| Preservation Tool |
Applicable Properties
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Description of Tool
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Mark-to-Market Debt Restructuring
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Project-based Section 8 properties with an FHA-insured or HUD-held mortgage and where Section 8 contract rents are above market rate.
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The HUD-insured mortgage is bifurcated into two mortgages. The first is sized to an amount that is supportable at market rate rents. The remaining unpaid principal balance is structured as a HUD held note that is serviced with 75% of surplus cash. The restructuring allows owners to finance rehabilitation needs and cover operating expenses. Repair escrows are provided for immediate capital needs and increased deposits to reserve accounts are made to address long-term physical needs. In addition to cash flow, owners receive fees based on operating performance and a return on investments required by the program.
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Mark-Up-to-Market
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Project-based Section 8 properties owned by a for-profit or limited dividend entity with Section 8 contract rents that are below market rents, but in excess of 100% of HUD’s published “fair market rent”.
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Provides incentives for owners with below market rents to remain in the Section 8 program. Owners are permitted to increase rents up to the lesser of market rate levels or 150% of HUD’s published “fair market rent.” The increased cash flow resulting from the higher rents may be used to recapitalize the property and increase distributions to owners of limited-dividend projects.
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Mark-Up-to-Market for a Non-Profit Transfer
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Project-based Section 8 properties being transferred to a non-profit organization where Section 8 contract rents are below market rents.
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Provides resources for non-profit, mission driven organizations to acquire and preserve Section 8 properties. Non-profit buyers are permitted to increase rents up to the lesser of “post-rehab” market rents or 150% of HUD’s published “fair market rent.”
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Mark-Up-to-Budget
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Project-based Section 8 properties owned by non-profits where rents are below market.
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Provides resources for non-profit owners to recapitalize a Section 8 property. Non-profit owners are permitted to increase below market rents up to 150% of FMR (or higher if HUD permits) if project needs are justified. Higher rents allow non-profit owners to support additional debt for rehabilitation or to increase contributions to the replacement reserve for future repairs.
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FHA Risk Sharing Loans
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All types of properties eligible provided the loan results in affordable housing.
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Mortgage insurance for mortgages of multifamily housing projects with loans that are underwritten by a Housing Finance Agency (HFA). HUD and HFAs share in the risk of the mortgage. HFAs may elect
to share from 10 to 90 percent of the loss on a loan with HUD. The HFA reimburses HUD in the event of a claim pursuant to terms of the risk sharing agreement.
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Section 236 IRP De-Coupling
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Properties with mortgages subsidized through the Section 236 program.
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Original 236 financing provides ongoing Interest Reduction Payments (“IRP”) in amounts that reduce the effective interest rate on the mortgage to 1%. In a De-Coupling transaction, the 236 mortgage is pre-paid and the previously budgeted IRP’s are retained. The anticipated flow of funds from the IRP can be leveraged to support debt in addition to what can be supported by the net operating income, providing additional funds for rehabilitation needs.
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HOME and CDBG Grants
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States and localities administer these programs and determine eligible properties.
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These are federal block grant programs that provide state and localities a source of funding to meet their community development and affordable housing needs. Rehabilitation of subsidized rental housing in an eligible activity but competes with other types of uses.
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Project-Based Vouchers
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Rental units assisted under certain federal housing programs (e.g., rental rehabilitation, public housing) cannot be assisted with project-based voucher assistance.
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Project-based vouchers are a component of a public housing agencies (PHAs) housing choice voucher program. A PHA can attach up to 20 percent of its voucher assistance to specific housing units if the owner agrees to rehabilitate the units. Rehabilitated units must require at least $1,000 of rehabilitation per unit to be subsidized, and all units must meet HUD housing quality standards.
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