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TRANSCRIPT
How to Preserve and Recapitalize a
Section 236 PropertyOffice of Recapitalization
HUD Office of Multifamily Housing Programs
April 30, 2015
Webinar FormatWebinar will be recorded. Participants will be on mute.Download the PowerPoint slides and accompanying materials on HUD Exchange for the webinar.
Please ask questions! Use Question Box on panel on the right of your screen to: • Submit your preservation questions for the Q&A
session at the end of the presentation.• Request assistance with technical difficulties.
Be ready for review questions.
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PresentersVince O’Donnell, Affordable Housing Consultant,
HUD Office of Recapitalization (Recap)John Ardovini, [email protected] Dickson, [email protected] Loewus, [email protected] Lynott, [email protected] Monroe-Baldwin, [email protected]
HUD Office of Asset Management and Portfolio Oversight (OAMPO)Stan Houle, [email protected]
Panelists
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HUD Welcome MessageThank You
Multifamily Properties: • Your stewardship and property management are
critical to the success of HUD’s affordable housing mission.
• Your properties have met the affordable rental housing needs of millions of low-income residents for decades.
• HUD and your residents still need you.
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Section 236 Projects at Risk: 550 buildings with 103,000 units
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HUD Can Guide You
Through the Process
Join the Preservation Movement
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Agenda
A. Preservation Process StepsB. Resources, Questions, and Answers
Preservation Process Steps
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At the end of this session, you will be able to:• Determine how to start
preservation planning for your Section 236 property.
• Identify how to maximize the rental assistance and financing options that will support your preservation goals.
Lesson Objectives
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On the HUD Exchange Training and Events Page for this webinar:• Webinar slides (transcript and recording coming soon)• Section 236 Preservation Checklist• Section 236 Preservation Resources and Tools• Guide: Preservation Options for Section 236 Properties
(coming soon)Get Started: Basic Information about Preservation• Webinar: Welcome to Preservation• Get Started on Your Preservation Strategy• Glossary of Multifamily Affordable Housing Preservation
Terms
Section 236 Preservation Information
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KNOWYOUR PROPERTYA. Financing
B. Rental Assistance
C. Capital Needs and Reserves
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How the Section 236 Program Works
Market-Rate Loan either FHA-Insured or
HFA-Financed
Interest Reduction Payments
Lower Mortgage Payments& Reduced Rents
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A. FinancingGather Documents Section 236 Mortgage Note Section 236 Regulatory
Agreement Interest Reduction Payment (IRP)
Amortization Schedule Flexible Subsidy documents ELIHPA or LIHPRHA Plan of Action
and Use Agreement, if anyOther financing documents Financial statements
When does your Section 236 loan mature?How many months are left on your IRP?
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B. Rental AssistanceGather documents: Project-Based Section 8 contract Rent Supplement (Rent Supp)
and/or Rental Assistance Payment (RAP) contract
Rent roll
When do your rental assistance contracts expire?What is your mix of subsidized and unsubsidized rents? What are your rents?
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C. Capital Needs and Reserves
Review your latest REAC report for capital and repair needs, know your score, and understand the issues.
Know the current balances in your reserves for replacements and residual receipts accounts.
You will need a Capital Needs Assessment (CNA) that evaluates your property’s upcoming capital replacement needs.
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Original Financing• Loan matures in Dec
2017• 30 months on IRP left• First mortgage is
prepayable without permission
• Flex Sub Loan for operating assistance
Current Rental Assistance• 60 Section 8 units• 20 Rent Supp units• 20 unassisted units
Current Capital Needs• Major upgrades needed• Too many efficiencies• Units not accessible
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SETPRESERVATIONGOALSSafeguard long-term rental assistance for current and future generations. Improve and modernize properties through capital repairs.Stabilize properties by placing them on solid financial footing.
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What are your capital improvement goals?Major repairsModernize older units and common areasConvert efficiencies to 1-bedroom apartmentsEnergy efficient upgrades that will save
operating costsAccessibility improvements
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CHOOSE YOUR PRESERVATION OPTIONS
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Choose Your Preservation Options
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RAISE CAPITAL
Why raise new capital funds for your property?To address capital needs.To get access to accumulated equity.
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Capital SourcesRefinancing – New First Mortgage Debt
• FHA-insured, Fannie Mae, Freddie Mac or state Housing Finance Agency (HFA)
Equity• Low Income Housing Tax Credits (LIHTC)• Cash-on-cash
Subordinate Debt• HOME, CDBG, State housing trust funds, National
Housing Trust Fund (starting in 2016)Grants
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PREPAYMENT
Why prepay your Section 236 loan?
To enable refinancing of a property.To trigger issuance of Tenant Protection Vouchers.
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PrepaymentSome properties will need HUD PERMISSION to prepay: • HUD permission usually required
for nonprofits, properties with Flex Sub Loans, certain FHA loans with Rent Supplement Contracts
• Check your mortgage note and other property documents
Governed by Section 250(a) of the National Housing Act.
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Tenant Notification Requirements• Notify tenants of the prepayment at least 150 days
before it may occur. Tenant comments are submitted with the request.
• Send tenant notification letter to the HUD field office with a signed certification that it has been delivered to the tenants.
Rehab Requirements• Property must be rehabbed. Minimum requirements
apply.
Prepayment when HUD Permission is Required
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Prepayment when HUD Permission is Required
Affordability Requirements:• Property must be maintained
with equal benefits for low-income residents through the original mortgage note term.
• Owner must execute a new Use Agreement.
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Section 236 Preservation Resources and Tools
Topic Reference or Tool
Prepayment Permission
• Notice H 2006-11 prepayments Subject to Section 250(a) of the National Housing Act
• Policy Clarification for Prepayments Subject to Section 250(a) of the National Housing Act
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Prepayment when Permission is NOT Required
Tenant Notification Requirements (Wellstone Notice):• Notify tenants 150 days or no more than 270 days
before prepayment may occur
• May be waived, but only to facilitate preservation
No rent increases for 60 days after the prepayment
No HUD rehabilitation requirements
Governed by Section 219 of the FY 1999 HUD Appropriations Act (Wellstone Amendment)
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DECOUPLING THE IRP SUBSIDY
Why decouple the IRP from your Section 236 loan?Owners may “decouple” the remaining IRP subsidy at prepayment and apply it to a new loan. These funds could help leverage new debt capital.
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Decoupling Basics
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IRP Decoupling Rent SettingSection 8 Units Non-Section 8 Units
• Rent set per Section 8 Renewal Guide Options
• Coordinate FHA, Section 8, and Section 236 rent underwriting
• Section 236 rent-setting rules continue for 5 years:• Budget-based rents• Rents capped
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Maintain Section 236 occupancy and income restrictions:• New tenant income less than 80% of median• Section 236 Basic or Market Rents maintained for 5
years beyond current maturity• No involuntary displacement• Section 8 contracts must be terminated and
immediately renewed for 20 years with a Preservation Exhibit
IRP Decoupling Use Agreement
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IRP Decoupling Distributions• Annual distributions: 6% of adjusted new equity. • If new equity: LIHTC equity, long-term deferred
developer fee, owner cash, but not grants and soft loans.
• If no new equity: 10% return on 10% of the new mortgage amount.
• Taken only from surplus cash (not included in budget-based rent calculation).
• For HFA-financed Section 236: state or local law controls distributions.
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Main Street Apts. will decouple its IRP and apply it to its new financing. Check all that are true:The new lender will receive the remaining IRP
payments from HUD.The IRP decoupling Use Agreement will continue for
5 years beyond original first mortgage loan term.IRP decoupling allows owners to terminate their
Section 8 contracts.Owners must follow requirements on budget-based
rent setting, rent caps, and rent increases.
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Main Street Apts. will decouple its IRP and apply it to its new financing. Check all that are true: The new lender will receive the remaining IRP
payments from HUD. The IRP decoupling Use Agreement will continue for
5 years beyond original first mortgage loan term.IRP decoupling allows owners to terminate their
Section 8 contracts.Owners must follow requirements on budget-based
rent setting, rent caps, and rent increases.
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FLEXIBLE SUBSIDY LOAN DEFERRAL
Why would I defer my Flex Sub Loan?
You may be able to defer repayment of the loan so you do not have to make a balloon payment at prepayment, maturity, or sale.
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What is a “Flex Sub” Loan? In the late 1970s, HUD provided loans for operating assistance or capital improvements. • Loans are required to be paid in full at the maturity or
prepayment of the Section 236 Loan, or at sale of the property.
• Capital improvement loans were amortized and typically have low balances.
• Operating assistance loans were structured as balloon payments.
Flexible Subsidy Loan
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Flexible Subsidy LoanRequirements for deferral of Operating Assistance Flex Sub Loan Repayment:• Regulatory compliance.• No other funding sources available to repay the loan.• Maximum deferral and re-amortization: Greater of 20
years or term of new first mortgage. • Projections show feasibility of repayment within new Flex
Sub Loan term.• New Flex Sub Use Agreement restricting rents and
incomes to match new term of Flex Sub Loan.
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Main Street Apartments has an operating assistance Flex Sub Loan that will be due in full when they prepay the Section 236 loan. Which is true?The Flex Sub Loan can possibly be deferred and re-
amortized for 20 or more years.The Flex Sub Loan cannot be deferred.
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Main Street Apartments has an operating assistance Flex Sub Loan that will be due in full when they prepaythe Section 236 loan. Which is true? The Flex Sub Loan can possibly be deferred and re-
amortized for 20 or more years.The Flex Sub Loan cannot be deferred.
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SECTION 8 CONTRACT
Why renew your Section 8 for 20 years?
Lenders and LIHTC investors expect a new 20-year contract for refinancing. Possible to increase rents to market level.
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Section 8 RenewalSee Section 8 Renewal Guide for available options and who is eligible for them.Main factors determining Section 8 renewal options:
• Over- or under-market rents at time of renewal
• FHA-insured debt• LIHPRHA or ELIHPA• Other regulatory agreements• Nonprofit owner
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VOUCHERS
How do Tenant Protection Vouchers assist your residents? TPVs provide Section 8 assistance after loss of rental assistance or at Section 236 mortgage prepayment.TPVs protect residents from being displaced due to rent increases.
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Tenant Protection Vouchers (TPVs)• TPVs are issued through your local Public
Housing Authority (PHA).• TPVs are portable, but may be project-based in
certain circumstances.• Availability is subject to annual appropriations.• Tenants and units must be qualified.• TPVs may be Enhanced Vouchers (EV) or regular
Housing Choice Vouchers (HCV).
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How are EVs different than TPVs? • Additional protections for residents. • Requirements for rent setting are more flexible.
Triggered when:• Section 236 loan is prepaid and subject to Section
219 OR• Prepayment in a property that has received a
Flexible Subsidy Loan OR• Section 8 contract is not renewed at expiration.
Enhanced Vouchers (EVs)
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Discretionary TPVs for Section 236 Properties
What if my property does NOT meet these TPV or EV requirements?HUD currently has limited competitive funds for Enhanced Vouchers or Project-Based Vouchers. • Eligibility – Certain tenants in low-vacancy areas, at risk
due to loss of affordability and not otherwise eligible for TPVs.
• Funding for FY15 see Notice PIH 2015-07.
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Rental Assistance Demonstration 2
Why RAD 2?
RAD 2 allows conversion of expiring non-renewable Rent Supp and RAP contracts into long-term project-based Section 8.
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Rental Assistance Demonstration 2TPVs generated by Rent Supp or RAP expiration are tenant-based, but RAD 2 allows conversion to:
• Project-Based Vouchers (throughyour local Housing Authority)
• Project-Based Rental Assistance(through HUD)
Applications can be submitted on a rolling basis according to the rules outlined in the Final RAD Notice(revisions pending).
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Main Street Apartments is going to refinance. What are its rental assistance options? Check all that apply.The Section 8 units may be renewed with a 20-year
contract.Some tenants may be eligible for Enhanced Vouchers.They may apply for RAD 2 to convert TPVs to project-
based assistance if they want the units to be affordable long-term.
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Main Street Apartments is going to refinance. What are its rental assistance options? Check all that apply. The Section 8 units may be renewed with a 20-year
contract. Some tenants may be eligible for Enhanced Vouchers. They may apply for RAD 2 to convert TPVs to project-
based assistance if they want the units to be affordable long-term.
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APPLY FOR HUD APPROVALS
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• Centralized processing through the HUD Office of Recapitalization (Recap).
• June 28, 2013 Memorandum “Transfer of 236 Preservation Activities” (revisions pending)
• To start the HUD approval process for a Section 236 preservation transaction, click “Submit an Application” on the Multifamily Preservation Resource Desk at http://www.hudmfpreservation.net/
Preservation Application Process
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Prepayment approval or permission request
Waivers with HFA-financed transactions
IRP decoupling Flexible Subsidy Loan
deferral requests Request for increase in
post-transaction rents
Issuance of TPVsNonprofit fees and sales
proceeds LIHPRHA-ELIHPA
amendmentsUnit conversion
requests (combining efficiencies into 1-BR units)
Secure HUD Approval
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Prepaying State HFA Loans• Many Section 236 loans were originated through a
state Housing Finance Agency (HFA). • All Section 236 preservation rules and incentives
apply to these properties.• Apply for approvals through HUD like all Section 236
projects PLUS contact your HFA about their required prepayment approvals.
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SECURE LONG TERM STABILITYClose on your new financing.Secure your rental assistance.Renovate your property. Stabilize your property by placing it on solid financial footing.
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What if your loan has matured or is maturing soon? Contact HUD to see if you still can:• Obtain TPVs by prepayment if loan has
not matured. • Qualify for discretionary TPV set-aside. • Renew Section 8 rental subsidy contract
to leverage new financing for capital needs.
DISCUSS IMMEDIATELY WITH HUD!
Start Now!
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Contact the HUD account executive/project manager for the project or email the Office of Recap at [email protected]:
• With questions• To get started• To discuss how to pay for predevelopment
costs
HUD CAN GUIDE YOU THROUGH THE PROCESS!
Start Now!
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New! HUD Exchange ResourcesDescription URL
Gateway to HUD preservation information on HUD Exchange.
www.hudexchange.info/ multifamily-housing-preservation
Section 236 information and links.
www.hudexchange.info/ section-236-preservation/
Subscribe to the Multifamily Preservation Mailing List for emails about news, preservation tools, and training.
www.hudexchange.info/ mailinglist/
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Coming Soon!Technical Assistance: Slides, transcript, and
recording of this webinar on HUD Exchange Section 236 webpage
Recapitalization Workbook
Preservation Clinics in 2015
HUD Guidance:Updates to “Transfer of
236 Preservation Activities” with guidance and policy clarifications
Updates to guidance on RAD 2
Revisions to Section 8 Renewal Guide
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QUESTIONS & ANSWERS
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Questions & AnswersUse Question Box in GoToWebinar dashboard to submit written questions.For specific project questions:• Contact your HUD representative OR• Email [email protected]
HUD Office of Recapitalization
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PLEASE GIVE US YOUR FEEDBACK
Feedback survey link will be sent after the webinar.
Thank You61