July 27, 2006

 
 

Preservation Outlook

 

This column typically analyzes housing preservation policy developments at the federal level. However,  saving affordable housing often comes down to decisions made in the city or state where a particular property is located. To  paraphrase the late Tip O’Neill: “All preservation is local.”

Many states and cities are rising to the challenge of saving affordable housing. Recent legislative developments in Rhode Island and Hawaii provide good examples.

This month, Rhode Island’s governor signed legislation strengthening the state’s “rights of first refusal” law. Before opting out of the Section 8 program, owners must now offer to sell the property to the tenant association, the state’s housing finance agency, the local housing authority, and the municipality.

Word that the owners of Barbara Jordan Apartments, a Section 8 property serving nearly 300 families in South Providence, planned to opt out of the contract spurred tenants and the Rhode Island HUD Tenant Project to pursue the legislation.

Hawaii’s Republican governor followed suit this month, signing legislation that requires the government to preserve the state’s largest affordable rental property: Kukui Gardens in Honolulu, an 857-unit Section 221(d)(3) BMIR property, being sold to a for-profit developer. The new law requires the state to negotiate with the developer to keep the apartments affordable. If an agreement cannot be reached, the law authorizes the state to use eminent domain to acquire the property. Click here for more information.

Rhode Island and Hawaii are hardly alone. All over the nation, states and cities are devoting resources to save existing, affordable  housing. State leaders are recognizing that preserving our country’s affordable housing is an essential first step in solving the affordable housing problem.

Stay tuned.

 
   Michael Bodaken
   NHT President

 

 

News from DC

 

Senate Appropriations Committee Passes FY07 HUD Spending Bill. On July 20, the Senate Appropriations Committee approved the Transportation-Treasury-Judiciary-HUD appropriations bill. Section 8 project-based rental assistance is funded at $5.675 billion, the same amount requested in the president’s budget and $200 million more than it is funded the House appropriations bill passed on June 14.  The Senate bill rejects the Section 202 and Section 811 cuts proposed by the president, funding the programs at $750 million and $240 million respectively.  

Mark-to-Market Extension Included in the Senate Appropriations Bill. The Senate HUD appropriations bill passed on July 20 includes reauthorization of the Mark-to-Market program. The bill extends the program for five years through fiscal year 2011.

Senate Bill Rejects Proposed Change to Tenant Protection Voucher Policy. The Senate appropriations bill also rejects a policy change proposed in the president’s budget that would limit tenant protection vouchers only to replace assisted units that were occupied directly prior to being “lost” through demolition or owner opt-out. For the last ten years, tenant protection vouchers generally have been provided to replace all subsidized units, even those that happened to be unoccupied at the time of demolition or conversion to market rate.

USDA Announces the Preservation Information Exchange (PIX) Website. USDA’s Rural Housing Services has released PIX, a website that will allow non-profits or public bodies to track prepayment requests made by owners of Section 515 properties. Once registered, users can choose to receive e-mail notification of prepayment requests. Use is restricted to non-profits and public bodies and requires a taxpayer ID number for verification. They system can be accessed by following this link: https://pix.sc.egov.usda.gov.

Advisory Council on Historic Preservation Releases Draft Policy Statement on Affordable Housing and Historic Preservation.  The Advisory Council on Historic Preservation is revisiting its “Policy Statement on Affordable Housing and Historic Preservation” adopted in 1995 and has released a revised draft policy statement.  The policy statement was created to serve as a guide for Federal Agencies and State Historic Preservation Offices when conflicts arise between the dual goals of providing affordable housing and preserving historic properties. Individuals who have specific experiences in using the 1995 policy in the planning and implementation of affordable housing projects are encouraged to submit comments on the draft policy statement by August 16. The Federal Register announcement of the draft statement is available here.

 

Predevelopment Programs:  An Opportunity for Federal Home Loan Banks to Enhance their Affordable Housing Programs

Federal Home Loan Banks and their member institutions play a critical role in the provision of high-quality, affordable housing for low- and moderate-income individuals and families. The grants and subsidized loans disbursed through Affordable Housing Programs have created a unique housing resource, providing millions of Americans with a foundation on which to support their families and build their communities.

Often, though, the initial costs associated with affordable housing development constitute a prohibitive barrier to nonprofits and smaller developers. Federal Home Loan Banks can enhance their Affordable Housing Programs with predevelopment financing programs that help nonprofit developers bridge these early-in costs. Predevelopment programs have a number of significant benefits for banks and members, as well as developers and lower-income communities that benefit from development activity.

Predevelopment Financing Models.  The National Housing Trust has surveyed Federal Home Loan Banks with experience in predevelopment funding, and found three highly successful program models.

  • Revolving Loan Funds
  • Grant Programs
  • Recoverable Grant Programs

When considering the comparative value of these models, Banks should consider several factors: program sustainability, funding and administrative efficiency.  Revolving loan funds and recoverable grant programs are structured to be self-supporting and are typically larger in size.  This benefits both members and developers, as loans or grants are more substantial and funding is more stable.  Grant programs require less oversight and reporting, but are often vulnerable to annual fluctuations in profitability and are inherently less sustainable. 

Revolving Loan Funds: FHLB Cincinnati.  Initiated in 2001, the Cincinnati Zero Interest Fund is a $2 million revolving loan program that provides predevelopment financing for affordable housing and community development projects.  Successful projects have used the fund to cover land acquisition, predevelopment and due diligence costs.  Averaging $100,000 per proposal, Zero Interest Fund loans are structured for repayment within 24 months.  When permanent financing is secured, organizations repay their Zero Interest Fund loan to the originating member institution.  FHLB Cincinnati then debits the member institution’s demand deposit account for the amount repaid. If the Bank has not been repaid by the end of the 24 month period, the member’s demand deposit account will be debited for the full amount of the zero interest loan.

Grant Programs: FHLB Dallas.  FHLB Dallas has provided predevelopment financing through the Partnership Grant Program since 1996.  The program relies on annual allocation of funding and currently stands at $225,000. Grants can be used by nonprofit organizations involved in affordable housing and community economic development to build organizational capacity.  Eligible uses include application fees for grants from other funding sources and the hiring of architectural, engineering, survey, legal and administrative services.  Eligible nonprofits must have been in operation for 10 years or less and have a total operating budget of $200,000 or less.  Organizations are limited to a maximum $30,000 lifetime grant.  Application is made through member institutions.  Each grant recipient is then required to report on how the funds were used to help fulfill the organization's objectives.

Grant Programs: FHLB San Francisco.  Launched in 2003, the Access to Housing and Economic Assistance for Development (AHEAD) program provides recoverable grants for predevelopment aspects of affordable housing and economic development projects.  Eligible projects provide housing, services, or other benefits to low- to moderate-income households, create or retain jobs, or facilitate public or private infrastructure projects.  Applications are submitted through member institutions and pass through a two-phase selection process.  Interested member institutions submit a letter of intent to FHLB San Francisco.  Selected projects are then invited to submit applications.  Project sponsors are asked to make their best efforts to repay the grant to the Bank if the project meets its goals.  Nonetheless, funding for the program is contingent on annual approval by the leadership of FHLB San Francisco.  In 2006, the Bank made $200,000 in AHEAD Program grants available to members, with individual grants averaging between $20,000 and $25,000.

Recoverable Grant Programs: FHLB Atlanta. Recoverable grant programs combine the flexibility of grant-making programs with the sustainability of a revolving loan fund.  FHLB Atlanta administrated a successful Predevelopment Fund, providing $1.6 million for predevelopment activities.  Grants were disbursed through member institutions. Members were responsible for structuring the funding with the project sponsor, and were allowed to charge a commitment fee at a maximum of 2 percent of the amount awarded.  The maximum grant amount was $100,000 per project, not to exceed 75 percent of the total eligible predevelopment expenses. 

FHLB Atlanta discontinued its program in 2006 due to staff constraints and other capacity limitations.  Despite this decision, the program’s manager reports that the fund functioned as intended: grants were made through member institutions, and recovered when projects secured construction or permanent financing.  If a project did not go forward, despite the best efforts of the project sponsor, or acquisition and construction financing was not obtained, no recovery of the grant was required.  If the project sponsor failed to comply with reporting requirements and/or failed to make good faith effort to proceed with the project, the grant was considered recoverable.  Stringent reporting requirements provided FHLB Atlanta with a great deal of oversight capacity, but also placed strain on the Affordable Housing Program’s staff.   

Innovative approaches may alleviate the staff burden associated with a recoverable grant program.  The careful oversight necessary for grant-making might be contracted out to a nonprofit organization with a successful grant and loan making program.  The National Housing Trust Community Development Fund (NHTCDF), which has made loans totaling $6,452,000, might serve as a prototype contractor with an interested FHLB.  The FHLB and member institution would retain control over project selection, and NHTCDF would manage staged disbursement and financial oversight.

Serious Need, Real Opportunity. Just as there is a serious shortage of affordable housing for low- and moderate-income individuals and families, there is a critical need for flexible predevelopment financing among nonprofits working to preserve and develop affordable housing.  Banks with predevelopment programs uniformly report that their funds are oversubscribed, regardless of structure.  Predevelopment programs offer Banks an opportunity to catalyze investment and lending activity for member institutions, provide critical early-in financing for nonprofit developers and help to create new and rehabilitated affordable homes that strengthen our communities.

For more information, or to talk about opportunities for collaboration on predevelopment financing for affordable housing, please contact the National Housing Trust.

 
HAC Has Funds Available for the Preservation of Rural Rental Housing

The Housing Assistance Council (HAC) has loan funds available for the preservation of existing USDA-supported multifamily rental housing projects. The HAC Preservation Revolving Loan Fund (PRLF) can be used for interim or permanent financing needs. The standard loan term is 1-5 years for interim financing; up to 30 years for permanent financing needs. A new loan product, PRLF will provide HAC borrowers needed capital to preserve and rehabilitate existing multifamily rental housing units.

Click here for a one-page description of HAC's product.

 
Florida Housing Finance Corporation to Consider 9% LIHTC Preservation Set Aside
On July 28, the Florida Housing Finance Corporation (FHFC) will consider changes to its low income housing tax credit allocation process, including adoption of a 9% tax credit preservation set aside. If adopted, Florida will join 24 states that already reserve a specific portion of tax credits for preservation/rehabilitation projects.

The set aside is one of many preservation recommendations being made by the Florida Affordable Housing Study Commission. In its 2006 report, the Florida Affordable Housing Study Commission urges the state to adopt a comprehensive statewide preservations strategy. Click here for the commission's additional recommendations related to preservation.

 
Exit Tax Relief Would Make Saving Affordable Housing Easier
Current tax law impedes the transfer of federally subsidized rental housing to buyers committed to maintaining affordability. When owners sell their properties, the price must be high enough to pay off existing mortgages, cover federal “exit taxes” that recapture depreciation write-offs they’ve taken on their tax returns over the years, and, ideally, provide a profit. This makes it difficult for affordable housing developers to offer a viable bid for the property. In addition, when owners can’t command prices high enough to pay off both mortgages and exit taxes, they are locked into their properties, leading to disinvestment and deterioration.

Bipartisan legislation introduced in the House and Senate would exempt owners of federally assisted housing from the recapture tax liability if they sell their housing to a qualified buyer committed to preserving affordability for 30 years. State housing finance agencies would determine if the buyer was qualified, if the property’s proposed rehabilitation is sufficient, and how much relief is to be provided. Click here for the Senate bill (S. 3616) introduced by Senators Gordon Smith (R-OR) and Chuck Schumer (D-NY). Click here for the House bill (H.R. 3715) introduced by Representatives Jim Ramstad (R-MN) and Benjamin Cardin (D-MD).

In its May 2002 report, the Millennial Housing Commission identified exit tax relief as critical to ensuring the preservation of affordable housing. Click here for its well reasoned analysis.