The Office of Multifamily Housing Programs issued Notice H 2012-10 providing guidance for properties with mortgages restructured through the Mark-to-Market program now requesting to refinance, sell, or transfer the property. There is a brief description of the Mark-to-Market program at the end of this article.
The notice, issued May 9, provides overall guidance and specific guidance for two circumstances:
- Requests for multifamily property owners seeking to refinance or sell a property where the mortgage will be assumed or subordinated.
- Requests for debt forgiveness, assignment, or modification (termed “debt relief”) for a “qualifying nonprofit purchaser” (QNP). In the Mark-to-Market regulations, a QNP is also known as a “priority purchaser,” which is a tenant organization, a tenant-endorsed community-based nonprofit organization or public agency, or a limited partnership with a sole general partner that itself is a priority purchaser under this definition.
For both types of requests, the notice states that the Office of Affordable Housing Preservation (OAHP) will apply three evaluation criteria:
- OAHP will use underwriting standards to test whether the proposed transaction will have negative physical or financial impacts on the property for the term of the existing Use Agreement (which sets out guidelines for income-eligible tenants and affordable rent requirements). The notice specifies benchmarks for the first mortgage, debt service coverage, operating expense cushion, and reserves for replacement.
- The proposed transaction should not have a negative financial impact on the value of the Mortgage Restructuring Note or Contingent Payment Note held by HUD.
- If there are net proceeds from the proposed transaction, OAHP may condition approval on a pay-down of the notes to enable HUD to recover a portion of the value created by the restructuring.
OAHP will favorably consider a request if the property meets a pronounced affordable housing preservation need within the community or if the property will undergo significant rehabilitation and meet established “green” standards.
Qualified Nonprofit Provisions
In an email announcing Notice 2012-10, Deputy Assistant Secretary for Multifamily Housing Marie Head characterized the notice as great news for qualified nonprofit preservation owners interested in acquiring restructured properties, primarily because the notice removes the “3-year window” limit on a QNP’s opportunity to receive debt relief upon purchasing a previously restructured property. For years, nonprofit developers sought to eliminate the 3-year window that HUD had arbitrarily imposed.
Notice 2012-10 states, “This Notice removes the ‘three-year policy’ for qualified nonprofit purchasers to receive debt relief upon acquisition of M2M [Mark-to-Market] restructured properties, making all properties restructured under M2M eligible for such acquisitions, regardless of restructuring date.” Prior to this notice, Appendix C of the Mark-to-Market Operating Procedures Guide only allowed QNPs to seek debt relief while obtaining a restructured property during a three-year period following the date of the restructuring commitment.
QNP requests for properties restructured within the three years before Notice H- 2012-10 will continue to be reviewed by OAHP using criteria in Appendix C. QNP requests involving properties restructured more than three years before the notice will, for the first time, be eligible for debt relief, but according to higher standards listed in the notice. In the future, all QNP requests after the date of the notice will be evaluated based on the nine factors listed in the notice.
Other Appendix C requirements remain in force, such as a QNP accepting a 50-year Use Agreement and agreeing not to sell or transfer a property for ten years, unless to another QNP. The notice adds that OAHP will require a QNP seeking debt relief to show that a transfer of a property to it will contribute to the long-term preservation and affordability of a property, and that the value of the notes will be maintained.
Due on Sale Clause
The Mark-to-Market statute requires a “due on sale or refinancing” clause. However, HUD has discretion and may waive it and agree to a “pay-down” instead of requiring payment in full if there is a refinancing or a transfer of the property to a preservation purchaser. The notice explains possible proportions of net proceeds realized from a transaction that OAHP might require as a pay-down in order to recapture HUD funds instead of unduly enriching a seller or purchaser. While this is laudable, some nonprofit developers are concerned about the potential adverse financial impact on nonprofits.
Brief Summary of the Mark-to-Market Program
Project-based Section 8 contracts were typically for a 20-year period. The rents under those contracts were often given automatic annual increases year after year without regard for what actual comparable rents were in the project’s market area. Consequently, HUD was paying the owners of many properties far more in rent than the owner could have gotten if the property did not have a project-based Section 8 contract. In response, Congress created the Mark-to-Market program in 1997, requiring HUD to “mark down to market rents” any renewing project-based Section 8 contract at a property with a HUD-insured mortgage.
When a project-based Section 8 contract approaches its expiration date, an owner can choose to not renew the contract (called “opt out”), or to renew the project-based Section 8 contract while also “restructuring” the property’s HUD-insured mortgage so that the development can remain financially viable even with lower Section 8 rental payments from HUD. Often, additional debt is also taken on in order to make major repairs and upgrades to the property. Generally, an owner obtains a new first mortgage that is supportable at market rents. HUD pays off the existing FHA-insured first mortgage through a claim on behalf of the owner, a claim the owner is obligated to repay as a subsidiary mortgage. Projects with approved Mark-to-Market restructuring must accept Section 8 rents for an additional 30 years.
Notice H 2012-10 is attached.
Click here for information about Mark-to-Market.
Click here for Appendix C of the Operating Procedures Guide.