lis 217 stemming the tide - LISC

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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
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: chapter oneSubsidized Housing Prese
Page 11 and 12: The reaction to HUD's proposal was
Page 13 and 14: In addition, there are special rule
Page 15 and 16: Over the past few years, new federa
Page 17: tions. However, the nonprofit purch
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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