax liabilityfor its owner. As mortgage principal payments—which constitute taxable income—increased,many owners found themselves paying taxes inexcess of actual cash received from the allowablelimited dividend. This so-called "phantomincome" problem created an additional incentiveto prepay, refinance, and convert the propertiesto market-rate housing.The first wave of prepayments galvanized tenantsand housing advocates across the countryand sparked a heated national debate over thefuture of privately owned, subsidized housingwith expiring use restrictions. Owners assertedtheir contractual rights to prepay and opposedany federal restrictions as an unconstitutionaltaking of private property. Preservation advocatesargued that the original social purpose ofthe housing should take precedence over theowners’ windfall profits, which were never anticipatedin the first place.1980s: Housing PreservationPrograms—ELIHPA and LIHPRHAThe debate over expiring use restrictions led totwo new federal preservation programs: theLow Income Housing Preservation Act of 1987(ELIHPA) and the Low Income HousingPreservation and Resident Homeownership Actof 1990 (LIHPRHA). These statutes effectivelyprohibited subsidized mortgage prepaymentsbut gave owners fair-market-value incentives tokeep the housing affordable for another 20 to50 years, at the federal government's expense.Initially, HUD provided additional mortgageinsurance and project-based Section 8 subsidiesto support financing for the owners’ equitytakeout ($25,000 in the single-unit exampleabove). Owners could either retain ownership orsell to priority purchasers—tenants, nonprofits,or state or local government agencies whowould agree to the same use restrictions. Inlater stages, advocates and nonprofits shiftedthe programs’ focus almost exclusively to prioritypurchaser sales through direct capitalgrants—a highly successful and cost-effectiveapproach to preservation.In total, approximately 100,000 units were preservedunder these programs, including 33,000units that were transferred primarily to nonprofitswith an average capital grant of $36,000 perunit.1990s: Restoration of Prepayment RightsIn 1996, Congress restored owners' prepaymentrights and terminated all federal preservationfunding. (While the preservation programsremain on the books even today, they are nolonger operational.) The goal of federal policyshifted dramatically from preserving the housingto protecting existing residents from displacement.2A new statutory notice provision, the WellstoneNotice, required owners to inform tenants,HUD, and the CEO of state or local governmentnot less than 150 days, but not more than 270days, prior to mortgage prepayment. Sales topriority purchasers were exempt, as were prechapterone: Subsidized Housing Preservation: An Historical Perspective

payments where the project would continue tooperate under the same terms and conditionsfor at least the original mortgage term.Meanwhile, Enhanced Vouchers became thecornerstone of the new federal preservationpolicy. Enhanced Vouchers were provided to eligiblelow-income tenants—and in some casesto moderate-income tenants—at the point ofprepayment. 3 Unlike regular vouchers, whichare limited by the public housing authority’spayment standard, Enhanced Vouchers are providedat the comparable market rent (as determinedby the public housing authority) if thetenant chooses to stay in the housing.Over the past few years, the tenant protectionfeatures of this program have improved considerably.Originally, the market rent was guaranteedfor just for one year, but now rents areadjusted to market annually. This has the effectof increasing owner acceptance and protectstenants from future rent increases. Additionally,tenants have a right to remain in the housing,unless the approved rent is not acceptable tothe owner or the housing is converted to nonrentaluse. On the other hand, EnhancedVouchers are subject to annual appropriations,and they do not preserve subsidized housing.Once the original voucher recipients move, theunits are permanently lost from the affordablehousing stock.Based on the most recent data, approximately60,000 units in 580 projects have been lostthrough mortgage prepayment since the demiseof the federal preservation programs. The averagerent increase is 57 percent. 4Recent Federal InitiativesIn the past couple of years, some modest newfederal tools are helping to create a preservationalternative at least for a portion of theexpiring use housing stock. 5 IRP Decouplingallows owners and purchasers of Section 236projects to secure new or additional rehab oracquisition financing for their projects whileretaining the IRP subsidy contract, thus helpingto keep rents affordable and extending theSection 236 use restrictions. The IRP RehabGrants program authorizes HUD to pool IRPsubsidies that are recaptured when Section 236mortgages are prepaid, foreclosed, or otherwiseterminated, and to recycle them in the form ofrehab grants or loans to eligible owners andpurchasers of other assisted properties.(Although this program was authorized bystatute in 1997, as of May 2002, it had not beenimplemented.)2. EXPIRING SUBSIDY CONTRACTS—SECTION 8 HOUSING1970s and 1980s: Section 8 Housing Stock—Older Assisted and Newer AssistedIn 1974, the federal government created a newincentive for private developers: the Section 8program, a rent subsidy paid directly to theproperty owner on top of the tenant's rentshare, which is currently limited to 30 percentthe tenant’s adjusted income. These Section 8subsidy contracts were either project-based(tied to the unit) or tenant-based (mobile subsidies,now called vouchers, which moved withthe individual tenant).For tenants, Section 8 provided a deeper subsidythan the shallow mortgage subsidy programs,with income-based rents (similar to publichousing) rather than budget-based rents. Forprivate owners and lenders, the Section 8 subsidyeffectively guaranteed the rent needed tocover the cost of development and operations,including the owner's profit. Compared toSection 221(d)(3) and Section 236, Section 8 isa more flexible operating subsidy mechanismthat can be, and has been, combined with manytypes of public and private financing.Today, the Section 8 project-based inventorycomprises approximately 1.5 million units, 60percent of which also have HUD-insured mortgages.This inventory divides into two stocks:older assisted and newer assisted housing.The older assisted Section 8 inventory consistsprimarily of projects financed under Section221(d)(3) and Section 236, including propertieswith expiring use restrictions. Section 8 contractswere added on top of the existing mortgagesubsidies for two reasons: to protect verylow-incomefamilies who could not afford thebudget-based rents and to rescue failing projectsfrom foreclosure. The contracts were fundchapterone: Subsidized Housing Preservation: An Historical Perspective3

ed under the Loan Management Set Aside(LMSA) program. Older assisted projects typicallyhave below-market rents due to their subsidizedmortgages and ongoing rent regulation.Older assisted contracts were typically shortterm,with an initial five-year contract and tworenewals for a total of 15 years.Newer assisted projects were originally developedwith Section 8 in the late 1970s and1980s, under the Section 8 NewConstruction/Substantial Rehabilitation programs.Newer assisted rents tended to be high,and were frequently above-market, for severalreasons. HUD set the original rents to cover theinitial cost of the development, financed at market(10-15 percent) interest rates. Many of thesedevelopments were located in weak marketswhere private developers would not buildbecause costs exceeded the attainable rent.Subsequent automatic annual rent adjustmentsalso helped to keep rents high. These Section 8New Construction/Substantial Rehab projectstypically were 100 percent assisted and hadlong-term subsidy contracts: 20 years if HUDinsured,and 30-40 years if financed with stateor local tax-exempt bonds.1990s: The Section 8 Fiscal CrisisIn the mid-1990s, HUD faced a looming fiscalcrisis as both short-term and long-term Section8 contracts began to expire simultaneously. Inits dual role as subsidy provider and mortgageinsurer, HUD was truly in a bind. On one hand,the cost of renewing all the Section 8 contractsat current—often above-market—rents threatenedto consume the entire HUD budget. Onthe other hand, if HUD declined to renewSection 8 contracts on HUD-insured properties,it could trigger a wave of mortgage defaults andforeclosures, resulting in staggering claimsagainst the HUD mortgage insurance fund.At same time, HUD was struggling to avoidextinction at the hands of a conservativeCongress. In 1995, HUD issued a bold blueprintfor reinventing itself. Instead of renewing expiringSection 8 project-based contracts, HUD proposedto "voucher out" existing tenants, markrents either down or up to true market rates,auction the project mortgages to the highestECONOMICS OF DEBTRESTRUCTURINGThe following table illustrates the economicsof Mark-to-Market debt restructuring for asingle, above-market rental housing unit.Before debt restructuring, the above-marketrent is $800 and the net operating income,after operating expenses, is $400, whichincludes $360 available to service the originalmortgage of $40,000 at 10 percent for 40years. To date, the cumulative amortizationof the mortgage has reduced the outstandingbalance to $35,000.After debt restructuring, the rent is reducedto the market rate, or $600, with a net operatingincome of $200 and $180 for debt service.Accordingly, the outstanding mortgage of$35,000 is bifurcated into a supportable firstmortgage of $25,000 and a deferred secondmortgage of $10,000.The $10,000 restructuring cost is absorbedby the mortgage insurance fund. The Section8 contract continues at the reduced monthlyrent.BeforeAfterRent $ 800 $ 600Less: Op. Exp. - 400 - 400Net Op. Income 400 200Avail. for Debt Service(90 percent) 360 180Cash Flow 40 201st Mtge. 10 percent, 40 yrs 8 percent, 25 yrs40,000 25,0002nd Mtge. (Deferred) N/A 10,000Total Debt 40,000 35,000Outstanding Debt 35,000 35,000bidder, and completely deregulate the assistedhousing stock. The private sector would restoremarket discipline and restructure the projects.In effect, HUD sought to completely privatizethe federally-assisted stock and end the government’slong-standing involvement with housing.4chapter one: Subsidized Housing Preservation: An Historical Perspective

The reaction to HUD's proposal was almost uniformlynegative. Advocates feared the potentialloss of affordable units. Owners, investors, andbondholders worried that withdrawal of longstandingfederal supports and uncontrolledmortgage sales or debt reduction would spurmassive foreclosures and create huge owner taxliabilities due to relief from mortgage indebtedness.Above-Market Properties: Mark-to-MarketIn 1997, Congress adopted the MultifamilyAssisted Housing Reform and Affordability Act(MAHRA) to address the problem of expiringSection 8 contracts in HUD-insured propertieswith above-market rents. MAHRA established aMark-to-Market program with a decidedly morepreservation-oriented flavor.In general, HUD was mandated to reduceabove-market rents when the contracts expired,to restructure the underlying debt, and to renewproject-based subsidies in most cases. TheHUD-insured mortgage would be bifurcated intosupportable and unsupportable debt, with HUDretaining a deferred second mortgage in theamount of the restructured, unsupportabledebt.In exchange for debt restructuring, owners wererequired to renew their Section 8 contracts,subject to appropriations, for 30 years. The programalso created adjunct long-term use restrictionsin case subsidies became unavailable.HUD was directed to designate ParticipatingAdministrative Entities (PAEs) to execute thedebt restructuring, with state and local publicagencies receiving preference over privateagencies. The PAEs were accountable to theOffice of Multifamily Housing AssistanceRestructuring (OMHAR), a quasi-independentoffice within HUD. PAEs were charged with creatinga process that minimized costs to themortgage insurance fund while ensuring longtermpreservation of affordable housing properties.The most innovative feature of the Mark-to-Market program—the bifurcated mortgagestructure—addressed a number of stakeholderconcerns. Since the unsupportable debt wasneither relieved nor forgiven, the IRS was ableto issue a favorable ruling to owners, whichminimized the risk of adverse tax consequencesfrom restructuring. HUD's continuing role assecond mortgage holder facilitated the accountabilityand long-term public control desired bypreservation advocates. The overall structureprovided a mechanism to secure a direct federalcapital subsidy for the housing, which wouldreduce annual Section 8 obligations and becost-effective over time—similar, ironically, tothe discarded preservation capital grant program.Implementation of the Mark-to-Market programhas been slow. PAEs received their first assignmentsas late as July 1999. Due to rising rentsand the generally robust housing marketnationwide, the number of properties eligiblefor debt restructuring is much smaller than originallyanticipated. Many properties can absorbthe relatively small rent decreases necessary tobring rents down to market without reducingtheir existing debt. Owners typically prefer this"OMHAR Lite" option, which involves less oversightand no use restrictions.OMHAR’s relationship with the public sectorPAEs has been a challenge. More private PAEshave been selected to administer Mark-to-Market than was originally anticipated, andmany public PAEs have left the program overtime. Of the 42 state housing finance agenciesthat were originally approved as PAEs, only 22remain in the program today.Over 2,102 properties were in the Mark-to-Market pipeline, with 1,461 transactions completedas of April 9, 2002. 6 Of these, only 627are full debt restructurings, while 571 are"lites." Non-renewal of Section 8 has been recommendedin only 16 properties to date. Thepipeline is heavily concentrated in the heartland—Ohio,Pennsylvania, and Kentucky—although nearly every state has eligible properties.Although some owners have been willing tocooperate in the restructuring process, recentOMHAR initiatives have provided incentives tochapter one: Subsidized Housing Preservation: An Historical Perspective5

encourage owner participation, and in particular,to facilitate sales to nonprofit purchasers.These new policies identify the allowable feesand transaction costs that HUD will underwriteas part of the restructuring package, outline theconditions under which HUD will forgive thedeferred second mortgage (for qualified nonprofitpurchasers), and give qualified nonprofitsa three-year window after debt restructuring topurchase the property and secure second mortgageforgiveness.Recent legislation extends OMHAR untilOctober 1, 2004, extends the Mark-to-Marketprogram with certain amendments until October1, 2006, and brings OMHAR under the authorityof the FHA Commissioner.Below-Market Section 8 Properties:Mark-Up-to-MarketWhile the MAHRA statute focuses primarily onabove-market Section 8 properties, it also permitsHUD to renew project-based Section 8 contractsin below-market properties—but only atthe owner's option. And to facilitate budgetarymanagement, all expiring Section 8 contractswere initially subject to annual renewals (aswell as annual appropriations), giving ownersfrequent opportunity to reconsider their participation.As rents escalated throughout the late 1990s,many owners of below-market Section 8 housingbegan opting out of their contracts.Between October 1996 and April 1999, thenation lost almost 40,000 Section 8 units asowners left the program. 7 This process culminatedin a series of well-publicized opt-outs inrural Iowa, where elderly Section 8 tenants inthe district of an influential congressman weredisplaced from the only affordable housing intheir communities.able housing in the country, located in goodneighborhoods with good schools and economicopportunities, was being lost due to federalhousing policy. This report laid the groundworkfor a new Mark-Up-to-Market program, whichbegan as an emergency initiative but was enactedinto law in October 1999.Under this program, owners of eligible propertiesare permitted to renew their expiring project-basedSection 8 contracts at the prevailingmarket comparable rents for a minimum of fiveyears (although payments are still subject toannual appropriations). For properties withexpiring use restrictions, mortgage prepaymentis prohibited during the mark-up term.Recent policy changes have relaxed the eligibilityrequirements for Mark-Up-to-Market , extendedthe contract renewal term to any lengthagreed to by the owner and HUD, and modifiedor eliminated the original limited dividendrestrictions for participating owners. Many ownersappear to be choosing this incentive as analternative to opting out of their contracts.Additionally, a variation of Mark-Up-to-Market—called Mark-Up-to-Budget—has been extendedto nonprofit owners who can justify marketcomparable rents based on the project’s budget.Mark-Up-to-Budget can either facilitate apurchase transaction or finance neededrepairs. 8Section 8 Contract Renewal OptionsHUD now offers a variety of renewal options forowners with expiring Section 8 contracts,including the following:1. Mark-Up-to-Market/Budget.2. Regular Renewal for below-marketproperties, with rents adjusted by anOperating Cost Adjustment Factor(OCAF) or on a budget basis.3. Mark-to-Market, for above-marketinsured properties.4. For certain "Exception Projects," thelesser of existing OCAF-adjusted rentsor budget-based rents, with no marketcap.6After renewed protests from housing advocates,HUD acknowledged that its own policies werecontributing to tenant displacement and creatingrecord levels of worst case housing needs.In a landmark 1999 report entitled "Opting In:Renewing America's Commitment to AffordableHousing," HUD conceded that the best affordchapterone: Subsidized Housing Preservation: An Historical Perspective

In addition, there are special rules for projectsthat participated in the federal preservationprograms or the Portfolio ReengineeringDemonstration Program, a predecessor of Markto-Market.Special rules also apply to propertieswith Section 8 Moderate Rehabilitation contracts:renewal rents are the lesser of existingrents adjusted by OCAF, the Section 8 FairMarket Rent or the market comparable rent.Enhanced VouchersWhere owners choose not to renew a Section 8contract, but to "opt out" instead, MAHRA providesthat eligible tenants will receive EnhancedVouchers at the prevailing market rent. Vouchereligibility in opt-outs is limited to low-incometenants with incomes at or below 80 percent ofarea median; otherwise, the same basic rulesapply as in the prepayment program. EnhancedVouchers are now available to eligible tenantsin any property where an opt-out occurred afterFY1994.Tenant NoticeOwners must give tenants notice at least oneyear prior to the opt-out date. If proper notice isnot given, the owner may not evict the tenant orincrease the tenant's rent share until the oneyearnotice requirement is met. (HUD will generallyprovide an interim contract extension tocover the notice period.)Pending Legislation: Federal Matching GrantsIn recent years, preservation advocates havefocused their legislative efforts on a campaignto secure federal matching grants for state andlocal preservation programs. While not yet successful,these efforts are gaining momentumeach year. In 1999, a preservation matchinggrant bill passed both the House and Senatewith 50 co-sponsors. In 2001, the bill was reintroducedas (HR 425 and S 2733) along withother bills proposing a broader affordable housingtrust fund with potential preservation aswell as production uses. Advocates anticipate arenewed effort to secure passage of these initiativesin 2002. 9 chapter one: Subsidized Housing Preservation: An Historical Perspective 7

chapter twoFederal Preservation ToolsProgram Goal Structure Utility forPreservationMarketApplicabilitySection 8PreservationTools1. Mark-Upto-MarketProvides incentives tofor-profit owners withbelow-market rents toremain in Section 8program upon contractexpiration.At least a 5-year contract, subjectto annual appropriations inwhich HUD subsidizes marketraterents in exchange for affordability.Provides owners withincreased cash flow fordistributions or refinancing,as alternativeto opt-out; can alsofacilitate preservationsales.Strongmarkets.2. Mark-Upto-BudgetPermits nonprofitowners to mark upbelow-market rents toacquire new propertyor to make capitalrepairs.20-year minimum contract termand use agreement. Budgetbasedrents. Capital repairs mayrequire owner contribution.Fewer eligibility restrictions butmore requirements than MarkUp to Market.Allows nonprofit owners/purchasersto supportnew debt foracquisition or rehab,while preserving existingSection 8 units.Strongmarkets.Section 236PreservationTools3. InterestReductionPayment(IRP)Retention/DecouplingAllows Section 236projects to retain IRPsubsidy when new oradditional financing issecured.Refinancing of original HUDinsuredmortgage, while continuingexisting IRP payments inexchange for extended affordability.Reuse of existing subsidysource not requiringnew budgetauthority.Strong or weakmarkets.4. IRP PooledGrants/LoansRecaptures IRP subsidiesfrom Section 236prepayments, andrecycles them intorehab grants andloans for eligible projects.To be determined by HUD andOMB. (Note: program is not yetoperational, and HUD has proposedeliminating the loanmechanism.) Potentially availableto any project with a HUDinsuredmortgage or Section 8contract on date of enactment(not just S. 236).Provides funds forrehab, replacementreserves, and debtservice on non-federalrehab loans.Strong or weakmarkets.Tenant-BasedTools5. EnhancedVouchersTenant-based assistanceto prevent displacementwhenowner prepays a subsidizedmortgage oropts out of subsidycontract.Voucher pays full market rent, aslong as tenant stays in the property.Screening and income criteriaapply in many cases.May be aggregated tosupport new financingin a preservationtransaction.Difficult to retainaffordability when tenantsleave, takingvouchers with them.Primarilystrongmarkets.DebtRestructuringTools6. Mark-to-MarketIncentivesIncentives to facilitatedebt restructuringand nonprofit purchases.Allowable costs and fees for forprofitand nonprofit owners;mortgage forgiveness for qualifiednonprofit purchasers.Increases attractivenessof Mark-to-Market programs andfacilitates nonprofittransfers.Weak markets.TechnicalAssistanceTools7. ITAG andOTAGGrants to nonprofitsand publicagencies to facilitatepreservation andacquisition offederally subsidizedhousing.Grants cover advocacy, technicalassistance, predevelopment,legal services, etc.Offers resources fordue diligence, transactioncosts, training andcapacity-building bynonprofits and publicagencies.Strong or weakmarkets.8 chapter two: Federal Preservation Tools 8

Over the past few years, new federal tools andprograms have emerged to help advocates preserveHUD-subsidized properties. Theseinclude:• Mark-Up-to-Market• Mark-Up-to-Budget• IRP Decoupling• IRP Pooled Loans and Grants• Enhanced Vouchers• Mark to Market Incentives; and• Technical Assistance Grants(ITAG and OTAG)These tools are designed to address differentaspects of the preservation problem and aretailored to different market circumstances. Theymay have overlapping applications, as well asconflicting regulatory requirements. The precedingchart outlines each program’s goal, itsprogrammatic and regulatory structure, itsutility for housing preservation, and itssuitability to market conditions.This chapter will discuss the structure andrequirements of each program and outline theassociated transaction issues. 10 Proforma examplesillustrate how the tools can be used tofacilitate a preservation purchase transaction.1. MARK-UP-TO-MARKET: FOR-PROFITAND LIMITED DIVIDEND OWNERS 11This program provides incentives to for-profitowners with below-market rents to remain inthe Section 8 program. It is a preservation toolfor properties in strong or rising markets. Underthe terms of the Mark-Up-to-Market program,rents may be marked up to comparable marketrents, which are capped at 150 percent of theSection 8 Fair Market Rent (FMR) but can behigher with a HUD waiver.Mark-Up-to-Market is available only after theproject's original pre-MAHRA subsidy contracthas expired. 12 Once the owner has renewedunder MAHRA, the owner may seek to mark uprents at any time, even during the term of thenew post-MAHRA contract. If a pre-MAHRA contractis still in effect, the owner must wait untilthe end of the contract term. Mark-Up-to-Market is one of six options available to ownersof projects with expiring Section 8 contracts, asdescribed in Chapter 3 of HUD’s "Section 8Renewal Policy" guidebook. 13EligibilityA project is automatically eligible for Mark-Upto-Marketif it meets all of the followingconditions:• It has comparable market rents at or above100 percent of FMR;• It has a HUD REAC 14 score of at least 60, withno urgent health and safety violations; and• It has no low- or moderate-income use restrictionsthat cannot be unilaterally terminatedby the owner. Examples include HUD FlexibleSubsidy 15restrictions, ELIHPA or LIHPRHA use restrictions,and local zoning or urban renewalrestrictions. The owner must certify that nosuch restrictions exist.A property that does not qualify automatically,or needs rents beyond the 150 percent FMR cap,may be eligible for Mark-Up-to-Market on a discretionarybasis, with approval from HUD headquarters.The property may qualify if it meetsany one of the following conditions:• It has a vulnerable tenant population—atleast 50 percent elderly, disabled, or large(five-plus person) families;• It is located in an area with a vacancy ratebelow three percent, where vouchers are difficultto use; or• It constitutes a high priority for the local community,as demonstrated by a contribution ofstate or local funds, such as tax abatementsor rehab grants.For projects with low- or moderate-income userestrictions, HUD will permit rents to be markedup only to the use-restricted level and will typicallyrenew the contract for the remaining termof the use restriction. In a Section 236 projectwith Flexible Subsidy, for example, the maximumrents would be 30 percent of 80 percent of thearea median income, adjusted for family size.If a Section 236 or 221(d)(3) BMIR project is noteligible for prepayment, then it is not eligiblefor Mark-Up-to-Market. Ineligible projectsinclude properties with original nonprofit ownersand some Flexible Subsidy projects which9chapter two: Federal Preservation Tools 9

equire HUD consent to prepay. Some projectsin this category may be eligible for Mark-Up-to-Budget, a parallel program for nonprofit ownersand purchasers (see below). In all other cases,a waiver from HUD headquarters is required.Rents, Contract Terms, and DistributionsHUD determines the initial rents based on marketstudies completed by the owner and HUD. Inaddition to the rent cap of 150 percent of FMR,rents for Section 236 and Section 221(d)(3)BMIR projects will generally be reduced by thevalue of the actual or imputed mortgage subsidy,with some exceptions (see IRPRetention/Decoupling below). For Section 236properties, the market rent is reduced by the IRPsubsidy, typically worth $75-$100 per month. 16The minimum contract term is five years. Themaximum term can be any length—in practice,up to 20 years. Prepayment of the Section 236or BMIR mortgage is prohibited during the contractterm, except as part of a transaction topreserve affordability. Importantly, owners donot have to renew their contracts once the initialterm expires—which effectively limits thevalue of Mark-Up-to-Market as a preservationtool to five years.During the contract term, rents will be adjustedby the Operating Cost Adjustment Factor(OCAF), as published by HUD, up to the marketrent cap, which is also OCAF-adjusted. Rentswill be readjusted to market (up or down) everyfive years based on new market comparabilitystudies prepared by the owner and HUD. Whilethese policies may put Mark-Up-to-Market ownersat a disadvantage between the five-yearreadjustment intervals, the project-based contractcompensates by reducing risk.In a Section 236 or 221(d)(3) BMIR project thatis only partially Section 8-assisted, owners arepermitted to take the increase in Section 8 rentsas a distribution in addition to the originalallowable dividend. In all other Section 8 projects,owners participating in Mark-Up-to-Marketreceive unlimited distributions. Any state orlocal restrictions on owner distributions in unitssubject to mark-up are preempted, except inprojects financed by a state housing financeagency (HFA).Non-Section 8 UnitsIn a partially-assisted Section 8 project, rentsare marked up only for those units covered bythe expiring Section 8 contract(s). Rents in anynon-Section 8 units, units occupied by Section8 voucher-holders, or units covered by a nonexpiringcontract remain unchanged. From anadvocacy perspective, this rent skewing featureof Mark-Up-to-Market offers the double benefitof holding harmless tenants in existing affordablenon-Section 8 units while preserving theSection 8 units as well. However, the lower thepercentage of Section 8 units, the less attractivethis option is likely to be to an owner whois considering opting out.2. MARK-UP-TO-BUDGET:NONPROFIT OWNERS AND PUR-CHASERS 17Under the Mark-Up-to-Budget program, which issimilar to Mark-Up-to-Market , nonprofits canmark Section 8 rents up to market rates(capped at 150 percent of FMR, or higher with aHUD waiver), if justified by documented projectneeds (budget-based rents). Mark-Up-to-Budget can be used under two circumstances:for acquisition of the property (if a nonprofit isthe purchaser), or for capital repairs (if a nonprofitis the current or prospective owner).Mark-Up-to-Budget enables nonprofit ownersand purchasers to support additional debt foracquisition or rehab while preserving theSection 8 units. Like Mark-Up-to-Market, thisprogram is available only when the existing pre-MAHRA contract expires, or anytime thereafter.HUD has published "safe harbor" rules forMark-Up-to-Budget in Chapter 15 of its "Section8 Renewal Policy Guidebook." 18 Transactionscomplying with these rules can be approved bythe HUD field office. All other cases require awaiver from HUD headquarters.EligibilityEligibility criteria for Mark Up-to-Budget aremuch less restrictive than the criteria for Mark-Up-to-Market. Projects can have comparablemarket rents that are less than 100 percent ofFMRs, and they can mark up despite low- andmoderate-income use or prepayment restric-10 chapter two: Federal Preservation Tools10

tions. However, the nonprofit purchaser/owner,or its controlling general partner, must meet thefollowing criteria:• It must be organized as a nonprofit understate law.• It must have 501(c) tax-exempt status, exceptfor limited-equity coops or projects wheresuch status was not previously required toparticipate in the HUD program.• It must be in good standing with HUD, withno unresolved audit findings.PROFORMA 1: NONPROFIT PURCHASEWITH MARK-UP-TO-MARKET/BUDGETProforma 1 illustrates how Mark-Up-to-Market orMark-Up-to-Budget can be used to facilitate a preservationtransaction under certain circumstances. Fiftypercent of the units in the hypothetical 100-unit projectare Section 8-assisted.In this example, the Section 8 rents are marked up by50 percent while the non-Section 8 rents increase by10 percent. As a result, the project can support newA nonprofit purchaser must meet the followingadditional requirements:• It must have previous ownership or managementexperience with affordable multifamilyhousing.• It must have community ties, although anational or regional nonprofit may form a jointventure with a local nonprofit.• It may not have an identity of interestrelationship with the current owner.debt of approximately $26,400 per unit, which isslightly more than half of the total development costof $50,000 (including $30,000 for acquisition,$15,000 for rehab, and $5,000 for transaction costs).Another $23,500 per unit (47 percent) must be raisedfrom gap financing sources.As this example indicates, Mark-Up-To-Market/Budget, while making a significant contributionto the preservation transaction, is only a partialsolution, leaving considerable gaps to be filled byother sources.PROFORMA 1: NONPROFIT PURCHASE WITH MARK-UP-TO-MARKETUnits Current Underwriting Basis Rent Total Per UnitRent Rent IncreaseIncome/ ExpensesNon - Section 8 Units 50 $500 $550 LIHTC10% $330,000Section 8 Units 50 500 750 Market 50% 450,000Gross Potential Inc. 100 780,000Vacancy: (Non S8) 5% (16,500)Vacancy: (S8) 3% (13,500)Effective Gross Inc. 750,000Operating Expenses 500,000 5,000Net Operating Income 250,000Debt Service 227,273Cash Flow 22,727Debt Coverage 1.10Sources ofFunds Rate Term (Years) ConstantNew Mortgage 7.75% 30 0.08597 2,643,645 26,436Gap Financing 2,356,355 23,564Total Sources 5,000,000 50,000Uses of FundsAcquisition 3,000,000 30,000Rehab + Contingency 1,500,000 15,000Transaction Costs 11% of acquisition & rehab 500,000 5,000Total Uses 5,000,000 50,00011chapter two: Federal Preservation Tools 11

2.236(e): when the 236 mortgage is prepaidand refinanced. The IRP assistance is decoupledfrom the original 236 mortgage andtransferred to the new financing. No lenderconsent is required. This approach is generallymore useful than 236(b) and is designed toprovide greater flexibility for lenders, owners,and purchasers. At least 30 transactions haveclosed to date.236(e) may be difficult to use in cases wherethe mortgage cannot be prepaid without HUDconsent (e.g., in insured Rent Supplementprojects and projects with original nonprofitsponsors). Where Low Income Housing TaxCredits (LIHTC) are used, current IRS rulesmay deem the IRP in a 236(e) transaction tobe a federal loan or grant which must beexcluded from basis. In these cases, 236(b)may be a preferable approach, since the IRSPROFORMA 2: NONPROFIT PURCHASE WITH MARK-UP-TO-MARKETAND IRP RETENTION/DECOUPLINGProforma 2 illustrates how Mark Up-to-Market /Budget can be combined with IRP retention/decoupling to facilitate a preservationpurchase, using the same project discussed in the previous example.Assuming the same rent structure and rent increases, this project can support additional debt of $36,400 per unit—an increase of$10,000 per unit. This represents the additional debt supportable by the IRP subsidy stream over its remaining 15-year contractterm. As a result of combining these two federal preservation tools, the gap financing need is reduced from $23,500 to $13,500 perunit, or 27 percent.PROFORMA 2: NONPROFIT PURCHASE WITH MARK-UP-TO-MARKET & IRP DECOUPLINGUnits Current Underwriting Basis Rent Total Per UnitRent Rent IncreaseIncome/ ExpensesNon - Section 8 Units 50 $500 $550 LIHTC10% $330,000Section 8/236 Units 50 500 750 Market * 50% 450,000Gross Potential Inc. 100 780,000Vacancy: (Non S8) 5% (16,500)Vacancy: (S8) 3% (13,500)Effective Gross Inc. 750,000Operating Expenses 500,000 5,000Net Operating Income 250,000Debt Service 227,273Cash Flow 22,727Debt Coverage (w/o IRP) 1.10Debt Service - IRP $90 per unit per month 108,000 1,080Sources of Funds RateTerm (Years) ConstantNew Mortgage 7.75% 30 0.08597 2,643,645 26,436IRP Mortgage 7.00% 15 0.10786 1,001,304 10,013Gap Financing 1,355,052 13,551Total Sources 5,000,000 50,000Uses ofFundsAcquisition 3,000,000 30,000Rehab + Contingency 1,500,000 15,000Transaction Costs 11 % of acquisition & rehab 500,000 5,000Total Uses 5,000,000 50,000* Assumes no deduction for IRP.13chapter two: Federal Preservation Tools 13

may construe the IRP as an "old and cold"subsidy if it continues to be linked to the originalfinancing.EligibilityEligible projects must be assisted under Section236 with insured, HUD-held, or non-insured(HFA) mortgages. Eligible mortgagors includenonprofit, limited dividend, and public entities.Under 236(b), eligible lenders are limited tostate or local public agencies approved by HUD.Under 236(e), eligible lenders may be public orprivate, but a state or local public agency mustprovide regulatory oversight (e.g., IRP subsidyadministration, rent increase processing,inspections, owner compliance monitoring).Alternately, the lender must be an FHAapprovedmortgagee, the mortgage must beHUD-insured, and HUD must perform regulatoryoversight functions.Rents, Contract Terms, and DistributionsThe IRP assistance continues as a monthly subsidystream for the remaining term of the 236mortgage, in accordance with the original subsidycontract. The monthly IRP subsidy may alsobe reduced and stretched over an extendedcontract term, but the monthly and aggregatetotal IRP cannot be increased. The 236regime—including budget-based rents, tenantincome eligibility limits, and other regulatoryoversight—continues for the original mortgageterm, plus five years, pursuant to a new HUDUse Agreement. The owner must also commit torenew any Section 8 contract throughout theextended use period if HUD offers a renewalcontract.Rents can be increased on a budget basis tocover debt service on any new financing foracquisition, rehab, or equity takeout. Upon prepaymentof the mortgage (under 236(e)) or terminationof the HUD mortgage insurance (under236(b)), Enhanced Vouchers are generally providedfor existing eligible tenants who are notcovered by a project-based Section 8 contract. 22Rents are capped at the new budget-based 236Basic Rent. Tenants may not be displaced inconjunction with the 236(b) or 236(e) transaction.In general, the new Section 236 Basic Rent cannotexceed the market-comparable rent minusthe IRP subsidy. Additionally, the Basic Rent fornon-Section 8 units may not be increased bymore than 10 percent. For preservation projects(financed under LIHPRHA or ELIHPA), the BasicRent for non-Section 8 units may not beincreased in conjunction with the transaction,except for operating cost increases.Any Section 8 units in the project may bemarked up to comparable market rents, if theyare eligible under either Mark-Up-to-Market orMark-Up-to-Budget. Again, the maximumSection 8 rent is generally the market comparablerent less IRP.In the past, these rent restrictions created a disincentiveto use decoupling. From a preservationperspective, this result is undesirable sinceIRP retention offers the benefit of continuedbudget-based rents and income restrictions foran extended period. The alternatives provideless long term affordability: Mark-Up-to-Marketwithout IRP retention requires only five years ofmandatory affordability, and Section 8 opt-outoffers no affordability benefits beyond currentresidents' tenure.Importantly, HUD now will consider waiving theIRP deduction for certain sales transactionswhere the project needs significant repairs or islocated in an area with lower market rents, aslong as rents are computed on a budget basis.This waiver is not available for transactionsinvolving equity takeout without a transfer ofownership.In strong markets, this policy change hasenabled nonprofits to combine IRP decouplingwith Mark-Up-to-Market/Budget and to maximizeSection 8 rents at full-market—while keepingnon-Section 8 rents as low as possible.Additionally, it has extended the benefits of IRPdecoupling to projects in weaker market areas.Limitations on owner distributions and theallowable return on equity that can be includedin the budget-based rent are less clear. HUDhas recently clarified that reasonable debt servicecoverage can be included in the budgetbasedrent. Based on past experience, reason-14 chapter two: Federal Preservation Tools14

able debt service coverage will generallybecome the allowable distribution for rent-settingpurposes.If feasible, outstanding HUD loans are supposedto be repaid in conjunction with thedecoupling transaction. The HUD field officenow has authority to approve deferral ofFlexible Subsidy, Section 241, and other loans ifrepayment is inconsistent with preservationgoals.4. IRP POOLED GRANTS/LOANS(SECTION 236(s))The Section 236(s) program was authorized byMAHRA in 1997 but is not yet operational. Itpermits HUD to recapture and pool IRP subsidiesfrom Section 236 mortgage prepayments,foreclosures, and insurance terminations—andthen to recycle them as rehab grants and loansto eligible projects. Eligible properties arebroadly defined as any project—including butnot limited to Section 236 projects—that had aHUD-insured mortgage and a Section 8 projectbasedcontract on October 27, 1997. Funds maybe used for rehabilitation, replacement reservecontributions, and debt service payments onnon-federal rehabilitation loans. HUD will determineapplicable use restrictions. This is a significantpotential resource because no new appropriationsare required: the budget authorityalready exists through re-programming of existingIRP funds.Despite the program’s promise, its current statusis uncertain. HUD has recently proposedeliminating the loan mechanism. If implemented,the program will likely be limited to grants.Further, in the FY2002 HUD-VA SupplementalAppropriations Act, Congress rescinded virtuallythe entire IRP pool.5. ENHANCED VOUCHERSThis program provides tenant-based assistanceto eligible tenants when an owner prepays asubsidized mortgage, terminates the HUD mortgageinsurance, or opts out of a Section 8 subsidycontract. 23 The purpose is to enable tenantsto remain in the housing. EnhancedVouchers are also available to tenants inFlexible Subsidy projects in conjunction withapproved preservation transactions.The Enhanced Voucher payment standard is setat the market rent for the property, subject torent reasonableness as determined by the localpublic housing authority (PHA), which administersthe program for HUD. Rents are adjustedannually to reflect changes in the market. Theregular voucher payment standard is reinstatedwhen the tenant moves.Enhanced Voucher tenants have a right toremain in the property as long as it is availablefor rental use and the owner agrees to the PHAapprovedrent. If tenants exercise their right toremain, the owner may not terminate the tenancyexcept for cause under federal, state, or locallaw.The Enhanced Voucher program is described inChapter 11 of HUD's "Section 8 Renewal PolicyGuidebook." Detailed program rules are promulgatedby the Office of Public and IndianHousing. 24EligibilityTo qualify for Enhanced Vouchers in a Section 8opt-out, low-income tenants must have incomesat or below 80 percent of median, and theymust be covered by the Section 8 contract atthe opt-out date. In the case of subsidizedmortgage prepayments or insurance terminations,eligible tenants—including tenants coveredby a Section 8 contract—are low-incomehouseholds who reside in the housing on theprepayment or insurance termination date.Moderate-income tenants—those with incomesat or below 95 percent of median—may alsoqualify if they are elderly/disabled or if the projectis located in a low-vacancy area. Tenants inFlexible Subsidy projects are subject to thesame eligibility criteria.LimitationsWhile Enhanced Vouchers provide more tenantprotections now than in the past, they do nothold existing tenants entirely harmless. If the15chapter two: Federal Preservation Tools 15

owner converts to non-rental use or refuses toaccept the rent approved by the PHA as reasonable,the tenant’s right to remain is not guaranteed.Since HUD has refused to enforce thisprovision, enforcement remedies depend entirelyon state and local law. Likewise, the publichousing authority's eligibility and screening criteria,which treat existing tenants in goodstanding as new applicants, may preclude sometenants from receiving vouchers.For over-housed tenants, the Enhanced Voucherpayment standard is based on the appropriatelysized unit. Over-housed tenants must move to asmaller unit within the project (or elsewhere)after one year or pay the rent difference out-ofpocket.Before conversion, over-housed tenantswere required to move only when an appropriately-sizedunit became available within thedevelopment.Additionally, Enhanced Voucher tenants mustpay a minimum rent equal to the dollar amount(or percent of income, in hardship cases) paidat the point of prepayment or opt-out. (Underthe regular voucher and project-based programs,there is no minimum rent.)Enhanced Vouchers have limited value as apreservation tool, but they may be used whenother resources are unavailable or unworkable.Because the subsidy is tenant-based and subjectto annual contract authority and appropriations,the amount of funds available from debtand equity sources for a voucher-based preservationtransaction will be more limited. Mostfunders will anticipate voucher attrition overtime and will underwrite the project at theunderlying "default" rents (e.g., maximumLIHTC rents, if applicable to the transaction)when voucher tenants move. Additionalreserves may be required to address the costsassociated with Enhanced Voucher attritionPROFORMA 3: NONPROFIT PURCHASE WITH ENHANCED VOUCHERSProforma 3 shows how the same 100 unit project might be purchased by a nonprofit with Enhanced Vouchersfor 100 percent of the units at comparable market rents ($750). The proforma assumes voucher attrition atthe rate of 10 percent per year (10 years), with 90 percent of the voucher holders replaced by householdspaying Tax Credit rents ($550) and 10 percent replaced by regular voucher holders at the regular PHA paymentstandard ($650). The transaction is underwritten in year 11, at the point when the lowest net operatingincome is achieved.Consequently, the project can carry only $17,840 per unit in new debt. The needed gap financing increases to$32,160 per unit, or 64 percent of total development cost. Affordability is also reduced over time, since 90percent of the units will rise to Tax Credit levels without rental subsidy. In the previous examples, 50 percentof the units maintained deep affordability through project-based rental subsidies.This scenario also creates excess cash flow in the early years of the project, since a substantial fraction ofthe initial NOI is not used for debt service. These funds can be used for additional rehabilitation, tenant services,or other project needs. Overall, Enhanced Vouchers are a less desirable approach than the two scenariospreviously considered but may be workable if sufficient gap financing is available.16chapter ?: title information here

Proforma 3: NONPROFIT PURCHASE WITH ENHANCED VOUCHERSCurrent New RentUnits Rent Rent Increase Total Per UnitIncome/ ExpensesS8 Enhanced Vouchers 100 $500 $750 50% 900,000S8 Regular Vouchers 10% over time $650 0Tax Credit Rents 90% over time $550 0Gross Potential Income 900,000Vacancy 5% (45,000)Effective Gross Income 855,000Operating Expenses 500,000 5,000Net Operating Income 355,000Debt Service Minimum NOI/1.10 (Year 11) 153,372Cash Flow 201,628Debt Coverage 2.31Sources of Funds Rate Term (years) ConstantNew Mortgage 7.75% 30 0.08597 1,784,025 17,840Gap Financing 3,215,975 32,160Total Sources 5,000,000 50,000Uses of FundsAcquisition 3,000,000 30,000Rehab + Contingency 1,500,000 15,000Transaction Costs 11% of acquisition & rehab 500,000 5,000Total Uses 5,000,000 50,000Year 1 2 3 4 5 6 7 8 9 10 11 12EVs 100 90 80 70 60 50 40 30 20 10 0 0Reg. Vs 0 1 2 3 4 5 6 7 8 9 10 10LIHTC 0 9 18 27 36 45 54 63 72 81 90 90TrendS8 EV 1.02 900,000 826,200 749,088 668,561 584,513 496,836 405,418 310,145 210,899 107,558 0 0Reg. V 1.02 7,956 16,230 24,832 33,772 43,059 52,704 62,718 73,112 83,895 95,082 96,983LIHTC1.02 60,588 123,600 189,107 257,186 327,912 401,364 477,624 556,773 638,896 724,083 738,564GPI 900,000 894,744 888,918 882,501 875,471 867,808 859,487 850,487 840,783 830,350 819,164 835,548Vac. (45,000) (44,737) (44,446) (44,125) (43,774) (43,390) (42,974) (42,524) (42,039) (41,518) (40,958) (41,777)EGI 855,000 850,007 844,472 838,376 831,698 824,417 816,513 807,963 798,744 788,833 778,206 793,770Op. Exp. 1.020 500,000 510,000 520,200 530,604 541,216 552,040 563,081 574,343 585,830 597,546 609,497 621,687NOI 355,000 340,007 324,272 307,772 290,481 272,377 253,432 233,620 212,914 191,287 168,709 172,083DS 153,372 153,372 153,372 153,372 153,372 153,372 153,372 153,372 153,372 153,372 153,372 153,372CF 201,628 186,635 170,900 154,400 137,110 119,005 100,060 80,248 59,542 37,915 15,337 18,711DCR 2.31 2.22 2.11 2.01 1.89 1.78 1.65 1.52 1.39 1.25 1.10 1.12chapter two: Federal Preservation Tools17

6. MARK-TO-MARKET INCENTIVESHUD/OMHAR has recently developed a packageof incentives for owners and purchasers to facilitateMark-to-Market debt restructuring transactions.These incentives clarify allowable costsand fees that OMHAR will finance or recognize,in whole or in part, through the debt restructuringprocess, reducing the need for other capitalsubsidies. For qualified nonprofit purchasers,additional incentives establish policies and proceduresto forgive deferred HUD debt resultingfrom the restructuring process, thus facilitatingnonprofit transfers. These policies are describedin OMHAR's "Initiatives for Mark-to-MarketOwners and Purchasers" and in the "OperatingProcedures Guide" which governs the Mark-to-Market program. 25Allowable Restructuring Costs and FeesThe following is an annotated list of costs andfees supported by HUD/OMHAR in the debtrestructuring process:Rehabilitation. HUD will pay for 80 percent ofapproved rehabilitation costs.Transaction Costs. HUD will pay for 80 percentof reasonable and customary transaction costsfor acquisition and restructuring—legal, titleand recording, survey, architectural/engineering,environmental, etc.Initial Reserve Deposit. HUD will pay 100 percentof any required initial deposit toReplacement Reserves (net of outstandingreserve balances carried forward).Developer Fee. HUD will pay for 100 percent ofthe allowable developer fee, for purchasersonly. The allowable developer fee is 3 percent oftotal uses, with a minimum of $40,000 and amaximum of $80,000. Purchasers who bringother resources to the transaction may qualifyfor a higher developer fee, with the balancepayable from other sources.Capital Recovery Payment (CRP). The balanceof the owner’s or purchaser's required contribution—20percent of allowable rehabilitation andtransaction costs, plus any portion of allowabledeveloper fee not covered by HUD—may berecovered out of operating revenues over a 7-10year period. This fee is underwritten above theline like any operating expense, as a series ofpayments, including an imputed interest rate.This should permit the owner/purchaser to borrowthe funds from a third party source (such asLISC, in the case of a nonprofit owner), thenrepay the loan from the CRP.Incentive Performance Fee (IPF). Owners andpurchasers are also entitled to a fee of up tothree percent of effective gross income, with aminimum of $100 per unit and a maximum of$200 per unit. The project pays this annual feeto the owner as a priority distribution from cashflow before any payment to HUD on the secondmortgage (a minimum of 75 percent of cashflow remaining after payment of the IPF). Theowner must either be in good standing with aminimum REAC score of 60 or have an approvedplan to correct any deficiencies.Additional FundsOMHAR has recently indicated that any additionalcapital resources brought to the transactionby the owner or purchaser—e.g., taxexemptbond financing, tax credits, public sectorgrants or soft debt—will not decrease theamount of HUD's insurance claim or capitalsubsidy to the project (the baseline claim) aslong as the additional resources are invested inthe property. 26Second Mortgage ForgivenessFor qualified nonprofit purchasers only, HUD willforgive part or all of the deferred second (andthird) mortgages incurred by restructuring.Mortgage forgiveness frees up cash that wouldotherwise (at least 75 percent) revert to HUD forpayment of deferred loans and generally putsthe property on more stable financial footing.To qualify for second mortgage forgiveness, thepurchaser entity (or its sole general partner)must meet the following criteria:• It must be a nonprofit entity organized understate law, but 501(c)(3) status is not required.• It must be community-based, usually withone-third of the board members consisting ofproject tenants or low-income community residents.18chapter two: Federal Preservation Tools

• It must be endorsed by a majority of residents.• It must be financially and legally independent.In exchange for mortgage forgiveness, the nonprofitpurchaser must agree to the followingconditions:• A 50-year use agreement.• A 10-year resale restriction.• A reinvestment obligation, which may requirethat a portion of the cash flow must be usedfor the benefit of the property/residents.Under current HUD policy, there is no formalreinvestment obligation.Qualified purchasers can acquire Mark-to-Market properties up to three years after therestructuring date and still qualify for secondmortgage forgiveness.Congress also recently amended MAHRA to permitassignment of the second mortgage, as analternative to mortgage forgiveness. This maybe a preferable option in cases where there arelimited dividend restrictions associated with theoriginal mortgage or Section 8 contract. Whilethese restrictions are superceded as long as theHUD second mortgage is outstanding, they arereinstated if the HUD debt is forgiven. If theHUD mortgage is assigned to an affiliate of thenonprofit purchaser instead of being forgiven,this problem can be overcome. HUD recentlyrevised Appendix C of the OPG to implementmortgage assignment.PROFORMA 4: NONPROFIT PURCHASE WITH MARK-TO-MARKET DEBTRESTRUCTURINGProforma 4 illustrates how the Mark-to-Market incentives can be used to facilitate a nonprofit purchase inconjunction with Mark-to-Market debt restructuring.In this hypothetical 100-unit HUD-insured Section 8 project, the restructured rents are reduced by 20 percent,from $750 to $600. After deducting operating expenses and the allowable Capital Recovery Payment of$16,721 (based on the purchaser's total contribution of $110,000), approximately $127,400 is available formortgage debt service, leaving a cash flow of $25,480.From this cash flow, the purchaser will receive $20,000 as a priority distribution for the Incentive PerformanceFee, capped at $200 per unit. Since the second mortgage is forgiven (see below), there is no additional debtservice. The balance of the cash flow is available to the purchaser (subject to any limitations on owner distributionsassociated with the original mortgage or Section 8 contract).In total, the purchaser will receive approximately $42,000 in operating revenues from the CRP, the IPF, andthe owner's share of remaining cash flow (from which any amounts borrowed to finance the purchaser's$110,000 contribution will need to be repaid).The total development cost of $2.63 million includes $1.8 million for repayment of the outstanding HUD mortgagebalance, $500,000 for rehab and contingency, $250,000 for reserves and transaction costs, and $76,500in developer fee (2.9 percent of total uses). The sources of funds include $1.28 million in new debt supportableby the restructured rents, $100,000 in existing reserve balances carried forward, and a $110,000 purchasercontribution (20 percent of rehab and transaction costs).The balance of $1.1 million is the HUD contribution or mortgage insurance claim, consisting of a $500,000second mortgage and a $600,000 third mortgage. 27 The HUD contribution is equal to the reduction in firstmortgage debt, plus 80 percent of rehab and transaction costs, plus 100 percent of the initial reserve depositand developer fee, minus the existing reserve balance carried forward.Assuming that the purchaser is a qualified nonprofit, the second and third mortgages are forgiven. Any additionalbuyer costs (acquisition, rehab, transaction) would have to be paid by the purchaser from other additionalsources, with no effect on HUD's $1.1 million contribution, the baseline claim.chapter two: Federal Preservation Tools19

PROFORMA 4: NONPROFIT PURCHASE WITH MARK-TO-MARKET DEBT RESTRUCTURINGUnits Current Underwriting Basis Rent Total Per UnitRent Rent IncreaseIncome/ExpensesSection 8 Units 100 $750 $600 Market -20% $720,000Vacancy & Bad Debt 7% (50,400)Effective Gross Inc. 669,600Operating Expenses Rate Term (years) Constant 500,000 5,000Capital Recovery Pmt 9% 10 0.15201 16,721Net Operating Income 152,879Debt Service 127,399Cash Flow 25,480Debt Coverage 1.20Distribution of Cash Flow:Incentive Perf. Fee 3.0%EGI (up to 3%; $100 - $200 / unit) 20,000Debt Serv. - 2nd Mtge (forgiven) 0Share to Buyer 5,480Total Cash Flow 25,480Cash Available to Buyer:Capital Recovery Payment (CRP) 16,721Incentive Performance Fee (IPF) 20,000Cash Flow Share 5,480Total Cash Flow to Buyer 42,201Sources of Funds* Rate Term (yrs) MIP ** ConstantNew HUD Mortgage 8.25% 25 0.5% 0.09961 1,278,928 12,789Existing Reserve Balance 100,000 1,000Owner Contribution 20% rehab + transaction costs 110,000 1,100HUD 2nd Mortgage FORGIVEN 521,072 5,211HUD 3rd Mortgage FORGIVEN 616,500 6,165Total Sources 2,626,500 26,265Uses of Funds*Repay Existing HUD Mortgage 1,800,000 18,000Rehab + Contingency 500,000 5,000Initial Reserve Deposit 200,000 2,000Transaction Costs 50,000 500Developer Fee 2.9%x uses (up to 3%; $40,000 - $80,000) 76,500 765Total Uses 2,626,500 26,265HUD Contribution:HUD Share:Reduction in 1st Mortgage 521,072 5,211Repairs 80% 400,000 4,000Transaction Costs 80% 40,000 400Initial Reserve Deposit 100% 200,000 2,000Developer Fee 100% 76,500 765Less: Existing Reserve Balance (100,000) (1,000)Total 1,137,572 11,3762nd Mtge 3rd MtgeRestructuring Pmt. 521,072 616,500 1,137,572 11,376* Not including additional buyer costs (acquisition, rehab, transaction) which must be paid from other sources.** Mortgage Insurance Premium20 chapter two: Federal Preservation Tools

7. PREDEVELOPMENT ANDOUTREACH/TRAINING GRANTSThe 1997 MAHRA legislation authorized $10 millionin annual funding for grants to help residentorganizations, nonprofits, and public agenciesacquire and preserve federally subsidizeddevelopments. Administered by OMHAR, thegrants provide critical predevelopment andtechnical assistance funding for preservationtransactions and related activities.There are two types of grants: IntermediaryTechnical Assistance Grants (ITAG) andOutreach and Training Grants (OTAG). Eligibleproperties include Mark-to-Market propertiesand other subsidized developments that are atrisk of mortgage prepayment, opt-out, or subsidycontract expiration/termination, or thatoffer a potential opportunity for nonprofitacquisition.Intermediary Technical Assistance Grants(ITAG)In recent years, ITAG grants have been administeredby three regional intermediaries undercontract to HUD/OMHAR. 28 Applications havebeen accepted on a rolling basis. There arethree specific types of ITAG grants:Resident Capacity (RC) Grants. RC grants arefor project-specific advocacy, technical assistance,and training activities. Eligible applicantsare resident groups, resident councils, and community-baseddevelopment organizations. In2001, the maximum grant was $20,000.Public Entity Grants (PEG). PEGs are for all eligibleRC or PD activities, either project-specificor community-wide. Eligible applicants includepublic agencies, community action agencies,legal services organizations, and fair-housingagencies. In 2001, the maximum grant amountwas $20,000.Outreach & Training Grants (OTAG)OTAG grants have been provided to local andstatewide organizing and technical assistanceorganizations on a multi-year basis. 29 Potentialpreservation purchasers will want to workclosely with OTAG grantees to identify at-riskproperties and establish contacts with residentgroups.Legislation passed in 2001 reauthorizes ITAGand OTAG funding at $10 million per year. Atotal of $11.3 million has been appropriated forthe 2002 fiscal year, including $1.3 million earmarkedfor outstanding obligations to existinggrantees. In the fall of 2001, HUD suspendedtechnical assistance grants pending a review ofalleged deficiencies in its program administration.Although the funds technically exist, unresolvedissues relating to these claims and otherconstraints imposed by the appropriations acthave cast doubt on HUD's ability to make newfunds available during the 2002 fiscal year.Predevelopment (PD) Grants. PD grants are forproject-specific transaction costs related to apreservation purchase. Eligible applicants areresident councils and community-based developmentorganizations that are seeking to purchasethe property and have a binding commitmentfrom the seller. In 2001, the maximumgrant was $70,000.chapter two: Federal Preservation Tools21

chapter threeState and Local Preservation Tools and StrategiesSince the termination of the LIHPRHA and ELIH-PA programs, responsibility for preserving HUDassistedhousing has increasingly devolved tothe state and local level. Today's federal preservationtools—including Enhanced Vouchers,Mark-Up-to-Market/Budget, IRP Decoupling,and Mark-to-Market incentives—are not adequatelydesigned or funded to preserve all ofthe units that remain at-risk. Not surprisingly,mortgage prepayments and opt-outs continueto erode the assisted housing stock.In recent years, however, a variety of innovativepreservation tools and strategies have emergedat the state and local level to supplement, andextend the reach of, existing federal programs.This chapter will review the laws, programs, andpolicies that have been developed by preservationadvocates, practitioners, and governmentofficials to preserve subsidized housing in theircommunities. Both regulatory and incentiveapproaches ("carrots and sticks") will beaddressed. Case studies will illustrate how differentcommunities have combined these toolsto develop successful preservation strategies. 301. REGULATORY ANDINCENTIVE APPROACHESRegulatory/Enforcement ToolsCrafting effective state or local regulatoryapproaches to preservation can be difficult.Efforts to restrict property rights must be carefullydesigned to avoid legal challenge. In theabsence of funding or other incentives, permanentpreservation can rarely be accomplishedby state or local regulation alone. Nevertheless,a variety of regulatory and enforcement toolshave been utilized to bring owners to the negotiatingtable or otherwise facilitate preservationoutcomes.Rent and Eviction ControlsSome localities have existing rent control laws(San Francisco, Los Angeles, New York City) orproposed initiatives (Massachusetts) that canhelp to preserve at-risk properties. These lawstypically extend coverage to federally-assistedhousing when the HUD subsidy expires throughmortgage prepayment or opt-out. Eviction controlsusually provide that tenancies in controlledproperties can be terminated only forgood cause.Where the regulatory scheme keeps rents belowmarket, incentives for conversion may be significantlyreduced. In San Francisco, for example,advocates attribute the virtual absence of prepaymentsand opt-outs to the city’s strong rentcontrol system. A weaker or more transitory regulatoryscheme may have less of an impact. Atthe same time, rent controls that depress propertyvalues below the level required to cover theseller's exit taxes 31 may discourage ownershiptransfers, including sales to nonprofit purchasers.For this reason, some preservationadvocates have sought to exempt propertiessold to nonprofits from rent control coverage.Existing Use RestrictionsSome properties may have use restrictionsimposed by a state or local agency that dateback to their original development. Theserestrictions often limit a property’s use beyondthe expiration of federal regulatory agreements.Local restrictions commonly arise from urbanrenewal plans, land disposition agreements,zoning or parking relief, tax relief, or publicfinancing.Often these covenants are buried in long-forgottenlegal documents, and identifying, excavating,and interpreting them in a way that ismeaningful to current circumstances can be aformidable challenge. But the rewards can besignificant: in Massachusetts, enforcement ofexisting restrictions by state and local agencieshas resulted in significant preservation benefits(see below).Notice RequirementsA number of states (California, Minnesota,Maryland) and cities (Portland, Oregon; SanFrancisco, California; Denver, Colorado) havelaws that supplement existing federal notice22chapter three: State and Local Preservation Tools and Strategies

equirements—for example, by requiring longernotice periods, more detailed information, orbroader distribution of information. In somecases, local notice requirements cover additionaltypes of at-risk properties. These laws seekto provide more time and local leverage toensure that tenants are adequately protectedand, if possible, to facilitate a preservationalternative.For example, California requires a 12-monthnotice for subsidized mortgage prepayments,opt-outs, and termination of use restrictions inTax Credit projects. A second notice at sixmonths must include specific informationregarding the owner's plans, timetables, andreasons for termination. The second noticemust be sent to interested preservation purchaserslisted on the state's preservation website, among other parties. Prospective purchasersare also entitled to certain financialinformation.Minnesota and Maryland notice laws alsorequire owners to file a detailed tenant impactstatement. The Rhode Island law requires twoyears' notice.FeesSome state notice laws also require owners topay compensatory or mitigation fees in conjunctionwith prepayments or opt-outs. For example,San Francisco and Seattle require relocationfees. Rhode Island and Maryland require ownersto pay tenants’ moving costs.The Portland ordinance formerly required areplacement housing payment of $30,000 perunit if an owner rejected the city's offer to purchaseat the appraised fair market value, to bepaid into an affordable housing fund. This provisionwas preempted by the state in exchangefor a longer notice requirement and authorizationof local eminent domain powers (seebelow).Right of First RefusalSome state notice laws also give the local government,or its nonprofit assignee, the right tomatch a private offer to purchase where theowner is seeking to sell. Typically, the right offirst refusal is triggered only if the owner triesto sell during the notice period, prior to conversion.It does not prevent the owner from convertingduring the notice period and then selling.Nonprofits, which are heavily dependentupon public funding, often have difficultymatching the timeframe of private buyers thathave cash on hand for due diligence and readyaccess to financing.Preemptive Purchase RightsThis approach gives prospective preservationpurchasers an exclusive window of opportunityto make an offer. For example, the newCalifornia law gives prospective purchasers listedon the state's preservation website an exclusiveright to make an offer during the first sixmonths of the conversion notice period,whether or not the owner intends to sell. 32During the next six months, preservation purchasershave a right of first refusal to match anyprivate offer. Although the owner is not requiredto accept a preservation purchase offer—exceptwhen it is made pursuant to the right of firstrefusal—this provision at least gives nonprofitsa timing advantage.The San Francisco ordinance provides an exclusivenegotiation period during which the citycan offer the owner a fair return price, which istied to the property's rent-controlled value. Thistool has been used in conjunction with rent controlto facilitate several transfers to nonprofitswith substantial city funding. In general, however,preemptive purchaser rights cannot force anunwilling owner to sell.Eminent DomainSome localities have used eminent domainpowers as a last resort to mandate a sale forthe public purpose of preserving affordablehousing. The housing must be purchased for itsappraised fair market value. Usually this tacticinvolves threatened or actual litigation, followedby a settlement that includes a preservationsale.For example, the City of Pacifica, California suedunder its eminent domain powers to acquireOceanview Apartments, a 100-unit project. Theowner had cancelled Section 8 voucher leaseschapter three: State and Local Preservation Tools and Strategies23

after refusing to accept the housing authority'spayment standard as the maximum rent. Thecity negotiated a settlement in which it acquiredthe property with state and local funds.Ownership was eventually transferred to anational nonprofit organization.In Denver, Colorado, after the owner of EastVillage Apartments opted out of a 160-unit project-basedSection 8 contract, the city and theproject’s tenants sued to acquire the propertyunder eminent domain. A purchase, whichincluded substantial state and local funding,was ultimately negotiated with the DenverHousing Authority. Tenants are negotiating furtherwith the housing authority to ensure thatthe Section 8 contract is renewed on a longtermbasis.Both Denver and Portland now have ordinancesthat explicitly authorize the locality to use eminentdomain to preserve affordable housing.Other Legal ClaimsA variety of other legal claims have been usedby residents and advocates to challenge conversionsof federally subsidized housing. 33 Forexample, the conversion may constitute abreach of existing local use restrictions (seeabove). The owner may have violated federal,state, or local notice requirements. Or theremay be a basis for fair-housing claims if theconversion will adversely or disproportionatelyaffect members of minority groups, perpetuateracial segregation, or if HUD has failed to promoteother fair-housing opportunities.Federal PreemptionMany state and local preservation initiativeshave been subject to legal challenge based onfederal preemption claims. Specifically, Section232 of LIHPRHA preempts state and local lawsto the extent that they restrict the owner's abilityto prepay, are incompatible with LIHPRHA, orare otherwise targeted exclusively to Section236 and Section 221(d)(3) BMIR projects thatare eligible to prepay. At the same time, laws of"general applicability," which also include prepayment-eligiblehousing, are not preempted.Accordingly, state and local ordinances shouldbe drafted broadly enough to fall under the protectionof the general applicability exception.2. FINANCIAL/ TAX INCENTIVESState and local governments have developed anarray of financial and tax incentives to help preservethe subsidized housing stock. In designingsuch programs, especially in view of thescarcity of state and local funds, a primary considerationis how to target incentives to achievethe highest impact. For example:Eligible Property. Should incentives be targetedto properties with the highest and mostimmediate risk, or should they be more generallyavailable? Should incentives be limited toproperties at risk of market-rate conversion, orshould they also be available to properties atrisk of disinvestment, default, and foreclosure?Eligible Recipients. Should incentives be availableonly to nonprofit purchasers, or also toexisting owners and/or for-profit purchasers?Broadening the scope of potential beneficiariesmay be necessary to garner political support, orto ensure that the maximum number of propertiescan be preserved. A possible compromisecould require any existing owner to provide aright of first refusal and/or option to a qualifiednonprofit with respect to any future sale.Long-Term Affordability. What type of userestriction should be imposed? How longshould it last—20, 30, or 50 years? The remaininguseful life of the housing?These issues are subject to tradeoffs whicheach jurisdiction will value differently. Findingthe appropriate balance—for example, whetherto curtail the number of eligible recipients andproperties in order to boost long-term affordability—ispart of the challenge of developing asuccessful preservation strategy.Preservation Housing ElementIn California, localities are required to prepare a10-year analysis of their at-risk subsidizedinventories as a component of their localHousing Element and General Plan. The locality24 chapter three: State and Local Preservation Tools and Strategies

must state its preservation goals and objectivesand provide a five-year action program thatidentifies available financing and subsidies forpreservation. This requirement fosters localresponsibility for the development of preservationstrategies and commits local resources tosupport those efforts.Targeting Federal ResourcesEach state is required to establish a QualifiedAllocation Plan (QAP) for distribution of competitiveLow- Income Housing Tax Credits (LIHTC).Many states have established set-asides, priorities,or bonus points for project categories thatinclude preservation of at-risk federally subsidizedhousing. The categories may be broadlyor narrowly defined. For example,Massachusetts has a 40 percent set-aside forpreservation, a broadly-defined category thatincludes existing unsubsidized properties aswell as HUD-subsidized housing. California hasa 10 percent set-aside specifically for at-riskfederal projects whose subsidies are set toexpire within two years. Similar targeting mayextend to tax-exempt bonds, HOME, and otherfunds subject to competitive allocation, instates where these resources are scarce.Dedicated State/Local RevenuesSeveral states and localities have earmarkedresources exclusively for preservation. Addingnew funds to the existing pie helps to relievecompetition between production and preservationuses. Minnesota, for example, has appropriateda total of $30 million for preservationcapital funding over the past three years.Massachusetts has established a preservationbond program financed by state revenues.Seattle supports preservation activities withfunds appropriated from its general revenues($1 million in 1999). San Francisco uses taxincrement financing for preservation. To theextent that advocates are successful in developinga federal matching grant program for preservation,states and localities that are devotingtheir own resources to preservation stand togain considerably. 34Refinancing ProgramsMany state housing finance agencies have specialloan programs to refinance at-risk federallysubsidized properties. These programs typicallycover acquisition, rehab, and/or equity takeoutby existing owners. Some programs include acapital or debt subsidy component—for example,low- or zero-interest loans for preservationpurchases funded internally by the housingfinance authority or by the state. Currently,Vermont, Pennsylvania, Maine, and Missouri allhave such subsidy programs.Property Tax ExemptionThe State of Washington has enacted localoption legislation that authorizes localities toadopt property tax exemptions for affordablelow-income housing projects funded with stateresources.Charitable Contribution ProgramThe State of Missouri allows sellers facing highexit taxes to take a state tax credit if theydonate an affordable housing property to a nonprofitpurchaser. Donor/sellers may deductfrom their taxes a sum equal to 55 percent ofthe donated value. This tool was recently usedto facilitate a large portfolio sale of subsidizedproperties by a private owner to a national nonprofitentity, and it is currently being used inconjunction with the transfer of several Mark-to-Market projects.CASE STUDIES1. STRATEGIC INTERVENTIONS: MINNESOTA 35In Minnesota, attorneys from the MinnesotaPreservation Project have collaborated with residents,advocates, community groups, and stateand local officials to develop multifacetedstrategies for affordable housing preservation.The strategies typically use financial incentivesas well as legal and regulatory pressure. A typicalprotocol for a particular project includes thefollowing steps:Investigation. Review of tenant notices, projectfiles (at HUD and other agencies), land or deedrecords, and tenant and community demographics.Resident Organizing. Contact with project residents,followed up with education and organizing.chapter three: State and Local Preservation Tools and Strategies 25

Owner Assessments. Assessment of theowner's intentions and needs, and the capacityand interest of potential nonprofit purchasers.Legal Analysis. Analysis of potential legalclaims: notice requirements, existing userestrictions, HUD prepayment approval requirements,HUD-held or HUD-sold mortgage status,Enhanced Voucher legal requirements, and fairhousingissues. Minnesota law requires a oneyearnotice, including a Tenant ImpactStatement for all subsidized mortgage prepaymentsand subsidy contract opt-outs. 36 BecauseHUD-subsidized projects are disproportionatelyoccupied by minority residents, owners' actionsare often subject to fair-housing claims.Financial Analysis. Analysis of the feasibility ofretaining affordability under existing ownershiparrangements or through a sale to a nonprofitpurchaser. Each year, Minnesota appropriatesstate funds for preservation which are availablefor both existing owners and new purchasers.Publicity. Contacts with media, elected representatives,and government agencies focuspublic attention on the project.Resolution. Wherever possible, development ofa preservation-oriented alternative throughnegotiation. Litigation is a last resort, althoughthe threat of litigation is often necessary andhelpful. In most cases, threatened litigation hasresulted in a favorable settlement.Case Study #1: Franklin Lane ApartmentsThis 66-unit project financed under Section 236is located in an integrated suburb outsideMinneapolis and is occupied primarily by elderlyand disabled residents. Historically, theSection 236 rents have been substantiallybelow market. A few years ago, the owner soldto a private purchaser who intended to prepaythe subsidized mortgage and convert the propertyto market-rate.StrategiesPreservation advocates and attorneys initiallypressured HUD to deny the Transfer of PhysicalAssets application, but this tactic failed. Withstrong political support from community groupsand local officials, tenants then launched ayear-long media and advocacy campaign.Tenants threatened litigation based on fairhousingclaims and potential violations of federaland state notice laws, and prepared topicket the owner's new restaurants downtown.OutcomeThese actions brought the new owner to thenegotiating table and ultimately resulted in thetransfer of ownership to a community-basednonprofit purchaser. Resources for the transactionincluded federal Low Income Housing TaxCredits, state preservation funds, county HOMEfunds, retained IRP subsidy, and project-basedcertificates through the PHA for all of the units.No tenants were displaced and long-termaffordability was secured.Case Study #2: Hopkins VillageThis 161-unit Section 236 project located inanother integrated suburb of Minneapolis isoccupied primarily by elderly and disabled personsas well as some families of color. The projectis partially-assisted with a Section 8 LMSAcontract covering 64 units. The owner notifiedthe tenants of his intention to prepay the mortgageand opt out.StrategiesInitial negotiations with HUD, the local housingfinance agency, and the tenants were unsuccessful.After the owner rejected the housingfinance agency's offer of state preservationfunds, as well as a purchase offer from a nonprofit,residents and advocates sued the ownerand HUD for failing to comply with fair-housingand federal and state notice laws. 37 The preservationcampaign received widespread publicityand community support.OutcomeAlmost immediately, HUD called a settlementconference, and the owner ultimately agreed tosell to a nonprofit. Resources for the transactionincluded federal Low Income Housing TaxCredits, state preservation funds, retained IRPsubsidy and project-based Section 8 subsidies.26 chapter three: State and Local Preservation Tools and Strategies

Case Study #3: Selby Dayton ApartmentsThis 93-unit Section 236 project is located in agentrifying inner-city St. Paul neighborhood.The residents are predominantly minority families,and 100 percent of the units are Section 8-assisted. The property was in poor conditiondue to the owner’s neglect, and when HUD notifiedthe owner of its intent to terminate theSection 8 contract, the owner found a buyerwho planned to undertake a market-rate conversion.StrategiesAfter residents and advocates failed to blockthe proposed sale and conversion, they filed alawsuit against HUD and the owner. Since HUDheld the mortgage, litigants claimed it had astatutory obligation to maintain existing restrictionsthrough the end of the original mortgageterm. The litigation and related preservationactivity received widespread local support andpublicity.OutcomeOnce again, HUD called for a settlement meetingimmediately after the litigation was filed.The city secured a purchase agreement andtransferred ownership to a nonprofit developer.Resources for the transaction includedHistorical and Low Income Housing Tax Credits,state preservation funds, city CDBG funds,retained IRP subsidy, and Section 8 projectbasedsubsidies.2. ENFORCEMENT OF EXISTING USERESTRICTIONS: MASSACHUSETTSIn Massachusetts, coalitions of residents, advocates,and government officials have developedsuccessful preservation strategies around theenforcement of existing state and local userestrictions. These restrictions are derived fromthe following sources:Tax Relief (Chapter 121A). Under this state program,many developers of federally-assistedhousing pay a formula-based excise tax in lieuof regularly assessed property taxes. Inexchange for tax relief and predictability, thedevelopers agree to provide public benefits,such as low- and moderate-income housing, forthe term of the 121A contract, typically 40 years.While most 121A contracts do not include anexplicit use restriction, promises made by thedevelopers in their original applications havebeen construed as legally binding.Zoning. Many federally subsidized projectsreceived some type of local zoning relief at thetime of original construction based on their lowandmoderate-income status. A common exampleis a parking variance granted on thegrounds that low-income elderly tenants needfewer cars. Unless stated otherwise, the obligationsimposed by zoning relief are permanent.In some cases, the zoning approval explicitlystipulates that parking requirements revert tothe original standard if the use and occupancyof the project changes.Urban Renewal. In projects that were built onurban renewal land, deed covenants oftenrestrict the parcel’s use to low- or moderateincomehousing for the term of urban renewalplan. Even if a parcel has no specific restrictions,if the property is located in an urbanrenewal area it is often subject to the low- andmoderate-income housing goals of the urbanrenewal plan.Case Study #4: Fresh Pond Apartments(Chapter 121A)This 500-unit property was developed 30 yearsago under the Section 221(d)(3) BMIR programin what is now a prime location in the City ofCambridge. Approximately two-thirds (338) ofthe units were assisted under a project-basedSection 8 LMSA contract—but only 250 unitswere actually receiving Section 8 subsidies, dueto what advocates perceived as the owner'sdeliberate underutilization of the contract inanticipation of market-rate conversion. Both theSection 8 and the non-Section 8 BMIR unitswere viewed as critical housing resources, withmarket units in the neighborhood renting fortwice the BMIR rents.In 1998, the owner sent tenants an opt-outnotice and announced his intention to prepaythe BMIR mortgage. The city's CommunityDevelopment Department played a lead role byorganizing residents, retaining its own consultants,and engaging the owner and HUD in negotiations.chapter three: State and Local Preservation Tools and Strategies 27

StrategiesAdvocates brought the owner to the negotiatingtable on the basis of HUD's existing FlexibleSubsidy contract and Use Agreement, whichrequired the owner to operate the project as221(d)(3) housing through the original mortgageterm and to secure HUD's consent to prepayment.HUD refused to approve the prepaymentunless the project remained affordable tolow-income families through 2010, the mortgagematurity date. 38 However, HUD stated thatthere were no federal rules preventing theowner from opting out of the Section 8 contract.The city then asserted claims under the project’sChapter 121A contract, which referenced theowner’s promise in the original application to constructand maintain a Section 221(d)(3) project withSection 8 assistance for 40 years. Based on thesedocuments, the City argued that the owner could neitherprepay nor opt out through 2010.The owner agreed to explore HUD's new Mark-Up-to-Market initiative as an alternative but quickly discoveredtwo hurdles. First, because the Section 8 contractwas underutilized, the financial benefits availablefrom Mark-Up-to-Market were limited. Second,the existing low- and moderate-income use restrictionsassociated with the City's 121A contract, andwith HUD's Flexible Subsidy loan, constituted an eligibilitybarrier. HUD would have to provide a waiverallowing the owner to participate in the Mark-Up-to-Market program. 39 The same restrictions would effectivelycap the market rents, thus reducing the level ofbenefits available from this program. Just how the cityinterpreted its 121A use restriction to HUD thusbecame critical to the owner's ability to take advantageof Mark-Up-to-Market incentives.OutcomeUltimately, the City succeeded in using its 121Arestrictions to extend affordability. The finalpackage included the following provisions:• All units covered by the Section 8 contract(338), to the extent actually occupied by subsidy-eligiblehouseholds, were marked up tothe effective BMIR limit (rents deemed affordableat 30 percent of the maximum BMIRincome level, or 95 percent of the AreaMedian Income (AMI)). Underutilized Section8 slots will be marked-up upon turnover,when the units are reoccupied by Section 8-eligible households. The owner is obligated torenew and fully utilize the Section 8 contractthroughout the term of the new use agreement.• If project-based Section 8 is discontinued, theowner must accept vouchers at the maximumPHA payment standard. Upon turnover, theunits will be rented at a stricter affordabilitystandard, 30 percent of 80 percent of AMI• While prepayment is permitted by the settlement,all 166 non-Section 8 units must beheld harmless at the OCAF-adjusted BMIRrents (for current and future tenants). Futureoccupancy will be restricted to householdswith incomes at or below 80 percent of AMI,vs. the current limit of 95 percent of AMI.• The owner must complete capital improvementsaccording to an agreed-upon schedule.• The term of the new use agreement is 20years, through 2020.• The city is a party to the new use agreementand has enforcement powers, along with HUDand the project residents.Following this precedent, Chapter 121A contractrequirements have been used by the BostonRedevelopment Authority to maintain affordabilityin at least a half dozen projects. InBoston, every 121A project that seeks to participatein the discretionary Mark-Up-to-Marketprogram is required by the BRA to execute along-term Section 8 contract that is at leastcoterminous with the 121A term, providing up to20 additional years of affordability.Case Study #5: Salem Heights(Chapter 121A, Zoning)Salem Heights is a Section 236 project containing284 units, built 27 years ago in a communitynorth of Boston. The tenancy is primarily elderly,with rents approximately half of current marketlevels. The property was formerly 20 percentSection 8-assisted, but the owner opted out ofthe Section 8 contract several years ago and,more recently, sought to prepay the HUD-assistedmortgage.StrategiesThe tenants and the city went to court andenjoined the prepayment based on two claims.First, they argued that the 121A tax contractrestricts the property's use to “moderate-28 chapter three: State and Local Preservation Tools and Strategies

income housing” for 40 years, through 2013, asstated in the owner's application. They alsoasserted that zoning variances for parking,access, and density were granted becauseSalem Heights was a publicly-financed projectfor the elderly—and if public financing were tobe terminated, the basis for these varianceswould no longer exist.The state's Attorney General filed an amicuscuriae brief in support of the city’s position,based on the state's 121A contract with theowner, which was independent of the city’s contract.Subsequently, the state's Department ofHousing and Community Development (DHCD)issued a ruling to clarify that the owner couldnot prepay without DHCD's prior consent,because prepayment would constitute a fundamentalchange in use of the project, which,under the 121A statute, requires DHCDapproval. This ruling has major implications forat-risk 121A projects statewide.OutcomeWhile there has been no final ruling on the merits,to date all of the owner's legal appeals havebeen unsuccessful, and the court has ruled thatthe City is entitled to summary judgment onseveral of its most important claims. The owneris enjoined from prepayment, and the originalWellstone Notice 40 has expired. With tenantsupport, a local CDC is seeking to negotiate thepurchase of the property. Most recently, theowner has opened settlement discussions withthe City aimed at preserving affordability.Case Study #6: New Falls Apartments(121A, Zoning, Urban Renewal)This 60-unit partially-assisted project, whichincludes 41 project-based Section 8 units, islocated in a highly desirable suburban communitywest of Boston. When the 20-year Section 8New Construction/ Substantial Rehab contractexpired last year, the owner notified tenants ofhis intention to opt out.StrategiesAfter researching the project, the city discoveredthat it had three forms of leverage. First,the owner in his original 121A application promisedthat all 60 units would be occupied bySection 8-eligible households for 40 years,through 2018 (although the documents alsoacknowledge the 20-year subsidy contractterm). Additionally, zoning variances granted bythe city required "up to" 41 Section 8 units,either project-based or tenant-based, arguablyon a permanent basis. Finally, the land dispositionagreement associated with the urbanrenewal parcel upon which the housing wasconstructed required 41 units of low- and moderate-incomehousing through 2009.The 121A contract also provided for a significantdeferral of tax liability while the property wassubject to HUD-restricted Section 8 rents, withinterest accruing at 14 percent. The deferredtaxes are due and payable in 2020 or upon refinancing.By the end of 1999, the tax debt on theproperty had accrued to $1.5 million. Not surprisingly,the owner was seeking to renegotiatethe tax liability formula.The city notified HUD of its restrictions, hired aconsultant, began working with the residents,and eventually forced the owner to the negotiatingtable. The city threatened to litigate, butalso offered to support the owner’s participationin the discretionary Mark-Up-to-Market program—byinterpreting all three local use restrictionsin a way that facilitated the owner receivingfull market rent. In exchange, the city wouldrequire a long-term contract renewal through2018, the full 121A term.The city also offered to consider modifying the121A contract to continue the tax deferral evenwith the Section 8 rents at market levels and tofurther defer payment of the tax debt if theowner wants to refinance. In exchange, the citydemanded a right of first refusal and an optionto purchase the property at the end of the 121Aterm, with the ability to apply the future taxdebt against the purchase price.OutcomePending the final outcome of these negotiations,the owner has continued to renew theSection 8 contract on a year-to-year basis. Thecity and the tenants hope that their creativeenforcement of local restrictions will ultimatelylead to a long-term preservation solution for theproperty.chapter three: State and Local Preservation Tools and Strategies 29

3. STATE AND LOCAL FUNDING INITIATIVES:MASSACHUSETTS, WASHINGTONIn direct response to local advocacy anddemonstration of need, both theCommonwealth of Massachusetts and the Stateof Washington have developed a set of flexiblefunding mechanisms for preservation, rangingfrom technical assistance and predevelopmentfunding through permanent financing.Case Study #7: Massachusetts Funding ToolsThe Commonwealth of Massachusetts hasdeveloped a broad array of financial tools toassist in the preservation of federally subsidizedhousing. These include:Community Economic Development AssistanceCorporation (CEDAC)CEDAC is a quasi-public intermediary establishedby the state legislature for the generalpurpose of furthering community economicdevelopment. Over the years, CEDAC has playeda unique role in the preservation field, providingpredevelopment loans and technical assistanceto community-based nonprofit purchasers of atrisk,federally subsidized housing. CEDAC alsoadvocates on preservation issues at the stateand local government level. This advocacy isinformed by the organization’s detailed involvementin, and sophisticated understanding of,transactional issues.Capital Improvement and Preservation Fund(CIPF)The CIPF provides direct capital funding forpreservation transactions. Under this program,the commonwealth floats general obligationbonds, which are repaid later from state appropriations.Unlike revenue bonds, which are paidfrom the projects themselves, this mechanismprovides projects with deferred loans or grants.The Massachusetts Department of Housing andCommunity Development administers the program,accepting rolling applications. The annualamount of CIPF funding is subject to an administrativecap on the state’s total bond issuance.CIPF funds are targeted specifically to federallyand state-subsidized projects with expiring userestrictions or subsidy contracts. A portion ofthe funds may be used as predevelopmentgrants or loans to nonprofit purchasers.Pending legislation will increase the original$20 million capitalization for the fund by anadditional $35 million.LIHTC Qualified Allocation Plan Set-AsideThe Commonwealth's Qualified Allocation Plan(QAP) for competitively allocated Low IncomeHousing Tax Credits includes a 40 percent setasidefor preservation. This category includesboth federally and state-assisted housing andother existing multifamily housing, as well asHOPE VI public housing projects. For subsidizeddevelopments, only at-risk projects with expiringuse restrictions or subsidy contracts are targetedfor funding.Massachusetts Housing Partnership Fund(MHP)The Massachusetts Housing Partnership Fund(MHP), another quasi-public lender, is capitalizedby fees generated from state bank mergerswith out-of-state banks. This source of fundingpermits considerable lending flexibility andenables MHP to make primary mortgage loanswith no additional credit enhancement. MHPhas financed a number of preservation transactions.MassHousingMassHousing (formerly the MassachusettsHousing Finance Agency) provides both taxableand tax-exempt bond financing for preservationtransactions. Under the Friendly PrepaymentProgram, the agency will also refinance existingHUD-subsidized mortgages with a minimumaffordability commitment: 20 percent of theunits must remain affordable to householdsearning less than 80 percent of AMI, or lessthan 50 percent of AMI if the HUD Risk Sharingmortgage insurance program is utilized for creditenhancement.Case Study #8: Washington State Section 8Local Response ProjectThe State of Washington provides some usefulmodels of community collaboration to developinnovative preservation financing strategies.These include the following:30chapter three: State and Local Preservation Tools and Strategies

Project-Based Section 8 Risk AssessmentThis initiative was sponsored by theWashington Low Income Housing Network inJuly 1998. Drawing on a broad-based communityadvisory board that included representativesfrom local government, the private sector, nonprofits,tenants, and community representatives,the network’s goal was to identify andtest new policy and financing tools to preservefederally-assisted housing in Washington State.• Subordinated loans to cover required ownercontributions for rehab and transaction costsin Mark-to-Market transactions, which areserviced by the allowable Capital RecoveryPayment fee. 41• Section 8 reserve guarantees to satisfy primarylender underwriting requirements withshort-term project-based subsidies or transitionalEnhanced Vouchers.The group looked at seven different financingtools, including property tax exemption, utilityrate reduction, subordinate debt, additionaloperating subsidy, and low-cost credit enhancement.Based on the study, the state legislatureauthorized a property tax relief program forstate-assisted affordable housing developmentswhich could be adopted on a local option basis.Several localities have adopted this provision.Since the State of Washington has no incometax, property taxes often impose a considerableburden on real estate operating budgets.Washington Community Investment Fund(WCIF)A second outcome of the risk assessment studywas the Washington Community InvestmentFund, sponsored by the Puget Sound LocalInitiatives Support Corporation (LISC) AdvisoryBoard and the Washington CommunityDevelopment Loan Fund (WCDLF). The fund iscapitalized with debt and equity contributionsfrom both the public and private sectors.WCIF provides a broad range of loan productsfor affordable housing developers and CDCs inWashington State, which they may use for bothproduction and preservation transactions. Forpreservation projects, the primary types offinancing include the following:• Predevelopment loans for third-party expensesand some staff costs, on a case-by-casebasis.• Acquisition bridge loans to enable purchasersto accommodate seller and tax credit closingtimelines.chapter three: State and Local Preservation Tools and Strategies 31

chapter fourResearching the Property: Towards a Preservation StrategyThis chapter discusses the kinds of informationthat can be collected about a particular project,how to use it, and where to find it. The followingtypes of information will be addressed:1. Regulatory2. Market3. Ownership4. Financial5. Property Condition6. ResidentsIn most cases, the first two issues—regulatoryand market—will determine what strategies areeven possible, but the status and motivations ofthe existing ownership entity are also important.Project finances, property conditions, andresidents will also influence the preservationstrategy.Research into these six areas should be thefoundation of any preservation strategy.Research will help determine whether or not aproperty is at risk of conversion or restructuringand may suggest what the owner is likely to do.Research can help preservation advocates evaluatepotential purchase opportunities anddevelop a preservation plan. The more anorganization learns about the property, the betterits negotiating strategy or purchase plan willbe. Research also focuses community attentionon the project. Project research can be animportant organizing tool, and effective advocatesknow that knowledge is power.This chapter explains how to research each ofthe six issues. Each section begins with a quickreferencechart that summarizes key elementsof the issue area and their implications fordeveloping a preservation strategy, and eachsection concludes with a list of informationsources and where to find them. 421. REGULATORYThe property’s existing regulatory framework isfundamental to determining both the constraintsand opportunities facing owners andprospective preservation purchasers. Many purchaseefforts have stalled because the partiesfailed to assess what was possible, or precluded,given the property's existing contractualand regulatory obligations.REGULATORY ISSUES AT A GLANCEIssueRental SubsidyContract StatusMortgage StatusLimited DividendResidual ReceiptsBond-Financed ProjectsImplications for Preservation StrategyDetermines eligibility for opt-out, owner/ purchaser opportunity to increaseproject income (or obligation to reduce it). Key timing and compliance issues.Indicates prepayment/ preservation status and eligibility;basis for determining owner compliance.Indicates potential conversion risk (or incentive to Mark-Up-To-Market).Indicates potential conversion risk.Potential additional restrictions.32chapter four: Researching the Property: Towards a Preservation Strategy

Rental Subsidy Contract StatusKnowing the status of a project’s rental subsidycontract will help to determine whether theowner might have a chance to opt-out, whetherthere is an opportunity to increase projectincome, or whether there is an obligation toreduce rents—and when these changes are likelyto occur. These variables will also frame theopportunities available to a preservation purchaser.Understanding the contract can alsoprovide a basis for assessing the owner’s compliancewith applicable requirements.Type/Date. Does the property have one or morerental subsidy contracts and, if so, what type—Section 8 Loan Management Set-Aside, Section8 New Construction/Substantial Rehab, Section8 Mod Rehab, Rental Assistance Program orRent 43 Supplement? Is it an original pre-MAHRAcontract or a post-MAHRA contract renewal (i.e.,executed after October 27, 1997)? The type ofcontract and its execution date will determinethe available renewal and rent increase options.Only projects with post-MAHRA contractrenewals, for example, are eligible for Mark-Upto-Market.Expiration. What is the contract expiration date?If expiration is imminent, the property is morelikely to be at-risk. Conversely, there may begreater opportunities for preservation (forexample, Mark-Up-to-Market) at the point ofcontract expiration.Coverage. What percentage of the units is covered—partialor 100 percent? This will determinethe value of any incentives that involveonly the Section 8 units (for example, Mark-Up-To-Market).Renewal Request. If the contract is expiringsoon, has the owner filed a request to renew oropt out? HUD requires this notice be filed atleast four months prior to the contract expirationdate.Opt-Out Notice. Has as an opt-out notice beensent to the tenants? HUD requires this notice atleast one year prior to date of contract termination.Mark-to-Market Status. If the contract is expiring,is the project in the Mark-to-Marketpipeline? If so, what is its status?Mortgage StatusThe nature of the property's first mortgage mayaffect a wide range of variables including theowner's right to prepay, continuation of userestrictions, eligibility for programs such asMark-to-Market, notice requirements, dividendrestrictions, and Residual Receipts status.These factors will influence the owner's decisionsas well as opportunities for a preservationtransaction.Lender Type. Is the mortgage insured or held byHUD? Financed by a state or local agency? By aprivate lender? This could affect eligibility forcertain types of programs (e.g. only projectswith HUD-insured or HUD-held mortgages areeligible for Mark-to-Market). Also, if the mortgageis, or was once, held by HUD, the ownermay be obligated to maintain the originalaffordability for the full mortgage term.Program. If the mortgage is insured or subsidizedby HUD, what is the applicable program?If it is a Section 221(d)(3) BMIR or 236 project,mortgage prepayment may be a concern.Section 221(d)(4) and Section 220 are commontypes of financing for Section 8 NewConstruction/Substantial Rehab projects.Section 202 projects are nonprofit-owned andtypically have no conversion risk.Prepayment Eligibility. If the mortgage is subsidizedunder Section 221(d)(3) BMIR or 236, is itan expiring use project that is eligible to prepay?Does it have any characteristics that mightprohibit or complicate prepayment?For example, if the original owner/mortgagorwas a nonprofit, or if the project is HUD-insuredwith a Rent Supplement contract, prepayment isprohibited without HUD consent. If the projectreceived Flexible Subsidy assistance, it shouldhave a 40-year use agreement and may alsohave a prepayment restriction.If the project is eligible to prepay, when is theprepayment eligibility date? For eligible HUDchapterfour: Researching the Property: Towards a Preservation Strategy33

insured projects, this date is 20 years from thedate of final endorsement of the HUD mortgageinsurance.Prepayment Notice. If the project is eligible toprepay, has a prepayment notice (WellstoneNotice) been filed with tenants, HUD, and theCEO of the state or local government? If so, themortgage may be prepaid within 150 days, butno later than 270 days, from the notice date.Prepayment/ Preservation Status. Has the mortgagealready been prepaid, foreclosed, or otherwiseterminated? Has the property alreadybeen preserved under ELIHPA or LIHPRHA? 44 Ifso, there should be a preservation use agreementwith rent and income restrictions that willaffect the future use of the property during itsterm. For ELIHPA properties, this is the remainingterm of the original mortgage. For LIHPRHAprojects, use restrictions last for the remaininguseful life of the property, or at least 50 years.In most cases, the Section 8 contract must beretained for the term of the preservation useagreement.Residual ReceiptsIf there is a limited dividend restriction, whoowns the Residual Receipts—the annual cashflow generated in excess of the allowable dividend?In Section 8 NewConstruction/Substantial Rehab projects withcontracts executed by HUD before the cut-offdate, Residual Receipts belong to the ownerwhen the Section 8 contract is terminated. Thisgives owners substantial incentives to opt outor convert.Bond-Financed ProjectsState or local bond financing may impose anadditional set of dividend restrictions and rulesgoverning the disposition of Residual Receipts.There may also be use restrictions tied to themortgage financing and sometimes even runningwith land which could affect the future useof the property (see Market, below).Maturity Date. If the mortgage is subsidized,when does it mature? At maturity, all of therestrictions associated with the mortgage (orwith any ELIHPA use agreement, if applicable)will terminate. For early 221(d)(3) BMIR projectsbuilt in the mid-1960s, this date may be justaround the corner.Limited DividendIs the owner's cash flow distribution restricted?If so, there may be a greater conversion incentiveand risk. HUD restricts owner dividends inall 221(d)(3) BMIR and 236 projects, and inSection 8 New Construction/Substantial Rehabprojects with contracts executed by HUD afterthe applicable cut-off date (November 5, 1979for New Construction; February 20, 1980 forSubstantial Rehab; and February 29, 1980 forHFA-financed projects). However, if the ownerexecutes a Mark-Up-to-Market contract, the dividendrestriction will be eliminated or significantlyincreased.34chapter four: Researching the Property: Towards a Preservation Strategy

REGULATORY INFORMATION SOURCESProject Documents. The most important sources of regulatory information are the project documents themselves—themortgage, note, regulatory agreement, rental subsidy contract, Flexible Subsidy contract, ELIHPAor LIHPRHA use agreement, and any amendments. These can usually be obtained through a Freedom ofInformation Act (FOIA) request to HUD and/or the HFA, if applicable. Many of these documents are recordedin the local Registry of Deeds.Agency Filings. For agency filings, such as Section 8 contract renewal requests or Wellstone Notices, contactHUD or the applicable public agency that received the filing. Third-party Section 8 contract administrators,usually the state HFA, now handle most filings.Mark-to-Market. HUD/OMHAR provides a frequently updated status report on all Mark-to-Market propertiesassigned to PAEs, organized by state (Exhibit 4). Seehttp://www.hud.gov/offices/omhar/readingrm/reports.cfm, Click on "PAE & Assigned Properties Report" link(PDF or MS Excel).Section 8 Expiring Contracts. HUD maintains a database for all properties with Section 8 contracts, includingcontract, property, and owner information. The "Multifamily Assistance and Section 8 Contracts Database,"which is updated monthly, can be downloaded from http://www.hud.gov/offices/hsg/mfh/exp/mfhdiscl.cfm.(See Exhibit 5 in Exhibits.), which illustrates some of the basic information that can be extracted from thisdatabase.HUD Mortgages—Insured or Terminated. HUD maintains separate databases for currently and formerlyinsured multifamily mortgages, updated quarterly. See www.hud.gov/offices/hsg/mfh/mfdata.cfm. Databaseson "Mortgages Currently Insured" or "Terminated Mortgages Database" may be downloaded from this page.(See Exhibit 6 in Exhibits.), which illustrates some of the basic information that can be extracted from thisdatabase.Prepayments and Opt-outs. The National Housing Trust maintains data on subsidized mortgage prepaymentsand opt-outs for each state, including individual project summaries (See Exhibits 7 and 8 in Exhibits). Seehttp://www.nhtinc.org/data.asp for the following databases: "Search Prepayment Statistics By State" or"Search Opt-Out Statistics by State."chapter four: Researching the Property: Towards a Preservation Strategy35

2. MARKETUltimately, the conversion risk of the propertydepends on the relationship between its currentuse and its maximum market potential.Preservation opportunities, including the avail-ability of federal subsidies, are also closely tiedto how the property is positioned in the marketplace.MARKET ISSUES AT A GLANCEIssueRents(Below or Above market)LocationMarket CharacteristicsMarket ValueUse and RegulatoryRestrictions(Urban Renewal,Zoning Relief, Tax Relief, PublicFinancing, Rent ControlImplications for Preservation StrategyIndicates conversion/ foreclosure risk and nature of preservationopportunity (through increased Section 8 rents or mortgage restructuring).Affects appraisal value/ conversion potential.Affects appraisal and preservation options.Highest and best use determines ultimate value.May limit appraisal value and conversion potential.RentsHow do the project rents compare with rents ofother properties that are similar in age, location,and amenities? This is a critical variable fordetermining the degree of risk to affordableunits and the opportunity for preservation.Below Market. If the project rents are belowmarket, the risk of conversion is greater. But ifthere are Section 8 units, there may also be apreservation opportunity through Mark-Up-to-Market and other federal programs.Above Market. If the project rents are abovemarket, there may be a risk of foreclosure—orthe potential for Mark-to-Market debt restructuringto preserve long-term affordability.LocationLocation plays a significant role in determininga property's current and prospective value.Some important issues include the following: Isthe project site and general location desirableor undesirable? What is located next door?Across the street? Are the surrounding usescompatible? Are transportation, jobs, shopping,and schools nearby? Are they accessible? Whatis the general neighborhood quality? Are theresigns of gentrification or disinvestment?Market CharacteristicsBeyond location, other key market indicatorsinclude: vacancy rates for affordable and market-ratehousing (especially rental); housingdemand vs. housing supply; and turn-backrates for Section 8 housing (i.e., the percentageof vouchers returned because recipients wereunable to locate housing within the allowabletime period). Some market indicators may havespecific relevance to a particular program. Forexample, if the area vacancy rate is below 3 percent,the owner of a below-market Section 8project may be eligible for Mark-Up-to-Marketon a discretionary basis.Market ValueWhat is the highest and best use of the propertythat is legally permissible, physically possible,and financially feasible on this site? Whatcould this property be in five years? In tenyears? Questions to ask include the following:Is the site zoned for office or retail use? Is therevacant land on the site that could be developed?Are there pending development plans forthis neighborhood (e.g., a new transit stop, or ahotel across the street)?36chapter four: Researching the Property: Towards a Preservation Strategy

Local Use and Regulatory RestrictionsAre there any local or state restrictions associatedwith the property that would limit its useafter federal restrictions expire? If so, the property'smarket value and conversion potential—as well as its ability to Mark-Up-to-Market 45 —could be affected. Common types of state/localuse restrictions include:Urban Renewal. For properties located in anurban renewal area, there may be deedcovenants or affordable housing requirementsassociated with the parcel or with the renewalplan in general.Tax Relief. The property may have received propertytax relief or other favorable tax treatment inexchange for its use as affordable housing.Public Financing. The property may havereceived state or local financing or subsidies inexchange for its use as affordable housing.Rent Control. The property may be subject torent or condominium conversion controls.Zoning Relief. Variances, special permits, orother forms of zoning relief may have beengranted for the original construction or substantialrehabilitation that require continued use ofthe property as affordable housing.MARKET INFORMATION SOURCESRent Comparability Studies. For almost all Section 8 properties, HUD requires owners to submit a rent comparabilitystudy when the original Section 8 contract expires, upon contract renewal under MAHRA—andevery five years thereafter. Section 8 projects whose contracts have not yet expired, but which are subject toAAF rent adjustments, must submit an annual market study if the owner wants to increase rents. Rent comparabilitystudies are not available from HUD under FOIA but can sometimes be obtained directly from theowner, or through a friendly state or local public agency.Market Data. Brokers, realtors, assessors, and other knowledgeable local sources can provide a good senseof the local housing market. The local housing authority should have data on Section 8 voucher utilization.Local Use Restrictions. Local planning, redevelopment, and housing agencies are good sources for neighborhoodplanning information and documents pertaining to state or local restrictions. Recorded restrictions canbe found at the Registry of Deeds.Appraisals. The owner may be willing to share a property appraisal. Prospective purchasers of subsidizedproperties may want to commission an independent appraisal before making a purchase offer.33chapter four: Researching the Property: Towards a Preservation Strategy 37

3. OWNERSHIPThe owner of a HUD-assisted property is typicallya complex entity representing divergentinterests that must be reconciled before anydecision to convert, sell, or otherwise preservethe property can be made. Tax considerations,estate planning, and a variety of other issues inaddition to property economics can influencethe decision of the ownership entity.OWNERSHIP ISSUES AT A GLANCEIssueLegal StructureManagement StructureOwner MotivationTax ConsiderationsRegulatory StatusBusiness PlanPersonal FactorsLocal LeverageImplications for Preservation StrategyDefines participants in ownership entity and their relationships.Defines respective rights and interests of participants in ownership entity.May be influenced by purpose of owner’s original investment in the housing.Taxes due on sale or under continued ownership can affect owner decisions; mayrequire mitigation strategies."HUD fatigue" or regulatory compliance issues can affect owner motivation.Useful information for predicting owner behavior.Useful information for predicting owner behavior.Useful information for influencing owner behavior.Legal StructureWhat is the legal form of ownership? Most subsidizedproperties are owned by limited partnershipsconsisting of one or more general partners(GPs) and any number of limited partners(LPs). The GPs are the principals who put thedeal together and control most of the decisions;typically one is designated as the managinggeneral partner (MGP). The LPs are investorswho bought equity shares and contributed capital(syndication proceeds) to the partnership inexchange for tax benefits. These parties havedifferent and often conflicting interests thatmust be reconciled in any transaction.A common ownership arrangement for subsidizedproperties developed or transferred duringthe past 20 years is the two-tiered limitedpartnership. The upper tier is an investmentpartnership formed by a syndicator in order toraise pooled equity capital for multiple projects.This may be a public fund involving thousandsof individual investors, or a private syndication.The lower tier is the project partnership involvingone or more local GPs. The upper tier investmentpartnership is the LP of the lower tier projectpartnership. An affiliate of the syndicatormay serve as a GP in the lower tier as well.While the partnership entity typically has title tojust the single asset, the principals may or maynot have additional holdings. Subsidized housingproperty owners range from actual singleprojectowners, to regional companies with adozen projects, to large national real estateoperators with tens of thousands of units.38Management StructureContractual Authority. Who makes decisions forthe property? In most cases, prospective buyerswill work with the MGP, who controls the dayto-daybusiness operations of the partnership.But even in partnerships where the GPs havesubstantial contractual authority, they are conchapterfour: Researching the Property: Towards a Preservation Strategy34

strained by their fiduciary duty to the LPs (consistentwith the partnership purpose and applicablelaws), so it's important to know somethingabout the LPs as well.Typically, the consent of a majority of LP interestsis required for significant decisions, suchas sale or refinancing. In a two-tiered partnership,that means consent of the upper tier partnership,which is the limited partner. A simplemarket rate conversion with no refinancing typicallyrequires no investor consent.Economic Benefits. Who gets what if the propertyis converted or sold? In a typical partnership, theGPs get 50 percent or more of the residuals fromsale or refinancing—but the LPs pay most of theexit taxes due on sale (see below) since theyhave received most of the tax benefits. And theLPs may get 50-90 percent of the cash flow afterthe 20th year, which could be significant if theproperty converts to market rate. Thus, the GPsand LPs may have conflicting interests regardingthe disposition of the property. In a two-tieredpartnership, this web of interests is even morecomplex since profits and losses are pooledacross all the projects in the fund—which meansthe fate of one project may be determined, inpart, by available options for the others.Owner MotivationWhat are the owners looking for? If they arewilling to sell, do they expect significant equityreturns or just enough cash to cover their exittaxes? What is the timing of their cash needs?Are they in a hurry or can they wait? If the GPhas a significant development deal pending, orthe LP is driven by year-end tax considerations,the seller may need to close before a nonprofitpurchaser can raise the necessary funds.Even if detailed information is lacking, a few keyfacts about the ownership history and principalscan provide important clues. In terms ofmotivation, most subsidized housing ownersfall into one or more of the following categories:Original Owners. These properties are still heldby their original owner, typically an aging localbuilder or developer who was involved with theoriginal construction. Often these owners havebought out, or are in the process of buying out,their limited partners, and partnership decisionmakingis now relatively simple. The familybusiness may be passing on to a new generation.After 20-plus years, these owners mayhave nostalgic attachments to their propertiesas well as a sense of economic entitlement thatmust be addressed. Personal and political considerationsfor this group tend to be important.Tax-Motivated Purchasers. These propertieswere bought and resyndicated prior to federaltax reform in 1986. The owners' anticipated taxbenefits never materialized, and the propertiestypically suffer from deferred maintenance dueto a lack of ongoing investment. The ownerstend to be large national operators. These ownersare often eager to sell, but their exit taxesmay exceed the available cash proceeds, especiallyif there are secondary note holders. (SeeFinancial.)Conversion-Motivated Purchasers. These propertieswere purchased more recently in anticipationof prepayment and/or market-rate conversion.The owners may have invested substantialcash in anticipation of future equity gains. Theymay have little interest or experience in subsidizedhousing or in the housing business generally.Some recent large-scale transactions inwhich entire subsidized housing portfoliosinvolving thousands of units were bought outby large non-housing conglomerates and thenquickly put on the auction block for resale mayfall into this category.Affiliated Management Companies. In additionto other motivations, many owners who alsomanage their properties value their managementfee interests beyond the dollar amount ofthe contract, especially if it is a family businessor an extensive operation. Where there is identityof interest management, owners are oftenreluctant to sell—unless they can keep managementas part of the transaction.Tax ConsiderationsAn owner's decision to prepay, convert, refinance,or sell may be driven by tax considerationsas much as cash benefits. The major taxissues affecting subsidized properties are asfollows:35 chapter four: Researching the Property: Towards a Preservation Strategy39

Phantom Income. If the property is experiencing"phantom income," there can be a substantialincentive to convert to market, refinance, orsell. The problem occurs in an aging propertywhen mortgage interest and depreciationdeductions are no longer sufficient to offsetmortgage principal payments. If cash flow islimited, the owner must pay taxes on "phantomincome"—money the owner never received. Asnoted above, the burden of phantom income isprimarily borne by the property's limited partners.Exit Taxes. Taxes due on sale can deter ownershiptransfers unless the cash proceeds generatedare sufficient to cover it. Sale of the propertytriggers a tax on the owner's capital gain,which consists of the cash proceeds realized onsale minus the owner's capital account. Thecapital account is the original cash investmentadjusted by cumulative profits and tax losses todate. After 20 years, properties that have providedgenerous depreciation and interestdeductions but limited dividends will typicallyhave a negative capital account. In these cases,owners will owe taxes even if they realize nocash proceeds from the sale.Tax Mitigation. Nonprofit purchasers may beable to assist the seller in developing tax mitigationor tax deferral strategies using one ofthe following measures:• Like-Kind Exchange. This is a three-way propertyswap which enables the seller to deferthe exit taxes for a period of time.• Bargain Sale. If the property is sold at abelow-market price, the seller may be able totake the difference between the market valueand the sales price as a charitable donation tooffset the seller's tax liability.• Affordable Housing UPREIT. 46 The sale can bestructured to involve an entity like theCommunity Development Trust, a LISC-affiliatedaffordable housing UPREIT which can providecontinued tax deferrals for investors.• Stepped Up Basis/Passive Losses. To theextent that the LPs are not tax-sensitive, exittaxes will be less of a problem. For example,any second generation LPs who have inheritedtheir interests are likely to have a"stepped up" tax basis, which wipes out theoriginal owner's negative capital account.Some LPs may have suspended passive lossesfrom other investments that can also beused to offset exit tax liability.Relationship to Regulatory AgenciesAfter 20 or more years of operations in a highlyregulated environment, the cumulative experiencewith HUD can be a significant factor affectingthe owner's decision-making process and indetermining the available options. Factors toconsider include:HUD Watch List. Is the owner in trouble withHUD? under pressure to complete majorrepairs? Owners on HUD's Watch List—thosewith significant regulatory or contract violations—canbe barred from participating in HUDprograms, including Section 8 contract renewal.Unless they can opt out, these owners may bemotivated to sell. If they do sell, they arerequired to sell to a tenant-endorsed, community-basednonprofit purchaser on a preferentialbasis. Once the sale is completed, the newowner would then be eligible to renew theSection 8 contract.Owner Attitude. What is the owner's generalattitude towards HUD? Even owners in goodstanding may no longer be willing to work withinthe HUD system. As HUD regulatory requirementsbecome more complex, less sophisticatedowners may be inclined to sell if they cannotopt out. This is especially true in the case oflow-value Mark-to-Market properties now thatmechanisms to facilitate sales are in place.Business PlanWhat course of action has the owner followedwith its other subsidized properties in the cityor region, or in other states? An owner with alarge inventory may have an overall businessplan for its portfolio which will be known tonational advocacy groups. A local or regionaldeveloper may be in the process of getting outof the subsidized housing business and repositioningits portfolio for market conversion.40 chapter four: Researching the Property: Towards a Preservation Strategy36

Personal FactorsHave there been any newsworthy personal orfamily events involving the owner? The death ofthe original developer/owner who was intimatelyinvolved with the property, or the bankruptcyof a family business, may be a harbinger ofchanges to come.Local LeverageDoes the owner have any new developmentdeals pending with the city or state? a history ofcode violations, discrimination complaints, ortax delinquency? A local owner who wants tomaintain a favorable public image may be vulnerableto negative publicity and communitypressure.OWNERSHIP INFORMATION SOURCESHUD Section 8 Expiring Contracts Database. This database includes useful basic ownership and managementinformation for Section 8 properties. See http://www.hud.gov/offices/hsg/mfh/mfhsec8.cfm. Click on"Multifamily Assistance and Section 8 Contracts Database" link. Click on "Download." The database can bedownloaded from this site. (See Exhibit 9 in Exhibits, which illustrates some of the information that can beextracted from the database.)Partnership Documents. These documents describe the structure of the ownership entity and any changesthat have occurred over time. They are generally found in the Secretary of State's office in the state where thepartnership was formed.HUD Documents. The most recent management contract and management certification will indicate anyowner/management affiliation. If the property has ever been sold subject to a HUD mortgage, there should bea Transfer of Physical Assets application and related documentation of the transaction in HUD's files.SEC Documents Online. The Securities and Exchange Commission (SEC) has recent documents for partnershipsthat are registered as public securities, including annual and quarterly reports, partnership agreements,and syndication prospectuses. See www.sec.gov. Click on "Search EDGAR" link. At "Search the EDGARDatabase," click on "EDGAR CIK Lookup" to locate the CIK (Central Index Key/search string) for a specificpartnership. Return to "Search the EDGAR Database" and click on "Search the EDGAR Archives" link. Enterthe CIK/search string to generate a list of available documents for the partnership. (See Exhibit 10 in Exhibits,for a sample report of available documents.)Owner Documents. The owner's most recent audited financial statement may be helpful in ballparking theextent of phantom income and exit tax liability problems, but the partnership’s tax returns (K-1s) present themost accurate picture. A potential nonprofit purchaser who has a good relationship with the seller may beable to obtain this information. The general ownership history should indicate what the tax issues will be.Other. For information about national owners, contact the National Housing Trust or the LISC PreservationInitiative. For information about local owners, keep abreast of local news, including the obituaries.chapter four: Researching the Property: Towards a Preservation Strategy 41

4. FINANCIALProject finances will affect the economics ofprepayment or refinancing as well as the feasibilityof acquisition by a preservation purchaser.FINANCIAL ISSUES AT A GLANCEIssuePrimary DebtSecondary FinancingCash FlowReserve Balances(Residual Receipts andReplacement Reserves)Operating CostsImplications for Preservation StrategyAffects conversion/ preservation feasibility. Potential for assuming, restructuring,selling, or refinancing existing debt.Secondary noteholder interests may be key in preservation/ conversion process.Indicates bottom-line performance and potential conversion risk.Indicates potential conversion risk; affects price negotiations.Affects appraised value/ conversion potential, purchase feasibility, managementplanning.Primary DebtThe property’s primary debt is typically itslargest current financial obligation, which mustbe dealt with in any conversion or preservationtransaction.Amount. What is the current outstanding balanceof the primary loan?Terms. What is the interest rate and term of theloan? When does it mature? Can it be assumedby a buyer? Is there a prepayment penalty?Holder. Who holds the mortgage? Most HUDinsuredand HUD-held subsidized mortgagesare now held by secondary lenders or largenational companies, such as Fannie Mae (forSection 236 projects). Non-insured mortgagesmay be held by housing finance agencies, otherstate or local agencies, or conventional lenders.Lender consent may be required to prepay/refinance,assume, sell, or restructure the existingdebt, which may be critical to the proposedtransaction. The lender may charge a fee orpenalty which must be taken into account orrenegotiated.Secondary FinancingAt some time in their history, many assistedproperties went through transactions that resultedin additional debt beyond the HUD-insured orHFA-issued first mortgage. The most commonreason for secondary financing was to enable aprevious owner to receive more consideration fora sale, on paper, than was available from the project’scash resources. Also, some projectsreceived additional capital resources to stabilizeoperations. Because of HUD’s mortgage insurancepolicies (and similar HFA restrictions), suchsecondary debt typically is not required to beserviced currently out of rental income—unlike afirst mortgage.Terms. These "soft" loans have deferred paymentterms and do not amortize on a currentbasis. Typically, they are held by a former owneror a public agency. Secondary debt may besecured by a mortgage or, more commonly, bythe partnership interests.42Repayment. Secondary debt is usually payableonly out of cash flow, upon sale or refinancing,or at a date certain in the future. Often, it is duearound the date when the subsidized mortgageis eligible for prepayment, with interest comchapterfour: Researching the Property: Towards a Preservation Strategy

pounded and accruing. In many cases thesenotes will consume a substantial portion of thecash proceeds realized on sale, reducing theamount available to cover the seller's exit taxliability. The amount due may even exceed theresidual equity value of the property.Transaction Impact. In cases with substantialsecondary debt, the note holder (though notusually present at the negotiating table) may bethe party actually driving the conversion, sale,or refinancing transaction. The note holder maybe able to force a market-rate conversion to satisfythe value of the note, or block the transactionby threatening foreclosure. At same time,an owner whose equity is substantially wipedout by secondary financing obligations has littleincentive to move the transaction forward.Often transactions involving large amounts ofsecondary debt become paralyzed until theinterests can be renegotiated.Public Note Holders. A public agency that holdssecondary debt on a subsidized property maybe in a position to help facilitate a preservationtransaction. For example, the public lender maybe willing to forego or defer repayment if theproject continues as affordable housing, or torecycle the funds back into the deal for apreservation purchaser.Cash FlowCash flow—the bottom line—is an importantindicator of the overall health of the propertyand may provide clues to the owner's motivations.How has the property performed historically—i.e.,over the past three years? Has cashflow been distributed to investors? Has cashflow exceeded the applicable dividend restrictions,leading to the accumulation of ResidualReceipts? (See Regulatory.)Reserve BalancesThese highly regulated, sometimes large, cashaccounts can affect an owner's motivation toconvert or sell and can be an important factor inprice negotiations.Residual Receipts. What is the account balance,and who gets the funds if the property is refinancedand/or the subsidy contract terminates?(see Regulatory) If Residual Receipts in a subsidizedproperty are substantial and will belongto the owner, there could be a high conversionrisk. If Residual Receipts are low or if they willrevert to HUD or the HFA, there is usually lessincentive to convert.Replacement Reserves. What is the account balance?These funds ultimately belong to theowner, so if they are substantial, there could bea higher conversion risk. If the property is sold,the buyer should probably expect to purchasethe Replacement Reserves, unless the seller isunsophisticated or unusually cooperative.Operating CostsA good understanding of project operating costs(historical and projected) is necessary for estimatingthe value of the property, assessing thefeasibility of a purchase, and anticipating futureoperating requirements.Historical. How much has it cost to operate theproperty over the past 3 years? How do thesecosts compare with the expenses of similarproperties?Projected. How much will it cost to operate theproperty under new, preservation-oriented ownership?Which budget line-items can be trendedfrom actual operating experience? Which lineitemsare likely to change? For example:• Utilities should be adjusted for proposedenergy efficiency improvements and/or conversionof systems.• Maintenance costs should reflect any operatingefficiencies associated with proposed renovations,as well changes in on-site staffingand contracting arrangements due to newownership and management.• Taxes and insurance may need to be adjustedbased on the new purchase price.• Management fee may be different under anew management company.• Services like security or tenant services maybe increased, decreased, or provided differentlyunder new ownership.chapter four: Researching the Property: Towards a Preservation Strategy43

FINANCIAL INFORMATION SOURCESProject Documents. Project documents are the best source of detailed financing information on. The mortgage,note, and any assignments of record can be secured via FOIA request to HUD (if the mortgage is HUDinsured),to the HFA (if HFA-financed), or from the Registry of Deeds.On-Line Databases. The HUD online databases include summary financing information for currently and formerlyinsured properties. See www.hud.gov/offices/hsg/mfh/mfdata.cfm. The databases for "MortgagesCurrently Insured" and "Terminated Mortgages" may be downloaded from this page. Exhibit 11 illustratessome of the information that can be extracted for sample properties.Secondary Financing. Secondary financing documents will be recorded at the registry of deeds only if thedebt is secured by a mortgage on the property. In other cases, Uniform Commercial Code (UCC) filings in stateoffices should be checked. Public agencies should have documentation for any secondary financing that theyprovide.Audited Financial Statements. Historical information on project income and expenses, including the owner'saudited financials and profit and loss statement (HUD Form 92410), usually must be obtained from the owner.This information is available from HUD only when a rent increase is pending. A management company or consultantshould develop projected budgets based on actual and comparable property experience.44 chapter four: Researching the Property: Towards a Preservation Strategy

5. PROPERTY CONDITIONThe property’s physical condition, includingcapital needs and deferred maintenance, willaffect its market value and conversion potentialas well as the feasibility of a preservation transaction.PROPERTY CONDITION ISSUES AT A GLANCEIssueWindshield SurveyCapital NeedsAssessmentImplications for Preservation StrategyProvides valuable overview of property maintenance, design, site and neighborhoodissues. May provide clues to predict owner behavior.Needed for property appraisal, assessment of purchase feasibility, rehab planning.Windshield SurveyA review of the property’s exterior, while superficialand incomplete, can provide a valuableoverview of the project's design, overallupkeep, and surrounding neighborhood. It mayalso offer clues about the owner's intentions.Without a direct view from the street, the realitybehind the written reports may be obscured.Building Style. Is the property a mid-rise, lowrise,townhouse, or garden-style development?Single or scattered site? Are there privateentries or hallways? These features may affectoperating costs as well as marketability.Curb Appeal. Is the property attractive? Howdoes it compare with the competition?Site. Does the site have, or lack, any notableamenities—community room, playground, parking,laundry?Units. What is the mix and distribution of unittypes and bedroom sizes? Are all family unitslocated together? What amenities are includedin the units (e.g., dishwasher, AC, cable TVaccess, updated appliances)?Accessibility. Is the site handicap-accessible?Are there accessible units?Deficiencies. Are there obvious maintenanceissues? Evidence of potential structural or environmentalproblems?Fix-Up. Are there obvious signs of fix-up? If so,the owner may be preparing the property forsale or conversion.Overall Condition. What is the property's overallcondition in relation to the neighborhood? Abad property in a good neighborhood may be ahigher conversion risk than a good property inbad neighborhood.Improvement Potential. What is the potentialfor improvement? Is there space to add a communitycenter or additional parking? Whatwould it take to match the condition of comparablemarket properties?Capital NeedsEvery property has building systems with finiteuseful lives, necessitating repair and replacementover time. Changing code requirementsand livability standards also require periodicupgrades and capital improvements. Capitalneeds may reduce the value of the property andaffect its conversion potential as well as thefeasibility of a preservation transaction.39chapter four: Researching the Property: Towards a Preservation Strategy 45

Most HUD-subsidized properties have had acapital needs assessment (CNA) completedwithin the past five years. These assessmentsvary widely in quality but can provide a usefulpoint of departure for further investigation.Groups considering a preservation purchase,participating in Mark-to-Market, or negotiatingwith owners and/or HUD over rehab plans usuallyfind that it is worthwhile to commission anindependent rehab study by a qualified architector capital needs assessor. This will providean assessment of rehab needs and costs basedon the nonprofit's goals for the property andlong-term preservation objectives. The rehabstudy can be useful in identifying the followingcategories of necessary repairs:Immediate Repairs. These repairs are needednow for:• Compliance with health, safety, and buildingcodes—including retrofits for fire safety,handicap access, seismic code, and otherapplicable regulations (which may havechanged since the property was built or rehabilitated).• Environmental remediation—lead paint,asbestos, underground tanks, radon, andtoxic soil conditions.• Energy efficiency—new boilers, new windows,conversion of electric heat to gas, and individualmetering.• Enhanced marketability—landscaping, painting,new kitchens and baths, and upgradedelectrical service.• Long-term preservation—replacement of outmodedor inefficient systems whose usefullife will soon expire.Future Replacement Needs. These repairs willbe needed over time to repair and replace agingbuilding systems and equipment. They shouldbe reflected in a Replacement Reserve schedule,which includes provisions for an adequateinitial deposit and annual reserve contribution.Value-Impairing Improvements. Prospective purchasersshould also identify any repairs thatwould need to be performed by a market-ratebuyer in order to receive the market rents. Thecost of these repairs should be deducted fromthe proposed purchase price. This scope of renovationsmay differ from the work proposed tobe completed by the buyer in order to preservethe property as affordable housing. This informationshould be communicated to the purchaser's appraiser.PROPERTY CONDITION INFORMATION SOURCESHUD Capital Needs Assessments (CNAs). CNAs are performed every 5 years for most assisted properties andcan be obtained by FOIA request to HUD.HUD REAC Scores. HUD's Real Estate Assessment Center (REAC) performs inspections annually for subsidizedproperties. REAC scores may be obtained from HUD through a FOIA request. The REAC score may affectthe property's preservation options. For example, if the REAC score is less than 60, the property is not eligiblefor Mark-Up-to-Market without a HUD waiver—although it may be eligible for Mark-Up-to-Budget. If the propertyalso has above-market rents, it will be required to go through Mark-to-Market debt restructuring and willnot be eligible for OMHAR Lite.Owner Records. The management company's maintenance logs should reveal any significant problems orcomplaint patterns that could be addressed by renovations (e.g. repeated sewer backups). Managementshould also provide records of recent capital improvements and appliance replacements.Code Violations. These should be verified from city records.Zoning. Local records should also be checked to determine compliance with local zoning.Environmental. A review of environmental records should reveal any historical problems and known risksassociated with the site or immediate neighborhood.Other. Other state and local records should be reviewed to determine whether the property is in a flood plain,seismic zone, historic district, or other similar area. This could affect renovations and/or property insurancerequirements.46 chapter four: Researching the Property: Towards a Preservation Strategy40

6. RESIDENTSProspective purchasers need to know who livesin the development in order to determine eligibilityfor applicable subsidy programs, to plantenant services, and to develop rehab programsthat address tenant needs.Resident profile information may affect the proposeddevelopment strategy. For example, ahigh proportion of elderly/disabled or largefamily households may qualify an otherwiseineligible property for Mark-Up-to-Market on adiscretionary basis.Resident profile information may also informthe overall preservation strategy. For example,there may be grounds for litigation based onfair housing claims if a significant portion of thepopulation consists of minority households.Also, knowing who lives in the development canhelp to build community support by putting ahuman face on the preservation problem.RESIDENT ISSUES AT A GLANCEIssueResident ProfileResident InterestsSocial IssuesPerceptionImplications for Preservation StrategyNeeded to determine subsidy eligibility; relocation & social service needs; fairhousing claims.Potential for resident participation.Social service needs and management planning.Potential community and political support for preservation.Resident ProfileWhat percentage of households are vulnerablepopulation groups, such as elderly/disabled,families with children, single-parent families,households with special needs? What is theincome and subsidy mix? What are the primarysources of income? How many householdsreceive public assistance? Have one or morewage earners?What is the ethnic and racial mix? How manyadults and children are in each household?What percentage of residents is over- or underhoused?What percentage of households has lived at thedevelopment for five years? Ten years? Sinceoriginal occupancy?What are current rents relative to tenantincomes? How many households can afford topay more? How many need additional subsidy?Resident Goals and InterestsWhat do residents want—in the short-term?Long-term? How do residents view the developmentin five years? Ten years?Are residents organized, informed, and effectivelyrepresented? If not, is there a potentialfor resident organization? What resources existto assist tenants?Would the residents support a preservation purchaseor advocacy effort?41chapter four: Researching the Property: Towards a Preservation Strategy 47

Social IssuesWhat is the nature and extent of social problemsonsite—crime, drugs, gangs, alcohol/drugabuse? Are there available services to addressthese problems onsite or in the community?PerceptionHow is the project viewed by residents, neighbors,and state or local officials? Is it perceivedas a community resource or a liability?Would the city or town support owner efforts toMark-Up-to-Market? (If financial support is provided,the project may qualify for Mark-Up-to-Market on a discretionary basis.) Would state orlocal funds likely be available for a preservationpurchase?RESIDENT INFORMATION SOURCESOwner Information. A cooperative owner should be willing to provide the monthly rent roll and TRACS occupancyreports, including individual household income, household size, rent, and subsidy data. Once a prospectivepurchaser obtains site control, the tenant recertification forms should also be requested for verification.Tenant Surveys. Additional information, including tenant incomes, can be obtained informally through tenantsurveys.HUD PD&R Data. HUD's Office of Policy Development and Research provides detailed demographic informationonline for each subsidized project, including household income and age distributions, family characteristics,average length of residence, and sources of income. This information also includes the project's congressionaldistrict, which may come in handy. See http://www.huduser.org/datasets/assthsg.html. Click on "APicture of Subsidized Households, 1998" link. Click on the applicable state link (map). Click on "Project,Agency, and State Summaries/View." (The publication, "A Picture of Subsidized Households, 1998" can also beordered from HUD.)48chapter four: Researching the Property: Towards a Preservation Strategy 42

exhibits49

EXHIBIT 3OPT OUT SUMMARYSTATETexasOhioIllinoisCaliforniaMissouriNew YorkMichiganWashingtonColoradoNorth CarolinaConnecticutIndianaArkansasFloridaMarylandTennesseeMassachusettsOregonArizonaDistrict of ColumbiaKentuckyLouisianaGeorgiaIdahoMississippiOklahomaAlabamaKansasNevadaSouth CarolinaSouth DakotaWyomingMinnesotaMontanaNebraskaNew JerseyNorth DakotaPennsylvaniaVirginiaWisconsinIowaNew HampshireNew MexicoUtahVermontWest VirginiaTotalsPROPERTIES533519181717161413111098777665555444433333322222222111111349UNITS8,6712,0861,6541,9228121,9523,1321,2321,1411,1091,0306394901,2821,267655693244729507270878367277360230490451740272120211958255803562135052100201201726014337,898SUMMARY OF OPT-OUTSUnits 37,898Properties 349Average Rent Increase(%) 44%Source: National Housing Trust Data Clearinghouseexhibits51

EXHIBIT 4OMHAR PAE and Assigned Properties Report: ExcerptState PAE City Property Name FHA Number TypeAK ONTRA, Inc. Bethel Ayalpik Apartments 17635019 Mrtg RstrAK ONTRA, Inc. Kodiak Bayview Terrace 17635012 Mrtg RstrAK ONTRA, Inc. Wrangell Etolin Heights 17655002 Rent RdctAK ONTRA, Inc. Fairbanks Executive Estates 17635014 Mrtg RstrAK ONTRA, Inc. Juneau Gastineau Apartments 17644015 Rent RdctAK ONTRA, Inc. Anchorage KBL Apts 17635015 Rent RdctAK ONTRA, Inc. Fairbanks Parkwest Apartments 17635013 Mrtg RstrAL First Housing Development Corporation Scottsboro River Grove II Apartments 06235282 Mrtg RstrAL First Housing Development Corporation Northport McDaniel Arms Apts 06235348 Mrtg RstrAL First Housing Development Corporation Boaz Meadowood Apartments 06235346 Mrtg RstrAL First Housing Development Corporation Northport Fieldcrest Apts 06235343 Mrtg RstrAL First Housing Development Corporation Mobile Oak Ridge Apartments 06235331 Mrtg RstrAL First Housing Development Corporation Oakman Oakman Terrace Apartments 06235372 Mrtg RstrAL First Housing Development Corporation Theodore Pearson Park Apartments 06235366 Mrtg RstrAL First Housing Development Corporation Decatur Lakeview Apartments 06235347 Mrtg RstrAL First Housing Development Corporation Scottsboro River Grove I Apartments 06235264 Mrtg RstrAL First Housing Development Corporation Alexander City Robinwood Apartments 06235280 Mrtg RstrAL First Housing Development Corporation Camden Pinewood Apartments 06235216 Mrtg RstrAL First Housing Development Corporation Florence Heatherwood Apartments 06235351 Mrtg RstrAL First Housing Development Corporation Birmingham Deer Park Apartments 06235258 Mrtg RstrAL First Housing Development Corporation Birmingham Southampton Apartments 06235281 Mrtg RstrAL First Housing Development Corporation Talladega City Court I Apartments 06235243 Mrtg RstrAL First Housing Development Corporation Florence Weeden Heights Apartments 06235385 Mrtg RstrAL First Housing Development Corporation Huntsville Cherokee Bend Apartments 06235259 Mrtg RstrAL First Housing Development Corporation Albertville Brookwood Park 06235313 Mrtg RstrAL First Housing Development Corporation Greensboro Eastridge Apartments 06235262 Mrtg RstrAL First Housing Development Corporation Mobile Brent Hill Apartments 06235379 Mrtg RstrSource: HUD Office of Multifamily Housing Assistance Restructuring52exhibits

EXHIBIT 4OMHAR PAE and Assigned Properties Report: ExcerptAccept 1st PCA Appraisal 2nd Plan Owner Completed Below IneligibilityTenant Complete Complete Tenant Submitted Executes Market UnderMtg Plan Review1-May-00 Y Y Y Y Y Y Y20-Jul-00 Y Y Y Y Y Y3-Aug-99 Y Y20-Jun-00 Y Y Y Y Y Y Y5-Oct-99 Y Y3-Aug-99 Y Y30-Mar-00 Y Y Y Y Y Y28-Feb-00 Y Y Y Y Y Y Y4-Jun-01 Y Y Y Y Y Y25-Jun-01 Y Y Y Y Y Y25-Jun-01 Y Y Y Y Y Y Y4-Jun-01 Y Y Y Y Y25-Jun-01 Y Y Y Y Y Y Y25-Jun-01 Y Y Y Y Y Y Y4-Jun-01 Y Y Y Y Y Y28-Feb-00 Y Y Y Y Y Y Y31-Mar-00 Y Y Y Y Y Y Y12-May-00 Y Y Y Y Y Y Y4-Jun-01 Y Y Y Y Y Y Y12-May-00 Y Y Y Y Y Y Y12-May-00 Y Y Y Y Y Y31-Mar-00 Y Y Y Y Y Y Y25-Jun-01 Y Y Y Y Y Y Y21-Jun-00 Y Y Y Y Y Y Y4-Jun-01 Y Y Y Y Y Y Y28-Feb-00 Y Y Y Y Y Y Y25-Jun-01 Y Y Y Y Yexhibits53

EXHIBIT 5HUD SECTION 8 DATABASE: SAMPLE EXPIRING CONTRACT DATAState City Property Name Street AddressMA Adams Adams Housing 3 Myrtle St.MA Adams Barrett House 17 Pleasant St.MA Adams Millhouses of Adam 75 Commercial StMA Agawam Hale Meekins Residence 203 School St.MA Amherst Puffton Village IV 1040 N Pleasant St.MA Amherst Village Park 1 Village Park Rd.MA Amherst Village Park 1 Village Park Rd.MA Andover Andover Commons 30 Railroad Ave.MA Arlington Broadwal Homes 110-112 BroadwayMA Arlington Millbrook Square Apts. 17 Mill St.MA Ashland Ashland Commons 101 Presidents RowSource: HUD Section 8 DatabaseEXHIBIT 6HUD SECTION 8 DATABASE: SAMPLE INSURED MULTIFAMILY MORTGAGE DATAState Property City Propert Bane UnitsMA Adams Town Adams Housing 60MA Adams Town The Millhouses 99MA Allston Charlesville Incorporated 210MA Allston Glenville Apts 117MA Allston Governor Apts 87MA Amerst Brandywine Apts 180MA Amherst New Puffton Village I and II 314MA Amherst Village Park Apts 200MA Amherst Town Village Park 200MA Andover Andover Commons 167MA Arlington Millbrook Square Apts 146MA Ashland Ashland Commons 96MA Ashland Chestnut Apts 207MA Auburn Kittyhawk Highlands 216Source: HUD Section 8 Database54exhibits

Total Units Assisted Units Program Type Expiration Date Cong. District60 35 LMSA 31-Mar-00 140 40 202/8 SR 21-Dec-99 199 98 Sec 8 SR 13-Jun-03 115 15 PRAC/ 811 31-Aug-16 264 9 LMSA 30-Sep-00 1200 127 Preservation 30-Sep-00 1200 127 Preservation 30-Sep-00 1167 167 Sec 8 SR 01-Oct-01 511 11 PRAC/ 811 30-Sep-17 7146 145 Sec 8 NC09-Feb-02 01,03,04,05,0696 96 Sec 8 NC12-Dec-03 5Sections (of the Act) Initial Endorsement Final Endorsement Maturity DateDateDate236(j)(1)/ Lower Income Families 14-Sep-71 24-Jun-77 01-Sep-12221(d)(4) Mkt. Rate Mod Inc/ Disp Fams 30-Sep-82 22-Mar-84 01-Nov-24221(d)(3) BMIR Urban Renewal/ Coop Hsg 07-Nov-69 21-Dec-71 01-Feb-11236(j)(1)/ Lower Income Families 06-Oct-70 15-Dec-71 01-Nov-11221(d)(4) Mkt. Rate Mod Inc/ Disp Fams 30-Sep-80 30-Apr-82 01-Aug-22207/ 223(f) - Delegated 26-Apr-94 26-Apr-94 01-May-29207/ 223(f) Pur/ Refin Hsg. 31-Mar-97 31-Mar-97 01-Apr-32241(f)/ 236 Equity Loan 30-Sep-94 30-Sep-94 01-Oct-23236(j)(1)/ Lower Income Families 24-Mar-71 18-Oct-73 01-Nov-13221(d)(4) Mkt. Rate Mod Inc/ Disp Fams 03-Mar-81 13-Jul-83 01-Apr-23221(d)(4) Mkt. Rate Mod Inc/ Disp Fams 12-Sep-80 13-Jun-83 01-Jul-22221(d)(4) Mkt. Rate Mod Inc/ Disp Fams 30-Sep-82 18-Sep-86 01-May-24207/ 223(f) Pur/ Refin Hsg. 30-May-96 30-May-96 01-Jun-31207/ 223(f) Pur/ Refin Hsg. 29-May-98 29-May-98 01-Jun-33exhibits55

EXHIBIT 7PREPAYMENT STATISTICS BY STATE (EXCERPT)Beaver Brook ApartmentsScott Gardens IFHA Number: 01755095435 Beaver StAnsonia, ConnecticutTotal Units: 171FY of Prepayment: 97Rent Before: $525Rent After: $716FMR:120% FMR Proxy:Percent Change: 36%Monthly Cost: $32,661Annual Cost: $391,932FHA Number: 0175505055050 Scott RdWaterbury, ConnecticutTotal Units: 100FY of Prepayment: 98Rent Before: $Rent After: $FMR:120% FMR Proxy:Percent Change:Monthly Cost:Annual Cost:East Wintonbury HillsScott Gardens IIFHA Number: 01744201East Wintonbury AveBloomfield, ConnecticutTotal Units: 110FY of Prepayment: 98Rent Before: $518Rent After: $830FMR: 692120% FMR Proxy: *Percent Change: 60%Monthly Cost: $34,320Annual Cost: $411,840FHA Number: 0175513055050 Scott RdWaterbury, ConnecticutTotal Units: 176FY of Prepayment: 98Rent Before: $Rent After: $FMR:120% FMR Proxy:Percent Change:Monthly Cost:Annual Cost:200 York Street ApartmentsPiper Brook ApartmentsFHA Number: 01744068200 York StNew Haven, ConnecticutTotal Units: 22FY of Prepayment: 96Rent Before: $Rent After: $FMR:120% FMR Proxy:Percent Change:Monthly Cost:Annual Cost:FHA Number: 01744150119 Hillcrest AveWest Hartford, ConnecticutTotal Units: 95FY of Prepayment: 98Rent Before: $400Rent After: $666FMR:120% FMR Proxy:Percent Change: 67%Monthly Cost: $25,270Annual Cost: $303,240Highridge HomesLitchfield GardensFHA Number: 0174411129 Knapp StStamford, ConnecticutTotal Units: 84FY of Prepayment: 96Rent Before: $380Rent After: $483FMR:120% FMR Proxy:Percent Change: 27%Monthly Cost: $8,652Annual Cost: $103,824FHA Number: 01744073115 Nanni DriveWinstead, ConnecticutTotal Units: 119FY of Prepayment: 98Rent Before: $506Rent After: $830FMR: 692120% FMR Proxy: *Percent Change: 68%Montly Cost: $38,556Annual Cost: $462,672Source: National Housing TrustData compiled from several HUD sources. Not independently verified. * 120% of FMR for a 2-Bedroom Unit was used as a proxy for“Rent After” where actual “Rent After” was not available. ** Owners have filed a Notice to Prepay Copyright NHT, 1999.Other Notes:Where the Trust was able to secure the actual "Rent After," the actual post prepayment rent was used. Where the precise “RentAfter” wasn't available, the Trust used 120% of FMR as a proxy for “Rent After.” Additional information was provided by EmilyAchtenberg, CEDAC, CHPC, CASH (Minnesota), and the Texas Tenant's Union.56 exhibits

EXHIBIT 8OPT OUT STATISTICS BY STATE (EXCERPT)Jones Walker Palm GardensSabal Palm Villas ApartmentsFHA Number: 066350382909 Blount StFort Myers, FloridaExpiration Date: 9/30/98Total Units: 80Funds Type: TRent Before: $565Rent After: $694Percent Change: 23%Monthly Cost: $10,320Annual Cost: $123,840FHA Number: 066110135364 NE 3rd AveMiami, FloridaExpiration Date: 9/30/97Total Units: 512Funds Type: RRent Before:Rent After:Percent Change:Monthly Cost:Annual Cost:Cambridge Square of HialeahFHA Number:1815 W 56th StHialeah, FloridaExpiration Date: 11/30/98Total Units: 280The BirchesFunds Type: RRent Before: $471Rent After: $842Percent Change: 79%Monthly Cost: $103,880Annual Cost: $1,246,560Sand Lake Village ApartmentsFHA Number: 06744148700 Ridenhour CirOrlando, FloridaExpiration Date: 9/30/97Total Units: 144Escambia ArmsFunds Type: RRent Before: $465Rent After: $814Percent Change: 75%Monthly Cost: $50,256Annual Cost: $603,072FHA Number: 06644013131 SW 6th StHomestead, FloridaExpiration Date: 6/30/97Total Units: 50Funds Type: RRent Before:Rent After:Percent Change:Monthly Cost:Annual Cost:FHA Number: 06335026200 Hickory StPensacola, FloridaExpiration Date: 4/30/00Total Units: 200 FundsFunds Type: RRent Before:Rent After:Percent Change:Monthly Cost:Annual Cost:Dorchester ApartmentsFHA Number:400 Dorchester SqLake Mary, FloridaExpiration Date: 7/13/03Total Units: 16Funds Type: TRent Before: $472Rent After: $814Percent Change: 72%Monthly Cost: $5,472Annual Cost: $65,664Source: National Housing TrustData compiled from several HUD sources. Not independently verified. Please note that for “Funds Type”: R=Voluntary Opt Out;T=Termination; D=Property Disposition Copyright NHT, 1999.Other Notes:Please note that the data does not include properties where available HUD data indicates owners prepaid HUD insurance andreceived enhanced vouchers. Those properties are included in NHT's Prepayment Data. Approximately 37% of these propertieswere vouchered out due to termination of Section 8 or property disposition.Where the trust was able to secure the actual “Rent After,” the actual post prepayment or opt out rent was used. Where the precise"Rent After" wasn't available, the Trust used 120% of FMR as a proxy for “Rent After.”Additional information was provided by Emily Achtenberg, CEDAC, CHPC, CASH (Minnesota), and the Texas Tenant's Union.exhibits57

EXHIBIT 9HUD SECTION 8 DATABASE: SAMPLE OWNERSHIP INFORMATIONState City Property Name Owner Name Owner Address Owner City Owner ZipMA Adams Adams Housing Landover Associates. PO Box 107 Adams, MA 01220MA Adams Barret Housing Barrett Housing Corp. 74 North St. Pittsfield, MA 01201MA Adams Millhouses of Adams Millhouses of Adams % 1 Charles River Pl. Needham, MA 02494Wingate Management Co.MA Agawam Hale Meekins Hale Meekins 110 Maple St. Springfield, MA 01105ResidenceResidence, Inc.MA Amherst Puffton Village IV Puffton Village IV 1040 N. Pleasant St Amherst, MA 01002MA Amherst Village Park Village Park Associates 101 Arch St. Boston, MA 02110MA Andover Andover Commons Andover Commons 100 Grandview Rd. Braintree, MA 02184AssociatesMA Arlington Broadwal Homes Broadwal, Inc. 300 Somerville Ave. Somerville, MA 02143MA Arlington Millbrook Square Apts Millbrook Square 150 Mt. Vernon St., Boston, MA 02125Apts Company Suite 520MA Ashland Ashland Commons Ashland Commons 500 W. Cummings Park Woburn, MA 01801AssociatesSource: HUD Section 8 DatabaseEXHIBIT 10SEC WEB SITEForm Description10KSB Optional form for annual and transition reports of small business issuers [Section 13 or 15(d), not S-B Item 405]10QSB Optional form for quarterly and transition reports of small business issuers10QSB Optional form for quarterly and transition reports of small business issuersSC TO-T/A [Amend]Tender offer statement by Third PartySC TO-T/A [Amend]Tender offer statement by Third PartySC TO-C Written communication relating to an issuer or third party10QSB Optional form for quarterly and transition reports of small business issuersSC TO-T Tender offer statement by Third PartyNT 10-K Notification of inability to timely file Form 10-K 405, 10-K, 10-KSB 405, 10-KSB, 10-KT, or 10-KT4058-K/A [Amend]Current report8-K Current report8-K Current reportSC 13D/A [Amend]General statement of acquisition of beneficial ownership10QSB Optional form for quarterly and transition reports of small business issuersNT 10-K Notification of inability to timely file Form 10-K 405, 10-K, 10-KSB 405, 10-KSB, 10-KT, or 10-KT405SC TO-I/A [Amend]Tender offer statement by Issuer10QSB Optional form for quarterly and transition reports of small business issuersSC TO-I Tender offer statement by IssuerSC TO-T/A [Amend]Tender offer statement by Third PartySC TO-C Written communication relating to an issuer or third partySC TO-T Tender offer statement by Third PartySC 13D/A [Amend]General statement of acquisition of beneficial ownership10QSB Optional form for quarterly and transition reports of small business issuers10-K Annual report [Section 13 and 15(d), not S-K Item 405]NT 10-K Notification of inability to timely file Form 10-K 405, 10-K, 10-KSB 405, 10-KSB, 10-KT, or 10-KT40510-Q Quarterly report [Sections 13 or 15(d)]10-Q Quarterly report [Sections 13 or 15(d)]10-K/A [Amend]Annual report [Section 13 and 15(d), not S-K Item 405]Source: http://www.sec.gov/cgi-bin/browse-edgar58exhibits

Owner Phone Agent Name Agent Address Agent City Agent Zip Agent Phone(413) 743-9301 Greylock Housing Mgmt Adams MA 01220 (413) 743-9301& Maintenance Co. Inc.(413) 499-1630 Berkshire Housing Services, Inc. 74 North St. Pittsfield, MA 01201 (413) 499-1630(781) 707-9000 Wingate Management Co., Inc. 1 Charles River Pl. Needham, MA 02494 (781) 707-9000Mental Health Assoc. of 146 Chestnut St. Springfield, MA 01103 (413) 734-5376Greater Springfield(413) 549-0145 Kelloggs Management Corp. 1040 N. Pleasant St Amherst, MA 01002 (413) 549-3808(617) 439-3911 Boston Financial Property Mgmt 101 Arch St Boston, MA 02110 (617) 439-3911(781) 849-0014 Corcoran Management 100 Grandview Rd Braintree, MA 02184 (781) 849-0011(617) 776-1448 Walnut Street Center, Inc. 300 Somerville Ave. Somerville, MA 02143 (617) 776-1448(617) 822-7300 CMJ Management Co. 150 Mount Vernon St Boston, MA 02125 (617) 822-7300(781) 935-4200 APT Management, Inc. 500 W. Cummings Park Woburn, MA 01801 (781) 935-4200Form Description10-Q Quarterly report [Sections 13 or 15(d)]PRES14A Preliminary proxy statements, special meeting10-K Annual report [Section 13 and 15(d), not S-K Item 405]NT 10-Q Notification of inability to timely file Form 10-Q or 10-QSBNT 10-K Notification of inability to timely file Form 10-K 405, 10-K, 10-KSB 405, 10-KSB, 10-KT, or 10-KT40510-Q Quarterly report [Sections 13 or 15(d)]10-K Annual report [Section 13 and 15(d), not S-K Item 405]10-Q Quarterly report [Sections 13 or 15(d)]10-Q Quarterly report [Sections 13 or 15(d)]NT 10-Q Notification of inability to timely file Form 10-Q or 10-QSBNT 10-K Notification of inability to timely file Form 10-K 405, 10-K, 10-KSB 405, 10-KSB, 10-KT, or 10-KT40510-Q Quarterly report [Sections 13 or 15(d)]10-K Annual report [Section 13 and 15(d), not S-K Item 405]10-Q Quarterly report [Sections 13 or 15(d)]NT 10-Q Notification of inability to timely file Form 10-Q or 10-QSBNT 10-Q Notification of inability to timely file Form 10-Q or 10-QSBNT 10-K Notification of inability to timely file Form 10-K 405, 10-K, 10-KSB 405, 10-KSB, 10-KT, or 10-KT405NT 10-Q Notification of inability to timely file Form 10-Q or 10-QSB10-Q Quarterly report [Sections 13 or 15(d)]SC 13D General statement of acquisition of beneficial ownership10-K Annual report [Section 13 and 15(d), not S-K Item 405]10-Q Quarterly report [Sections 13 or 15(d)]NT 10-Q Notification of inability to timely file Form 10-Q or 10-QSBNT 10-Q Notification of inability to timely file Form 10-Q or 10-QSBDEFS14A Definitive proxy statement for special meeting10-Q/A [Amend]Quarterly report [Sections 13 or 15(d)]NTN 10K10-Q Quarterly report [Sections 13 or 15(d)]exhibits59

EXHIBIT 11HUD SECTION 8 DATABASE: FINANCIAL INFORMATION FROM INSURED MULTIFAMILY MORTGAGE DATABASEState City Property Name Units Section (of the Act) Original Mortgage Current Principal andAmountInterest (Monthly)MA Adams Town Adams Town 60 236(j)(1)/ Lower Income 1,486,700 11,074.54FamiliesMA Adams Town The Millhouses 99 221(d)(4) Mkt. Rate 5,074,300 33,392.49Mod Inc/ Disp FamsMA Allston Charlesview Inc. 210 221(d)(3) BMIR Urban 5,089,100 18,419.34Renewal/ Coop HsgMA Allston Glenville Apts. 117 236(j)(1)/ Lower 1,923,000 14,656.76Income FamiliesMA Allston Governor Apts 87 221(d)(4) Mkt. Rate 3,817,400 25,121.20Mod Inc/ Disp FamsMA Amherst Brandywine Apts. 180 207/ 223(f) - Delegated 3,825,000 27,167.48MA Amherst New Puffton Vllage 314 207/ 223(f) Pur/ Refin Hsg. 10,423,400 73,088.87I and IIMA Amherst Village Park Apts. 200 241(f)/ 236 Equity Loan 3,886,600 31,487.59MA Amherst Village Park 200 236(j)(1)/ Lower Income 3,658,700 26,821.72TownFamiliesMA Andover Andover Commons 167 221(d)(4) Mkt. Rate Mod 8,179,400 53,826.24Inc/ Disp FamsMA Arlington Millbrok Sq. Apts. 146 221(d)(4) Mkt. Rate Mod 7,325,500 48,388.61Inc/ Disp FamsMA Ashland Ashland Commons 96 221(d)(4) Mkt. Rate Mod 4,893,880 48,282.75Inc/ Disp FamsMA Ashland Chestnut Apts. 207 207/ 223(f) Pur/ Refin Hsg. 7,650,000 56,852.95MA Auburn Kittyhawk Highlands 216 207/ 223(f) Pur/ Refin Hsg. 6,187,400 39,528.60Source: HUD Section 8 Database60 exhibits

Amortized Principal Interest Rate Holder Name Holder City Servicer Name Servicer CityBalance (Unpaid)1,100,900 8.5 Beal Bank SSB Dallas, TX GMAC Commercial Horsham, PAMortgage Corp.4,449,124 7.5 USGI INC Darien, CT Huntoon Hastings Darien, CTCapital Corp.1,934,736 3 Corestates Bank NA Philadelphia, PA Midland Loan Kansas City, MOServices Inc.352,293 8.5 Federal National Atlanta, GA FNMA-GMAC Washington, DCMortgage AssnCommercial Mortgage3,223,909 7.5 Bank of America NA Cypress, CA Dovenmuehle Schaumburg, ILMortgage Inc3,652,335 8 Heartland Bank Chesterfield, MO Heartland Bank Chesterfield, MO10,185,298 7.875 Capstone Realty Cleveland, OH Capstone Realty Cleveland, OHAdvisors LLCAdvisors LLC3,656,427 9 Continental Wingage Needham, MA Continental Wingage Needham, MAAssoc IncAssoc Inc2,518,610 8.5 GMAC Commercial Horsham, PA GMAC Commercial Horsham, PAMortgage CorpMortgage Corp6,990,630 7.5 Riggs Bank NA Riverdale, MD Reilly Mortgage Mclean, VAGroup6,200,342 7.5 Riggs Bank NA Riverdale, MD Reilly Mortgage Group Mclean, VA4,619,013 11.728 Massachusetts Hsg Boston, MA Massachusetts Hsg Boston, MAFin AgencyFin Agency7,454,758 8.45 Centennial Mortgage Inc South Bend, IN Centennial Mortgage South Bend, INIncInc6,075,126 7 Prudential Huntoon Edison, NJ Prudential Huntoon Edison, NJPaige AsscPaige Asscexhibits61

affordable housing preservation glossaryAnnual Adjustment Factor.Mechanism for adjusting rentsin certain types of Section 8-assisted properties, includingSection 8 NewConstruction/SubstantialRehab. HUD publishes annualpercentage factors by unit typeand region.Bargain Sale. A tax deferralmechanism involving a sale ofthe property to a charitableorganization for an amount thatis less than its appraised fairmarket value. The seller takes acharitable contribution deductionfor the difference betweenthe fair market value and thereduced sales price. The deductionmay be used to offset thetax liability resulting from thesale.Basic Rent. The rent required tooperate a Section 236 project,including debt service on thesubsidized mortgage at 1%interest. This is the minimumrent payable by tenants (absentany additional rental subsidy).Below Market Interest Rate(BMIR). See Section 221(d)(3)BMIR.Capital Account. The owner'soriginal cash investment in theproperty plus cumulative profitsand tax losses over the life ofthe investment. Subsidizedproperties that have providedgenerous depreciation andinterest deductions with limitedor negligible cash flow will havea negative capital account aftertwenty years. Taxes will be owedon the negative capital accounteven if no cash proceeds arerealized from the sale.Capital Gain. Cash proceedsrealized upon sale of the property,if any, minus the owner's capitalaccount (see CapitalAccount). Capital gain is subjectto federal and state tax whenthe property is sold.Decoupling. A program to permitowners or purchasers ofSection 236 housing to retainthe Interest Reduction Payments(IRP) contract and subsidy afterrefinancing or adding new debtto the existing Section 236mortgage. The existing userestrictions must be extendedfor five years beyond the outstandingmortgage term.Authorized by Section 236(b)and (e)(2) of the NationalHousing Act. See also: IRP.Emergency Low IncomeHousing Preservation Act (ELIH-PA). 1987 statute authorizingthe original federal preservationprogram. Program active 1987 -1992.Eminent Domain. Authority of agovernment entity to forciblyacquire real estate for a publicpurpose, with compensation atFair Market Value.Enhanced Vouchers. TenantbasedSection 8 assistance providedto eligible residents whenowners prepay their subsidizedmortgages or opt out of projectbasedSection 8 contracts.Rents are set at market comparablelevels, instead of the regularvoucher payment standard,as long as the tenant elects toremain in the housing.Exit Tax. Tax due on the owner'scapital gain when a property issold. See Capital Account andCapital Gain.Expiring Use Restrictions(EUR). Low- and moderateincomeaffordability requirementsassociated with subsidizedmortgages under Section221(d)(3) BMIR and Section236, which terminate when themortgage is prepaid.Flexible Subsidy. A direct HUDloan or grant for rehabilitationor operating losses, available toeligible owners of certain HUDsubsidizedproperties. Ownersmust continue to operate theproject as low- and moderateincomehousing for the originalmortgage term. Not currentlyactive.Freedom of Information Act(FOIA). Generally refers to theprocess of securing availabledocuments from HUD or otherfederal agencies in accordancewith required procedures.Certain types of documents,including owner financial statements,are considered privilegedand not are not disclosableto the public under FOIA.Full/Full Restructuring. A transactioncarried out under Markto-Marketinvolving both rentreduction and bifurcation of theHUD-insured debt into performingand deferred loans.Interest Reduction Payment(IRP). In a Section 236 project,the Interest Reduction Paymentor interest subsidy provided byHUD on a monthly basis, whichmakes up the differencebetween the mortgage debtservice actually paid and thedebt service that would havebeen paid at an interest rate of1%.62Affordable Housing Preservation Glossary

Intermediary TechnicalAssistance Grant (ITAG). HUDfunds available to residentgroups, community-based nonprofitdevelopers, and publicagencies seeking to preserve orpurchase federally subsidizedhousing. Includes ResidentCapacity Grants ($20,000),Predevelopment Grants($70,000), and Public EntityGrants ($20,000). Except forPublic Entity Grants, these arefor project-specific activities.ITAG Intermediary.Organizations responsible fordisbursing and monitoring ITAGfunds in a geographic region,under contract to HUD.Low Income HousingPreservation and ResidentHomeownership Act (LIHPRHA).1990 statute authorizing the"permanent" federal preservationprogram. Program active1990 - 1996.Like Kind Exchange. A taxdeferralmechanism involving a"swap" of the project beingsold with a replacement project.Capital gains tax is deferreduntil the replacement propertyis sold.Lite/OMHAR Lite. A transactioncarried out under the Mark-to-Market program, involving rentreduction but no debt restructuring.Lite transactions may ormay not involve refinancing ofthe existing debt.Loan Management Set-Aside(LMSA). A form of project-basedSection 8 assistance used primarilyfor Section 221(d)(3)/BMIR and Section 236 housing.These contracts were addedafter the housing was developedand were short-term,renewable.Multifamily Assisted HousingReform and Affordability Act(MAHRA). 1997 statute authorizingthe Mark-to-Market programand renewals of expiring Section8 contracts.Mark-to-Market. A programenabling owners of above-marketSection 8 properties withHUD-insured mortgages toreduce rents, restructure theexisting debt, and generallyrenew project-based Section 8subsidy contracts. Authorized byMAHRA and administered byPAEs under contract toHUD/OMHAR. Owners who participatein debt restructuringmust agree to 30-year Section 8renewals, and underlying userestrictions for a portion of theunits. Tenants and state/localgovernments have an opportunityto participate in the restructuringplans.Mark-Up-to-Market. A programenabling eligible owners ofbelow-market Section 8 properties(insured and uninsured) torenew expiring subsidy contractsat comparable marketrents. Contracts must be at least5 years.Mortgage Insurance Fund. TheHUD reserves that are drawnupon in the event of mortgageforeclosure or assignment, topay off the lender in response toan insurance claim.Operating Cost AdjustmentFactor (OCAF). Percentage factorused to adjust Section 8 projectbasedrents. Published by HUDon an annual basis. The OCAFpercentage is applied to theSection 8 gross rents less debtservice, i.e. to operating expensesplus cash flow.New Construction/SubstantialRehab. A form of project-basedSection 8 assistance used in theoriginal development andfinancing of the housing.Projects are both insured anduninsured (with conventional orstate/local bond financing).These contracts are long-term(20-40 years). Active 1976 -1985.OMHAR. Office of MultifamilyHousing AssistanceRestructuring, a special officewithin HUD established underMAHRA to oversee the Mark-to-Market Program. OMHAR hasrecently been brought under theauthority of the FHACommissioner/ AssistantSecretary for Housing.Outreach and Training Grant(OTAG). HUD funds available toorganizations working with residentsand resident groups infederally-subsidized housing.Participating AdministrativeEntity (PAE). The ParticipatingAdministrative Entity is responsiblefor structuring Mark-to-Market transactions at the localor state level, under contract toOMHAR. PAEs may be public orprivate entities or joint ventures.Passive Losses. Losses ordeductions generated by a propertywhich exceed the amountneeded to offset taxable income.Since the Tax Reform Act of 1986,passive losses can no longer beused to shelter ordinary incomefrom taxation; however, they canbe used to offset "phantomincome" or capital gains tax liabilitywhen the property is sold.Phantom Income. Income taxableto a property owner in anAffordable Housing Preservation Glossary63

affordable housing preservation glossaryamount greater than the cashflow distributions actuallyreceived. Phantom incomeoccurs in subsidized propertiesfor two reasons: (1) as propertiesage, depreciation and mortgageinterest deductionsdecrease while mortgage principalpayments, which are taxable,increase; and (2) allowablecash flow distributions to ownersare often limited by formula(the limited dividend). Phantomincome creates an incentive forowners to refinance or sell.Preemptive Purchase Rights.Right to make an offer to purchase,typically within a specifiedtime frame, whether or notthe property has been offeredfor sale. Owner may or may notbe required to accept underspecified conditions.Priority Purchaser. As definedunder LIHPRHA, a qualified residentorganization, nonprofitentity, or state/local publicagency purchaser of prepayment-eligiblehousing. Prioritypurchasers may also qualify forsecond mortgage forgiveness orassignment under Mark-to-Market if they meet certainadditional criteria (including residentendorsement and onethirdboard membership by projectresidents or low-incomeneighborhood residents).Project-Based Section 8. A programproviding rental assistanceon behalf of some or all of theunits in a project occupied byeligible tenants for a specifiedcontract term. Tenants pay 30%of adjusted income for grossrent including utilities. The subsidyis attached to the unit andstays with the housing after thetenant leaves.Purchase Money Note.Obligation to pay the seller aportion of the purchase price ona deferred basis, either overtime or at a future date. ThePurchase Money Note may besecured by a mortgage or, moretypically for subsidized properties,by a pledge of the partnershipinterests.Real Estate Assessment Center(REAC). HUD Office responsiblefor monitoring how properties inHUD's real estate portfolio complywith regulatory requirements.Conducts annual physicalinspections and reviewsfinancial audits, tenant incomeverifications, management operations,and resident satisfactionin public and assisted housing.Real Estate Investment Trust(REIT). A business trust or corporationthat combines the capitalof many investors to acquireor finance real estate, whichmay include assisted housing.Cash flow generated by theproperties is distributed toinvestors in the form of stockdividends. The REIT can alsoprovide an attractive tax deferralmechanism by enablinginvestors to exchange their partnershipshares for interests inthe REIT, a non-taxable transfer.Rent Supplement. An older HUDproject-based rental subsidyprogram used for some 221d3and 236 properties. The subsidycontract is coterminous with themortgage. Most rent supplementcontracts in HUD-insuredprojects were converted toSection 8 in the 1970s.Rental Assistance Program(RAP). A project-based rentalassistance program that isauthorized under Section 236 ofthe National Housing Act.Assisted rents are set at theSection 236 Basic Rent, andsince the program is not authorizedby Section 8, it is not subjectto Mark-to-Market or Mark-Up-To-Market.Residual Receipts. Cashaccount maintained under jointcontrol of the owner and HUD(or HFA) into which is depositedall surplus cash generated overand above the allowable limiteddividend. The disposition ofresidual receipts at the end ofthe Section 8 contract and/ormortgage is governed by theRegulatory Agreement.Right of First Refusal. Right tomatch the terms and conditionsof a third-party offer to purchasethe property, within aspecified time period. Holdermust be notified of the thirdparty offer and may be requiredto close by a designated date.Section 221(d)(3) BMIR. A HUDprogram under which the federalgovernment provided directloans at a below-market interestrate (3%) and mortgage insuranceto private developers oflow- and moderate-incomehousing. Active 1963 - 1970.Section 236. A program underwhich HUD provided interestsubsidies (known as InterestReduction Payments or IRP subsidies)and mortgage insuranceto private developers of lowandmoderate-income housing.The interest subsidy effectivelyreduced the interest rate on theloan to 1%. Active 1968 - 1975.64 Affordable Housing Preservation Glossary

Tenant-Based Section 8. Rentalassistance provided on behalf ofeligible tenants, currentlyknown as vouchers. The subsidyis attached to the tenant andmoves when the tenant leaves(see also Enhanced Vouchers).Transfer of Physical Assets(TPA). The sale of a propertywhich is subject to a HUDinsuredor HUD-held mortgagethat will not be terminated inconjunction with the sale. Thetransfer must be approved byHUD and carried out in accordancewith required HUD procedures.Wellstone Notice. Noticerequired to be given by ownersof prepayment-eligible projects,prior to prepaying the subsidizedmortgage or terminatingmortgage insurance. Must begiven to tenants, HUD, andstate/local government, at least150 days but no more than 270days prior to prepaymentAffordable Housing Preservation Glossary 65

endnotesCHAPTER 11 This Chapter is drawn, in part, from Emily P.Achtenberg, "Federally-Assisted Housing:Privatization vs. Preservation," in Housing:Foundation of a New Social Agenda, Rachel Brattet al., eds., Temple University Press (forthcoming).2 Not all Section 221(d)(3) and 236 projects havethis automatic prepayment right and the opportunityto convert to market use. If the project’soriginal sponsor was a nonprofit entity, or if theproject has a federal rent supplement contractcombined with HUD mortgage insurance, theowner cannot prepay without HUD consent.Some gray areas exist, especially for projectsthat received special federal rehabilitation loansor grants in the late 1970s and 1980s underHUD's Flexible Subsidy program. Some of theseprojects require HUD's consent to prepay andsome do not, although all have use restrictionsthat limit rents through the original mortgageterm.3 For a more detailed discussion of theEnhanced Voucher program, see Chapter 2,"Federal Preservation Tools."4 The National Housing Trust maintains summaryprepayment data for each state (see Exhibit 1 inExhibits). See http://www.nhtinc.org/data.asp;click on "Summary Table of Prepayments" link.5 For a more detailed discussion of these programs,see Chapter 2, "Federal PreservationTools."6 The OMHAR website includes a weekly statusreport of pipeline activity (Exhibit 2 in Exhibits).Click on "M2M Status Report" athttp://www.hud.gov/offices/omhar/readingrm/reports.cfm.7 The National Housing Trust also maintains optoutdata for each state (Exhibit 3 in Exhibits).See "Summary Table of Section 8 Opt Outs" linkat http://www.nhtinc.org/data.asp. (This datadoes not include terminated Section 8 units inexpiring use properties, where tenants receivedEnhanced Vouchers.)8 For a more detailed discussion of Mark-Up-To-Market and Mark-Up-To-Budget, see Chapter 2,"Federal Preservation Tools."9 To locate current legislation or pending bills,see http://thomas.loc.gov. Search by bill number(e.g., "HR 425").Or, search by word/ phrase (e.g."Preservation").CHAPTER 210 For the latest source documents, such as HUDNotices, handbooks, regulations, and policies,see http://hudclips.org.11 Including nonprofit controlled limited partnerships,which are also eligible for Mark-Up-to-Budget. Relative to Mark-Up-to-Budget, Mark-Up-to-Market has stricter eligibility rules butfewer requirements.12 Contracts executed on or before October 31,1997 are pre-MAHRA contracts. Contracts executedon or after November 1, 1997 are post-MAHRAcontracts.13 Seehttp://www.hud.gov/offices/hsg/mfh/exp/guide/s8guide.cfm. This website also provides Section 8Renewal Policy Guidebook updates and answersto Frequently Asked Questions (FAQs). See also"Renewal Options for Expiring Project-BasedSection 8 Contracts" (May 1, 2001 REV 2) byEmily P. Achtenberg, available atwww.liscnet.org/resources/housing_preserv/.14 HUD’s Real Estate Assessment Center (REAC)monitors project conditions and regulatory compliance.15 Flexible Subsidy, no longer active, providedrehabilitation or operating loss loans and grantsin exchange for additional use restrictions.66 Endnotes 65

16 For background on the IRP subsidy, seeChapter 1, "Subsidized Housing Preservation: AnHistorical Perspective."17 Including nonprofit controlled limited partnerships,which may also be eligible for Mark-Up-to-Market. Relative to Mark-Up-to-Market , Mark-Up-to-Budget has less restrictive eligibility criteriabut more requirements.18 Seehttp://www.hud.gov/offices/hsg/mfh/exp/guide/s8guide.cfm.19 The status of Section 221(d)(3) BMIR projectsrelative to nonprofit distributions is uncertain.20 It is not clear whether initial equity refers tothe original owner's stated equity or the newowner's recognized equity.21 See http://www.hudclips.org. Click on"Library" link; click on "Handbooks & Notices."Select "Housing" and "Browse." Look forHousing Notice 00-8: "Guidelines forContinuation of Interest Reduction PaymentsAfter Refinancing." The expiration date on thisnotice has been extended to July 31, 2003(Notice H 02-15).See also Emily P. Achtenberg, "Retaining IRPSubsidy through Decoupling and Note Purchase"(May 1, 2001 REV 1), available atwww.liscnet.org/resources/housing_preserv/.22 Under current law, Enhanced Vouchers arenot available if the project is not eligible to prepaywithout HUD consent. See also EnhancedVouchers, below.23 Under current law, Enhanced Vouchers areavailable for subsidized mortgage prepaymentsand insurance terminations only if the project iseligible to prepay without HUD consent.24 See http://www.hudclips.org. Click on "2001PIH Notices." Click on Notice PIH 2001-41 (HA),"Section 8 Tenant Based Assistance (Enhancedand Regular Housing Choice Vouchers) ForHousing Conversion Actions." This Notice hasbeen extended to January 31, 2003 (Notice PIH2002-3).25 Seehttp://www.hud.gov/offices/omhar/index.cfm. Forthe new owner and purchaser incentives, clickon "Owners" link; click on "Owner andPurchaser Initiatives (September 2000)" link. Amatrix and related memoranda describing theincentives can be downloaded from this page.For the "Operating Procedures Guide," return tothe OMHAR home page(http://www.hud.gov/offices/omhar/index.cfm)and click on the "Operating Procedures Guideupdate" link. Appendix C to the OPG containsthe policy on second mortgage forgiveness.These documents are also available at www/liscnet.org/resources/housing_preserv/.26 OMHAR is the process of developing a formalAdditional Funds policy.27 The maximum amount of the second mortgageis the existing HUD mortgage balanceminus the new supportable debt.28 Seehttp://www.hud.gov/offices/omhar/index.cfm.Click on "Tenants" link. Click on "TechnicalAssistance Programs" link. Click on "GrantNumbers" link. A list of ITAG intermediaries andOTAG grantees including their geographic coveragecan be downloaded from this page.29 Ibid.59Endnotes 67

CHAPTER 330 Much of the information in this Chapter isdrawn from Brian Galle, "Preserving Federally-Assisted Housing at the State and Local Level: ALegislative Tool Kit," Housing Law Bulletin,National Housing Law Project (October, 1999),with selective updates. Available atwww.nhlp.org and also atwww.liscnet.org/resources/housing_preserv.31 For a discussion of exit taxes, see Chapter 4,"Researching the Property: Towards aPreservation Strategy."32 See the California Department of Housing andCommunity Development's website athttp://www.hcd.ca.gov/hpd/hrc/tech/presrv forthe text of the law and related materials.33 See National Housing Law Project,"Challenging Conversions of Federally-AssistedHousing" and "Challenging Conversions ofFederally-Assisted Housing in California," availablefrom NHLP at www.nhlp.org.34 For a discussion of the proposed federalmatching grant program, see Chapter 1,"Subsidized Housing Preservation: An HistoricalPerspective."35 Information in this section was provided byAnn M. Norton, attorney with the MinnesotaPreservation Project.36 For copies of the Minnesota statute, seewww.mhponline.org. Click on "AffordableHousing" link. Click on "Preservation." Click on"State laws."37 For the pleadings of this case and relatedlegal documents, see www.mhponline.org. Clickon "affordable housing" link. Click on "preservation."Click on "Hopkins Village."39 For a discussion of Mark-Up-to-Market eligibilityrequirements and the impact of low- andmoderate-income use restrictions, see Chapter2, "Federal Preservation Tools."40 For a discussion of the Wellstone Noticerequirements, see Chapter 1, "Introduction toPreservation: An Historical Perspective."41 For a discussion of the CRP incentive, seeChapter 2, "Federal Preservation Tools."CHAPTER 442 For related resources, see Florida HousingCoalition, "FHC Risk Assessment" (undated),and National Housing Trust, "ConsiderationsWhen Evaluating the Preservation/Developmentof Affordable Housing" (November 2000); availableat www.liscnet.org/resources/housing_preserv.43 The Rental Assistance Program (RAP), authorizedby Section 236, predates Section 8 but providesproject-based rental assistance on similarterms.44 See Chapter 1 for a description of the ELIHPAand LIHPRHA programs.45 For a discussion of local use restrictions andMark-Up-to-Market, see Chapter 2, "FederalPreservation Tools."46 An UPREIT is an Umbrella Partnership RealEstate Investment Trust. Under federal tax law,an owner can exchange ownership interests forinterests in the UPREIT without triggering animmediate capital gain.38 Pursuant to Section 250(a) of the NationalHousing Act, HUD may consent to a prepayment(where HUD's consent is required) only wherethere is no longer a need for lower income rentalhousing in the area.68 Endnotes

iographiesEmily P. Achtenberg is a Boston-based housingconsultant with more than 30 years of experiencein affordable housing preservation transactionsand related research, program design,and policy development. She has assisted nonprofit,resident, and government organizationsin acquiring or retaining over 2,900 affordableunits threatened with expiring use restrictionsand/or subsidy contracts. A nationally-recognizedexpert in subsidized housing preservation,she has been actively involved in thedevelopment of federal and state preservationpolicy and has published a comprehensive manualfor preservation purchasers. She is a frequentspeaker and panel participant at nationaland regional housing preservation conferences.Ann Norton has worked with affordable housingand community development issues for almost30 years. An attorney since 1977, Ann has practicedlaw in various capacities in the public andprivate sectors. She spent eight years in privatepractice where she specialized in communitydevelopment issues and in 1990 she wasappointed to be the first Housing Court Refereein Ramsey County. Currently, she is presidentof the Housing Preservation Project, a publicinterest law firm in St. Paul, MN, whose missionis to preserve federally assisted, privatelyowned affordable rental housing in Minnesotaand across the country. Ann has written extensivelyand is a frequent speaker on a number ofcommunity development and affordable housingrelated issues.biographies 69

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