Last month HUD issued the ninth in its series of annual reports designed to help Congress make informed policy decisions regarding housing assistance. A key finding: “There continues to be a shortage of affordable housing that is available to very-low-income and, more significantly, extremely-low-income renters.” In contrast to this expressed need, President Bush’s proposed FY 2007 HUD and rural housing budget proposals follow the trend of recent years.

Our budget article in this issue shows you what’s up, down, and out. To be fair, the budget cloud has some silver linings for housing preservation:

• an increase in funding for Section 8 project-based assistance that FHA Commissioner Montgomery assures is enough to renew all current contracts; and  

• a significant increase in money for rural housing vouchers to help with the problem of Section 515 rental housing loan payments.

At the same time, the budget proposes significant cuts to CDBG and to core federal housing programs for the elderly, disabled, and people living in rural areas. Inevitably, this squeeze on overall budget expenditures will reduce available resources for affordable housing.

Meanwhile, state and local governments, nonprofit and private developers across the country keep working hard to build on the foundations already in place: preserving the federally assisted housing and tax credit properties already on the ground and bringing new tax credit developments on line.  

In this and future issues, we’re bringing you case studies, best practices - along with preservation trends nationwide - to help you in that work.

• The Rural Housing Service issued a NOFA for the Section 538 loan guarantee program.  The notice has been posted on the Housing Assistance Council's website and can be accessed by clicking here. 
• President Bush released his FY 2007 budget proposal.  More information on how certain housing programs fare is provided in our budget article below.  The full budget can be accessed by clicking here. 

Tell us about your strategy for preserving affordability in expiring tax credit properties.  It’s a two-prong approach. First, our Preservation Team designed a process for marketing and selling tax credit properties to qualified buyers who will keep them affordable at the end of the 15-year compliance period. An explanation of this process, including our procedures and forms, is available on our web site (click here). Then we hosted several training sessions to help nonprofits understand how the process works and how they can participate.

Second, we’re streamlining our monitoring procedures for owners and managers of tax credit properties who stay in the program after the 15 year minimum, focusing only on preserving affordability. We’re also partnering with other public agencies to monitor jointly funded properties. This lessens the burden on property owners and also allows us to combine resources when working out asset management and preservation issues that arise - with added clout.

What other tools does WSHFC deploy to preserve affordable housing?  Like many state agencies, we give preference for 9% credits for preserving properties that have affordable use periods expiring within five years, including properties with annual Section 8 contract renewals. We recently used tax exempt 501(c)(3)bonds to preserve a large portfolio - 30 properties with 926 units - of Rural Development properties in cooperation with Mercy Housing. We’ve also used the 4% credit combined with tax exempt bonds to preserve a number of large project-based Section 8 properties.

And you’ve also invested $5 million with Impact Capital to preserve affordable housing throughout the state. That’s right. Impact Capital is a Community Development Financial Institution.  Impact Capital was launched to provide early-stage financing and capacity assistance to nonprofit housing and community development organizations here in Washington . So far, it’s raised $18 million of public and private capital. WSHFC was an early investor in the fund. We also have staff members serving on three regional credit committees, a Loan & Investment committee and the Board of Directors.

Why do you view preservation as important for Washington State?   We view the 26,000 HUD and Rural Development assisted units as critical to our future success: a fundamental base. Preserving them allows us to create additional rental housing opportunities without displacing existing low-income tenants. It makes sense financially and provides long-term stability to existing residents.  Now, we need to preserve the tax credit and bond portfolios for the same reasons.

In Maryland, Montgomery County ’s Department of Housing and Community Affairs asked this question about the County’s federally assisted housing in 2000. Their approach - combining triage, moral suasion, and just plain common sense - provides lessons for us all.

Defining the Universe: The County obtained a comprehensive list of federally assisted properties from the National Housing Trust (NHT) database (click here).

Performing Triage: Next, the County asked NHT to help determine what properties were most likely to “opt out” in some form or another. To do this, NHT considered a number of factors, including:  

• Status of federal, state and/or local regulatory restrictions, including restrictions on cash flow distributions;    

• Ownership of residual receipts and/or replacement reserves;

• Ownership type and property history;

• Population served, e.g., families or senior citizens;

• Relationship between market rents, contract rents, Fair Market Rents and tax credit rents;

• Location, curb appeal and physical condition;

• Annual operating costs and cash flow; and

• Occupancy rates

NHT created a priority list, sorting developments into 5 categories:

• Already lost, i.e., already converted to market rate housing;

• Presumed safe: elderly and family housing owned or controlled by dedicated non-profits, local agencies, cooperatives and other special projects;

• Not presently at risk: Section 8 contracts expiring in later years;

• Already in the preservation process; and

• At risk in the short term

Then we discussed the list in detail with Montgomery County staff, using their knowledge of individual properties, owners, management companies and county history to confirm what properties needed attention first.

Montgomery County is a leader in committing local money for affordable housing initiatives. They saved some properties by funding acquisition efforts by public and non-profit owners. Not everyone can do that. Equally important, big money investments aren’t always needed.

Moral Suasion: In the County’s case, the most difficult properties to address were mixed income developments with partial Section 8 assistance. With the list and background information in hand, the County Executive met with owners’ representatives of the seven properties—consisting of 1,047 apartments, 283 of which were affordable—that were likely to opt out of the Section 8 program and substantially raise rents. This was a very compelling statement of the County’s concern. He asked how the County could help.  

Innovative Solutions:  The owners shared their concerns: the gap between true market rents and the rents they were able to charge under Section 8; their inability to collect from residents who caused excessive damage and rent loss during the time needed to fix up their units; HUD’s requirement that owners conduct periodic market studies at their own cost to justify their rents; and late payments from HUD.

County officials calculated the cost of eliminating these concerns and agreed to: 1) cover repair costs and rent losses caused by excessive tenant damages; 2) pay for the HUD required market studies; and 3) front the rent money when HUD is late in paying.

The County budgeted $60,000 a year for this effort to cover all seven properties. Actual expenses have been much less than that in some years. To date, there’ve only been two instances when owners asked the County to cover the costs of a damaged unit. Market studies are only required every few years, so that expense is spread out over time. And the money to front late rent payments from HUD works as a revolving fund; it’s paid back by owners once the HUD funding arrives.

Even if the County spends the full $60,000 in a year, the annual federal subsidy received by residents at these properties is approximately $12,000 a year per unit, which is $3.4 million total, or 56 times the amount of the County’s investment – a bargain by any measure.

For more information, contact Stephanie Killian at Montgomery County’s Department of Housing and Community Affairs: stephanie.killian@montgomerycountymd.gov.

Once again, the president has submitted a budget request that reflects his focus on creating an “ownership society”.  A number of homeownership programs receive a boost in this FY 2007 budget, but that’s not the case for most rental programs.  Overall, the president requested $33.6 billion in discretionary budget authority for HUD, a 1.8 percent reduction from FY 2006 funding levels.

HOME receives a $166 million increase over FY 2006 funding levels, but nearly half of that is new for the American Dream Downpayment Initiative.  Section 8 project-based assistance receives an additional $639 million, (13% increase) enough necessary to merely renew existing expiring contracts but provide no new net contracts. Tenant-based assistance receives an additional $503 million (3% increase). USDA’s Rural Housing Voucher Program receives $74.25 million in funding - up from $16 million - and money for the 538 rental housing guarantee program almost doubles. It’s expected this money will go to refinance existing 515 properties eligible to prepay and provide vouchers for residents to cover increased rents.    

Significant cuts are proposed for a number of important housing assistance programs.  Elderly housing (Section 202) receives a 25% cut in funding, down to $545.5 million.  Disabled housing (Section 811) receives a 50% cut in funding, down to $118 million.  CDBG remains in HUD, but receives only $3.032 billion- a significant 27% decrease in funding.  The Public Housing Operating Fund receives no change in funding – which is effectively a cut-  and the Public Housing Capital Fund is down by 11% to $2.178 billion. Of great concern to preservation is the Administration’s proposal to zero out USDA’s Section 515 rental housing, preservation demonstration, and preservation revolving loan programs. Also proposed to be “zeroed out” are Hope VI and HUD’s rural housing and economic development program.