Affordable Housing Impacted by HUD Appropriations and Housing Acts

The provisions of the recent 2008 and 2009 HUD Consolidated Appropriations Acts (P.L. 110-161, P.L. 110-329), and the Housing and Economic Recovery Act of 2008 (HERA; P.L. 110-289), will affect the preservation and development of affordable housing, as well as HUD's administrative policies, warns attorney Michael Reardon, a partner in the Washington law firm of Nixon Peabody LLP.

These provisions relate to:

• Section 213's (formerly Section 318) transfers of assistance contracts and use restrictions;

• Section 220's foreclosure provision; and

• Section 202's mixed finance elderly development provision.

In addition, the changes under HERA will better coordinate the use of low-income housing tax credits (LIHTC) with various HUD grant programs.

Section 213 Replaces Section 318

Going forward, transactions occurring under former Section 318 (changed to Section 215 in the FY 2008 Appropriations Act and to Section 213 in the FY 2009 Appropriations Act) involving the transfer of project-based assistance, loans, and low-income use restrictions from one multifamily project to another will be authorized as Section 213 transactions, Reardon says. The 2008 and 2009 Appropriations Acts restate and revise the old Section 318, providing HUD with additional authority. Section 213 permits HUD to transfer project-based assistance, project debt, and use restrictions from one project to other projects. It improves Section 318 by allowing the transfers to be to multiple projects. The provision giving HUD this new authority is set to expire in 2009.

For those transfers that were previously authorized under Section 318, Section 215 added interest reduction payments (IRPs) under Section 236 as eligible for transfer from one project to another, Reardon explains. Consequently, the list of subsidies that can be transferred from nonviable sites to other projects now includes the following: Project-based Section 8, Rent Supplement, Section 236 IRP, and Section 202 project rental assistance contract (PRAC) payments. And Mark-to-Market (M2M) and Section 202 use agreements may also be moved from one site to another, or to multiple sites.

Section 218: HUD Must Maintain HAP Contracts

Section 218 (formerly Section 220) still requires that HUD maintain Section 8 project-based housing assistance payment (HAP) contracts in the case of HUD foreclosures through FY 2009, Reardon says. Prior to the FY 2006 Appropriations Act, when HUD sold a foreclosed property, it often provided the residents with Section 8 vouchers instead of maintaining Section 8 project-based assistance.

Before foreclosing on a property, HUD must determine whether the cost of rehabilitation or operations makes it unfeasible to maintain the project as an affordable housing resource, Reardon says. HUD must consult with residents and local government authorities and review federal, state, and local resources, including increased Section 8 rent levels under Section 524 of the Multifamily Housing Reform and Affordability Act of 1997 (MAHRA), to make this determination.

If HUD finds that the site is not viable, HUD now has the authority to transfer the Section 8 HAP contract to another, or several, multifamily projects. After the transfer, the contract's allowable rent levels will be determined under MAHRA, Reardon adds.

Section 202: Elderly Housing Development

Since the American Homeownership and Economic Opportunity Act of 2000, new Section 202 elderly housing projects can be developed with LIHTC. HERA made a number of changes in the law to foster the use of Section 202 Capital Advances and other federal grants in conjunction with LIHTC. The 2008 Appropriations Act allowed partnership site ownership entities to borrow capital advances.

HERA amended provisions of Section 42 of the Internal Revenue Code to provide that certain federal grants, including Section 202 Capital Advances, did not need to be lent to the owner at the applicable federal rate (AFR)—an interest rate published monthly by the Treasury Department—to be included in the eligible tax credit basis for the project.

Prior to HERA, for a project to receive the maximum amount of 9 percent LIHTC, the Section 202 Capital Advance had to be loaned to the project by the sponsor at the AFR. Because interest accrued on the 40-year life of the Capital Advance loan, it was difficult to project whether the loan could be paid out when it matured. Congress' elimination of the need to lend the Capital Advance funds at the AFR makes it easier to underwrite projects using both the Capital Advance and LIHTC, Reardon says.

In addition to improving coordination between the Section 202 Capital Advance grant and the LIHTC program, Congress also directed the Treasury Department to amend its regulations to assure that certain operating subsidies made available to affordable housing projects, including Section 202 PRAC payments, will not be considered federal grants that must be deducted from the tax credit basis. The Treasury Department had already amended its regulations, which excludes Section 8 HAP contract payments and public housing operating subsidies from being considered federal grants for LIHTC purposes.

However, there was some ambiguity regarding other types of operating subsidies and rental assistance payments. In addition to PRAC payments, HERA directs the Treasury Department to exclude a number of other rental subsidy programs from being treated as federal grants, including grants under Title IV of the McKinney-Vento Homeless Assistance Act, grants under Section 811 for persons with disabilities, Section 236 IRP payments, and rent supplement payments under Section 101 of the Housing and Urban Development Act of 1965.

Finally, Reardon notes, HERA contains a provision that requires HUD to delegate to state or local housing finance agencies the processing of Section 202 elderly projects being developed with a combination of Section 202 Capital Advance funds and other sources of funding such as LIHTC. Since such agencies generally have more experience in the underwriting of mixed finance projects, these agencies should be able to issue a firm commitment for Section 202 mixed finance elderly projects within 12 months of the delegation.

Insider Source

Michael Reardon, Esq.: Partner, Nixon Peabody LLP, 401 9th St. NW, Ste. 900, Washington, DC 20004; (202) 585-8000; mreardon@nixonpeabody.com.

Sidebar

Conditions for HUD Transfer Approval Under Sections 215 and 213

Sections 215 and 213 maintain conditions from Section 318 that have made it difficult for some proposals to move forward. The conditions that must be met before HUD will approve a transfer are as follows:

• The number of low- and very low-income units and the dollar amount of federal assistance must remain the same in the receiving project or projects;

• The transferring project must be determined to be physically obsolete or financially insolvent;

• The residents at the transferring site must be consulted;

• The residents at the transferring site must not be required to vacate their units until units in the receiving site are available;

• If either the transferring or receiving site is insured by the Federal Housing Authority (FHA), all other mortgages must be subordinate;

• Use agreements recorded against the receiving project will endure for a time period that is not less than that of existing restrictions; and

• The transfer must result in a reduction of risk to the FHA insurance fund.

As a result of these statutory requirements, there is a cumbersome application and submission process, which requires lengthy negotiations. Therefore, it is unlikely that the new authority will be granted on a wider basis, says attorney Michael Reardon, a partner in the Washington law firm of Nixon Peabody LLP.

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