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Preservation GlossaryAnnual Adjustment Factor (AAF). A mechanism used until FY 1999 to set all annual rent increases in developments with Section 8 project-based assistance. HUD surveyed a market and determined the average rent increase for a given apartment type, then converted this into a percentage (the AAF) to apply to the gross rent of Section 8 properties, based on their prior year’s rents. The AAF is still used for all Section 8 developments that have not yet reached the expiration date of their initial subsidy contract. However, for developments that are now renewing on an annual basis, Section 8 project-based rents are adjusted using the Operating Cost Adjustment Factor (OCAF) or if requested by the owner, budget-based rents. Budget-Based Rents. A rent-setting mechanism originally applied only to the older assisted properties (Section 221(d)(3) and Section 236), but now used as well under the Section 8 project-based subsidy program, upon request of the owner, as a basis for annual rent increases. More commonly, the Operating Cost Adjustment Factor is used. Certificates. Tenant-based Section 8 assistance, which the tenant may take with him or her to different properties and even different states. The monthly rent subsidy paid to the landlord on behalf of the tenant is based on a formula: the difference between the resident’s actual rent (up to a maximum, usually the FMR) and the family’s affordable rent (30% of income). If the resident’s income decreases, he or she may seek a reduction in their portion of the rent and an increase in the amount paid from the Section 8 subsidy. If their income increases, their share of the rent will increase after their income is recertified, which occurs annually. Effective October 1, 1999, all Section 8 certificates are being merged into the voucher program. ELIHPA. The "Emergency Low Income Housing Preservation Act of 1987, also known colloquially as "Title II". The government’s first reaction to the prepayment problem, prohibiting prepayment if an owner wished to convert the property to market rents, and setting forth the beginnings of a "preservation program" using federal incentives. Developments financed under the Section 236 and Section 221(d)(3) BMIR programs were covered by this legislation. Enhanced Vouchers. Also known as preservation vouchers or sticky vouchers. These Section 8 vouchers are available to all income-eligible tenants of a property prepaying a Section 221(d)(3) or Section 236 HUD mortgage; and all residents receiving Section 8 project-based subsidies (eligibility of other income-qualified residents is unclear) in developments opting out of their project-based Section 8 contract. Eligibility is limited to low and moderate income households living in the development at the time of prepayment or opt-out. The enhanced voucher payment standard is set based on the actual (typically much higher) rent in each development. The vouchers are "sticky" because they stick with those specific residents, who can move out, taking the vouchers with them. However, the value of an enhanced voucher drops to the standard level for the community once the resident moves out of the original development. Fair Market Rents (FMRs). HUD’s estimate of the actual market rent for a non-luxury apartment in the conventional marketplace. Every year, HUD develops and publishes FMRs for every MSA. Interest Reduction Payment (IRP). HUD provides an IRP for Section 236 projects equaling the difference between the cost of the actual interest rate on the mortgage and a 1% mortgage rate. The FY 2000 Appropriation Act allow flexibility in the use of IRPs as a way to preserve affordability, allowing the IRP to be retained, for example, even if the mortgage is refinanced, so long as the owner maintains affordability for 5 years beyond the original mortgage term. LIHPRHA. The "Low Income Housing Preservation and Resident Homeownership Act" of 1990, also known colloquially as "Title VI", the successor to ELIHPA. The law confirmed the prohibition on sale of older assisted properties for market-rate use, and compensated them with financial incentives for either extension of the current ownership or sale to residents or a nonprofit buyer. The financial incentives for preservation properties were typically in the form of higher rents supported by new Section 8 LMSA contracts. Limited Dividend (LD). The maximum amount of annual cash flow HUD permits an owner to receive as a limited return on the owner’s original investment. Surplus cash in excess of this amount is retained in a residual receipts account. The limited dividend typically is not a percentage of the surplus cash flow, but rather a fixed amount set at the time of initial financing, which is not adjusted for inflation. Loan Management Set-Aside (LMSA). A form of project-based Section 8 used to support properties that need assistance, either to alleviate resident rent hardship or to prevent high vacancy and potential default. Originally created in 1976, LMSA has been allocated annually thereafter. Contracts were typically set at 15 years for the initial term, although some were 3-5 years. As these contracts expire, HUD has been renewing LMSA contracts on an annual basis. Mark-to-Market. Refers to the program for restructuring debt on eligible HUD-insured developments with Section 8 project-based subsidies where the rents approved by HUD over the years exceed comparable rents in the non-subsidized housing market. PAEs review and propose a restructured debt on these developments, with a write-off of unsupportable first mortgages (up to 100%) and creation of "soft" second mortgages, payable when cash flow permits. 30-year guaranteed affordability term required. Mark up to Market. A procedure for authorizing higher rents in eligible Section 8 developments where rents are at least 110% of HUD’s FMR. Market comparability studies are required by both the owner and OMHAR prior to approval of higher rents. 5-year guaranteed affordability term required. Multifamily Assisted Housing Reform and Affordability Act of 1997 (MAHRA). The federal law that established the Mark-to-Market program. Office of Multifamily Housing Assistance Restructuring (OMHAR). A new office established in HUD to supervise the Section 8 renewal and restructuring program. OMHAR Lite. This is one of the processes used by owners of eligible HUD-insured Section 8 project-based developments with expiring contracts and Section 8 rents HUD identifies as above comparable market rents. If these owners wish to renew their contracts but chose not to go through the mortgage restructuring process, they submit a market rent comparability study to HUD, which is then reviewed by OMHAR, to confirm that their rents are reasonable. The rents are then reduced accordingly. OMHAR may also decide they must restructure rather than take a rent reduction. Operating Cost Adjustment Factor (OCAF). This factor is used to adjust rents on an annual basis in budget-based federally assisted properties. It is applied only to operating expense items, rather than to the full rent as was the case with the Section 8 AAF, and is designed to insure coverage for inflationary conditions adjusted for vacancy and management fees. Participating Administrative Entities (PAEs). Agencies to which HUD delegates implementation of the Section 8 project restructuring program. These organizations can be state or local public housing agencies, housing finance agencies, nonprofits or other entities determined by HUD to be qualified based on a variety of selection criteria. HUD both selects and monitors the PAEs, and can step into their shoes if it deems they are not performing adequately. Phantom Income. Refers to a situation where a development is generating more taxable income to its owners than the annual cash flow they receive. Phantom income comes from two different types of situations: 1) as properties age, both the amount of mortgage interest and depreciation decrease, meaning that the tax write-offs are much less than in the early years; and 2) when a development generates cash flow in excess of the amount allowed to be distributed under a limited dividend requirement, that money is taxable even though the investors may not receive it. Portfolio Re-engineering. HUD’s more recent term for Mark-to-Market to encompass the broader effort needed to not just restructure properties financially, but also reposition them in the marketplace, rethink their regulatory structure and reduce HUD’s workload Real Estate Assessment Center (REAC). HUD office that performs a physical assessment of Section 8 properties to determine their condition. Properties with very low REAC scores may be disqualified for Mark-to-Market and Mark Up to Market initiatives. Section 221(d)(3). The oldest multifamily mortgage insurance program aimed at producing affordable family housing, active from 1963 through 1970 in two different forms:
Section 221(d)(4). One of the longest-lived FHA mortgage insurance programs for multifamily housing, introduced in 1973 and still used. Typically used to finance market-rate housing, but during the late 1970’s and early 1980’s, was often paired under the GNMA "tandem" program with the Section 8 new construction and rehabilitation programs. Section 236. Active from 1968 through 1975, this program provided both mortgage insurance and interest reduction subsidy payments (IRP) in an amount equal to the difference between actual debt service and debt service at a 1% interest rate. Some properties were financed by state housing finance agencies using the IRP portion of the program without FHA mortgage insurance. Sticky Vouchers. See Enhanced Vouchers. Vouchers. A tenant-based form of Section 8 assistance based on a local "payment standard". HUD makes up the difference between the payment standard and the family’s affordable rent at 30% of income. Effective October 1, 1999, the Section 8 certificate and vouchers programs are being merged, with residents holding certificates shifting over to vouchers. |