HUD’s Office of Multifamily Housing Programs issued Notice H-2012-25 providing guidance about the circumstances under which HUD may consider amendments to use agreements for projects assisted under the Low Income Housing Preservation and Resident Homeownership Act of 1990 (LIHPRHA). The intent is to preserve housing built up to 40 years ago and now in need of resources for significant repairs. HUD oversees an inventory of approximately 640 properties with more than 75,000 units subject to LIHPRHA provisions.
In a use agreement, the owner agrees to keep a property affordable and occupied by households meeting specific income eligibility criteria in return for additional HUD subsidies. Many current LIHPRHA use agreements restrict periodic distributions of surplus cash generated by properties to 0% or 6% of initial equity. Some use agreements also restrict owners from realizing any proceeds from project refinancing. Other LIHPRHA use agreements expressly prohibit owners from bringing LIHTC equity into the project. Such restrictions may hamper owners’ ability to refinance and make substantial repairs. None of these restrictions are imposed by the statute. For example, the LIHPRHA statute allows owners to take distributions up to 8% of “preservation equity” as calculated at the time of the original LIHPRHA closing.
In general, HUD will only consider amendment of a use agreement when the owner proposes a transaction to prepay an existing FHA-insured, HUD-held, or state-insured mortgage in conjunction with a refinancing or sale or acquisition transaction that meets a number of criteria spelled out in the notice. Key criteria include:
- Permitting an owner to receive proceeds from refinancing a property.
- Allowing the owner to receive annual distributions of proceeds up to 8% of preservation equity as calculated at closing of the LIHPRHA transaction.
- Removing any express prohibition on the use of LIHTC equity.
- Continuing the same affordability and income restrictions through the remaining useful life of the property.
- For properties that received rental assistance under the Section 8, Rent Supplement or Rental Assistance Payment programs, executing a Section 8 renewal contract with a 20-year term, along with a preservation exhibit that automatically renews the HAP contract for an additional term at least equal to the number of years that were remaining on the original HAP contract.
The first few pages of the notice provide helpful background for those unfamiliar with LIHPRHA. In the 1960s and 1970s, FHA mortgage insurance under Sections 221(d)(3) and 236 helped finance the development of thousands of properties for lower income households. The mortgages were typically for 40 years, with an option for owners to prepay the FHA-insured mortgage after 20 years. At prepayment, the owner could convert the project to market rate housing, which happened for hundreds of thousands of units.
To address the loss of affordable housing stock, Congress enacted LIHPRHA, which imposed a prepayment limitation while offering owners fair market value incentives to:
- Extend low income affordability standards for the remaining useful life of the property (no less than 50 years), or
- Transfer their properties to nonprofit organizations, tenant associations, and community-based organizations that would keep the housing units affordable for the remaining useful life of the properties.
LIHPRHA incentives were utilized for approximately six years. In 1996 Congress restored owners’ right to prepay federally insured mortgages and removed all federal LIHPRHA preservation funding.
Click here for notice H-2012-25.