lis 217 stemming the tide - LISC

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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
Page 1 and 2: LOCAL INITIATIVES SUPPORT CORPORATI
Page 3 and 4: STEMMING THE TIDEA Handbook on Pres
Page 5 and 6: CONTENTSIntroductioniChapter One 1S
Page 7 and 8: chapter oneSubsidized Housing Prese
Page 9 and 10: payments where the project would co
Page 11 and 12: The reaction to HUD's proposal was
Page 13 and 14: In addition, there are special rule
Page 15: Over the past few years, new federa
Page 20 and 21: may construe the IRP as an "old and
Page 22 and 23: owner converts to non-rental use or
Page 24 and 25: 6. MARK-TO-MARKET INCENTIVESHUD/OMH
Page 26 and 27: PROFORMA 4: NONPROFIT PURCHASE WITH
Page 28 and 29: chapter threeState and Local Preser
Page 30 and 31: after refusing to accept the housin
Page 32 and 33: Owner Assessments. Assessment of th
Page 34 and 35: StrategiesAdvocates brought the own
Page 36 and 37: 3. STATE AND LOCAL FUNDING INITIATI
Page 38 and 39: chapter fourResearching the Propert
Page 40 and 41: insured projects, this date is 20 y
Page 42 and 43: 2. MARKETUltimately, the conversion
Page 44 and 45: 3. OWNERSHIPThe owner of a HUD-assi
Page 46 and 47: Phantom Income. If the property is
Page 48 and 49: 4. FINANCIALProject finances will a
Page 50 and 51: FINANCIAL INFORMATION SOURCESProjec
Page 52 and 53: Most HUD-subsidized properties have
Page 54 and 55: Social IssuesWhat is the nature and
Page 57 and 58: EXHIBIT 3OPT OUT SUMMARYSTATETexasO
Page 59 and 60: EXHIBIT 4OMHAR PAE and Assigned Pro
Page 61 and 62: Total Units Assisted Units Program
Page 63 and 64: EXHIBIT 8OPT OUT STATISTICS BY STAT
Page 65 and 66: Owner Phone Agent Name Agent Addres
Page 67 and 68:
Amortized Principal Interest Rate H
Page 69 and 70:
Intermediary TechnicalAssistance Gr
Page 71 and 72:
Tenant-Based Section 8. Rentalassis
Page 73 and 74:
16 For background on the IRP subsid
Page 75 and 76:
iographiesEmily P. Achtenberg is a
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lis 217 stemming the tide - LISC

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