Group Title: Affordable housing issues
Title: Affordable housing issues ; vol. 16 no. 2
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Title: Affordable housing issues ; vol. 16 no. 2
Series Title: Affordable housing issues
Physical Description: Serial
Language: English
Creator: Shimberg Center for Affordable Housing
Publisher: Shimberg Center for Affordable Housing
Place of Publication: Gainesville, Fla.
Publication Date: February 2006
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Bibliographic ID: UF00087009
Volume ID: VID00037
Source Institution: University of Florida
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AFFO R D A B L E


HOUSING


M.E. Rinker, Sr., School of Building Construction College of Design, Construction & Planning PO Box 115703,
University of Florida, Gainesville, FL 32611-5703 TEL: (352) 273-1192 SUNCOM: 622-7697 FAX: (352) 392-4364

Volume XVI, Number 2 February 2006




For decades, the government response to the need for affordable housing was focused on
new construction of multifamily rental properties, either directly through public housing or
indirectly in the form of assistance to private developers. The focus shifted to a demand-
side tenant-based subsidy system during the 1980's. New construction of affordable housing
has been unable to keep pace with demand and has slowed down due to challenging project
economics. This is coupled with an ongoing loss of existing affordable units due to conver-
sion to market-rate housing or dilapidation. Preservation of the affordable housing stock has
become an important approach to meet current and future housing needs. This newsletter will
frame the preservation topic by discussing the terms of three federal programs under which
affordable housing was constructed by the private sector, perspectives of property owners,
and opportunities and obstacles for preservation.




"Mr. Chairman, the outlook for housing for low-income Americans over the next 15 years is
grim. The facts are relatively easy to summarize:

We have never provided enough subsidized housing to meet the demand;
We are unable to provide enough funds to properly maintain our existing housing stock;
The housing demands of the poor are likely to increase over the next few years;
The ranks of the homeless are growing because of a complex set of conditions, and we
have done relatively little to stem the tide, and;
We risk the loss of a substantial number of 236 and 221(d)(3) units over the next 15
years."








This could have been written yesterday, but
actually dates back to 1988. It is an opening
statement by House Representative Roukema
at a hearing on the preservation of low income
housing before the federal Subcommittee on
Housing and Community Development. Today,
the demand for affordable housing units contin-
ues to soar, impacted by growing populations,
changing formation of households, soaring land
values, stagnating incomes, deteriorating proper-
ties and continuing loss of affordable units from
the housing stock.

New construction of affordable rental properties
is not geared to the lowest income groups and
has actually slowed down due to unfavorable
project economics. At the same time, existing
units are being lost. In its 2005 report, the Af-
fordable Housing Study Commission denotes
that 5,749 units have been lost in Florida as of
March 2005, due to prepayment of federally sub-
sidized mortgages or opt-out from federal rental
assistance contracts by private property own-
ers of affordable housing developments. This
number understates the extent of the real loss of
affordable housing in Florida, because it does
not include loss of units under other government
programs or loss due to dilapidation. To under-
stand how units could have disappeared and may
vanish in the future, the terms of three federal
housing programs are discussed next.






Between the late 1930's and mid-1970's, af-
fordable housing was supplied through the


production of public rental developments by
local housing authorities. The federal attitude to
housing production shifted in a fundamental way
when Kennedy took office in 1961. He explored
alternate ways of housing production that would
target households with incomes too high to be
eligible for public housing but too low to become
homeowners. The goal was also to achieve better
efficiencies through public-private cooperation.
From the early 1960's to the mid-1980's, the fed-
eral government created three subsequent hous-
ing programs that would stimulate production
of moderate- and low-income multifamily rental
housing: Section 221(d)(3) Below Market Inter-
est Rate, Section 236 and Section 8 Project-Based
assistance.

The Section 221(d)(3) Below Market Interest
Rate (BMIR) program was created under the
National Housing Act in 1961 to promote con-
struction of affordable housing. It enabled private
lenders to originate mortgages on rental housing
properties at a three percent interest rate by allow-
ing them to sell these mortgages to Fannie Mae
at market. The loans were also insured by the
Federal Housing Administration (FHA) to lower
the risk to lenders. The rate of return to property
owners was restricted to six percent of original
equity. The amortization term of the mortgages
was 40 years. Most for-profit owners were eligi-
ble to prepay after 20 years and terminate the use
restriction at that same time. Section 221(d)(3)
required large capital outlays up front by Fannie
Mae. Due to this budgetary impact, the program
was eliminated and replaced by Section 236 in
1968. In Florida, about 23,127 housing units were
financed under Section 221(d)(3).








The Section 236 program became law under the
Housing Act of 1968 that was enacted by the
Johnson Administration. The government pro-
vided lenders with a monthly interest reduction
payment (IRP) subsidy, which reduced the inter-
est rate on loans to developers of rental housing
from market rate to one percent. The amorti-
zation term was the same as that for Section
221(d)(3), 40 years with eligibility for prepay-
ment after 20 years. In addition to the mortgage
subsidy, the government provided special tax
advantages to the property owners such as accel-
erated depreciation. The rate of return to owners
continued to be capped at 6 percent. In 1973,
new funding under this program came to a halt
when Nixon's government placed a moratorium
on all housing programs. In Florida, a total of
8,025 units were funded under Section 236.

In 1974, the federal government introduced
two new programs to stimulate construction
of affordable rental housing. These programs
were established to provide a direct rent subsidy
through a contract between the property owner
and the local public housing authority. The pro-
grams were:

Loan Management Set Aside Program:
Properties built under Section 221(d)(3) and
Section 236 were experiencing difficulty in
meeting their mortgage obligations due to short-
comings in the rents received from tenants. The
Loan Management Set Aside (LMSA) program
was developed to supplement the rents on those
properties. Section 8 contracts were usually for
five years with two options to renew for five
years at a time. A property owner was given the
choice to opt-out of the Section 8 contract upon


expiry instead of renewal. In Florida, over 8,000
units continue to receive project-based rental-as-
sistance through LMSA.

New Construction Program and Substantial
Rehabilitation Program: Rental assistance was
provided to newly constructed or substantially
rehabilitated privately owned rental develop-
ments that were funded by any FHA-insured
mortgage. The term for assistance was set at
20 years, after which the owner could opt-out
or extend by one to five years, subject to an-
nual appropriations by Congress. These Section
8 programs were repealed in 1983. In Florida,
about 1,400 units were constructed under these
programs.


By the 1980's, federal housing policy had shifted
from a supply-side production approach to a
demand-side tenant-based subsidy system. New
construction of affordable housing slowed down
steadily during the 1980's, which went hand in
hand with a decline in the number of unassisted
private units with affordable rents. Furthermore,
the 1980's marked the 20th anniversary of the
subsidized mortgages issued under the earliest
federal programs. Many of the oldest structures
built under the HUD-subsidized programs also
faced substantial repair needs. Policy-makers
and housing advocates began to recognize the
risk that subsidized privately-owned rental units
could be lost to the affordable housing stock in
any of these three ways:








* Dilapidation and default as a result of lack
of cash reserves for capital requirements or
due to disinterest of owners, especially for
properties in blighted areas.
* Conversion to market-rate rentals or condo-
miniums if the rent levels in the area were
higher than the project rents and if tax ben-
efits had expired.
* Redevelopment to non-residential use.


Although the risk of potential loss was identi-
fied at the federal level, the extent of prepay-
ments and the impact on residents were uncertain
and had not been explored. In 1987, the federal
government introduced the Emergency Low
Income Housing Preservation Act (ELIHPA). It
placed a two-year moratorium on prepayments,
while Congress developed a 'permanent' solu-
tion to protecting affordable units. ELIHPA was
replaced by the Low-Income Housing Preserva-
tion and Resident Homeownership Act (LIH-
PRHA) in 1990. This Act was aimed at preserv-
ing privately-owned subsidized properties for
their remaining useful life, set at 50 years. The
new regulation imposed 'permanent' prepayment
restrictions and encouraged property owners to
refinance or sell to a 'qualified' purchaser, an
entity that keeps the units affordable.


In 1996, the Clinton Administration adopted the
Housing Opportunity Program Extension Act. It
restored the right of eligible property owners to
prepay a subsidized mortgage as of the 20th an-
niversary of the loan.


Owners of subsidized properties have contrac-
tual rights and obligations that present them
with several choices at the time of eligibility of
subsidized mortgage prepayment or rental as-
sistance contract expiry: retain the property and
maintain affordability; retain the property and
convert to market-rate rentals or condominiums;
sell to another) 'preserving entity' that will
maintain affordability; or sell to another) market
buyer who will convert to market-rate housing.
An owner's decision may be impacted by a wide
variety of inter-connected factors such as the fol-
lowing:

* Tax benefits: Tax benefits expire as allow-
able depreciation reaches zero and mortgage
interest deductions are no longer sufficient to
offset taxable income. This can be motivation
to sell. At the same time, as principal pay-
ments increase over the life of a loan, many
owners are paying taxes in excess of actual
cash received from the allowable limited
dividend, referred to as phantom income.
The property owner builds up this phantom
income and has to pay taxes on this non-cash
capital gain upon sale of the property (the
exit or recapture tax). In that case, an owner
might decide to convert or let the property
deteriorate.
* Physical state of the property: Aging build-
ings require capital improvements, but cash
reserves often have not been allocated or
have been depleted to cover operating ex-
penses. The need for a capital injection may
lead to an owner's decision to sell, convert or
let the property dilapidate.
* Availability of other government funding:
To keep units affordable, substantial govern-
ment support is needed. But housing budgets
have seen major cuts. If funding is lacking or
is uncertain for the future, a property owner
can be deterred from continuing to operate an
affordable housing development.








* Local market conditions: Rent restrictions
and limited dividends curb cash flows. When
a development is located in a market with
strong property values, good schools and
amenities, low vacancy rates, low poverty
and low crime, there is great potential to
improve financial returns by converting to
market housing.
* Ownership status: If the owner is a nonprof-
it organization, its mandate will be focused
on the supply of affordable housing for low
income families, and therefore the risk of
conversion to market rate rental or condos
is marginal. For-profit owners with their eye
on the bottom line would be more enticed to
terminate subsidies and convert to a mar-
ket-based system. Portfolio decisions are
also driven by a myriad of factors related to
corporate strategies and personal motivations
such as retirement plans.






The issue of preservation has received much at-
tention from all levels of government and orga-
nizations such as the National Housing Trust, the
Florida Housing Coalition and the Governor's
Affordable Housing Study Commission. The
attention is no longer only on the oldest proper-
ties funded by the three federal programs dis-
cussed. The issue of preservation also impacts
public housing units, properties funded by the
Rural Housing Service, Section 201 units for
the elderly, Section 811 units for persons with
disabilities, and developments funded under state
administered programs such as the Low Income
Housing Tax Credits and Multifamily Mortgage
Revenue Bonds.


Several programs and strategies have been devel-
oped to keep units affordable, including:

* Enhanced Vouchers: These are made avail-
able by HUD to tenants of properties that
convert to market rate rental housing when
the owner prepays the mortgage or opts out
of the Section 8 rental assistance contract.
The Enhanced Voucher will not stay with the
unit or tenant, but is terminated when the ten-
ant moves out.
* Mark-Up-To-Market: Under this federal
program, contracts for Section 8 Project-
Based properties with below-market rent
levels may be renewed at market rent for a
minimum of five years (subject to annual ap-
propriations).
* Mark-To-Market: This federal program
applies to Section 8 Project-Based properties
with FHA insurance and contract rent levels
above the prevailing market rents. The mort-
gage on the property is refinanced in order to
reduce the owner's loan payments, and the
Section 8 contract is renewed at a lower rent
level for 30 years in order to reduce HUD's
cost of the subsidy.
* Low Income Housing Tax Credits: Several
states are setting aside LIHTC's for preser-
vation and may also award extra points to
applications that propose to preserve units.
Although Florida does not have such a de-
fined allocation, it has funded rehabilitation
projects with tax credits.






To date, preservation efforts have been hap-
hazard at most state and local levels. Although
some 'preservation tools' exist as discussed
above, these come with regulatory restrictions
and budgetary uncertainties. Governments and
authorities have also been unable to respond








to preservation needs in a proactive manner.
This is due to a lack of understanding of the
extent of the issue and limited property-level
data that would provide insight into the risk of
prepayment or opt -out. Around the country,
several states and counties have started to cre-
ate databases of assisted affordable housing
developments, often with the goal to develop a
better picture of the preservation challenges and
opportunities in their jurisdiction. The Florida
Housing Data Clearinghouse that is administered
by the Shimberg Center for Affordable Housing
has developed the Assisted Housing Inventory
(http://www.flhousingdata.shimberg.ufl.edu/).
It contains property-level information for mul-
tifamily rental properties in the state of Florida


that receive federal, state and/or local funding. It
is a comprehensive and evolving tool for policy-
makers and housing professionals.

The Governor's Affordable Housing Study Com-
mission reported that "affordability requirements
for approximately 60,000 units will expire over
the next 15 years, and many believe these include
the units most likely to serve the state's lowest
income residents". Preservation is a necessary
approach to prevent displacement of families and
to address the demand for affordability.

The inquisitive reader is encouraged to visit the
following HUD website for the Office of Afford-
able Housing Preservation -
http://www.hud.gov/offices/hsg/omhar/.


Affordable Housing ISSUES is prepared bi-monthly by the Shimberg Center for Affordable Housing for the purpose
of discussing contemporary issues facing affordable housing providers. Reproduction of this newsletter is both permitted and
encouraged. Comments or questions regarding the content are welcome and should be addressed to Robert C. Stroh, Director.


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