More than 700 nonprofits own FHA-insured Section 236, Section 231, and Section 221(d)(3) properties with 40-year mortgages maturing within the next ten years. These properties have 80,000 affordable units, 42,000 of which also have project-based Section 8 rental assistance. These properties are at risk of losing their affordability when the mortgages mature, because owners are no longer required to target occupancy to low and moderate income households or adhere to rent affordability restrictions. Many of these properties need significant capital improvements, adding to the risk of them leaving the affordable housing stock.
Prior HUD policy prohibited nonprofits from receiving proceeds from the sale of these properties. This was a disincentive for some nonprofits that have limited property management capacity and therefore want to get out of housing ownership in order to focus on their other nonprofit endeavors. Potential sales proceeds are an attractive source of income for such nonprofits to use for their other nonprofit activities, especially if the affordable housing is in a desirable neighborhood and can command attractive purchase offers from for-profit buyers intending to convert the property to high-end use when the mortgage matured.
With the new HUD policy, nonprofit owners can now anticipate selling property at market prices, which will encourage them to sell to a buyer pledged to maintain long-term affordability.
HUD’s Office of Multifamily Housing issued Notice H-2011-31, clarifying the manner in which nonprofits may now retain the proceeds from the sale of a project to a purchaser who agrees to maintain long-term affordability. Notice highlights include:
- The seller must ensure that the purchaser will continue to operate the project as affordable rental housing by having a “Section 250 Use Agreement” that extends affordability and rent restrictions for at least 20 years beyond the original mortgage maturity date.
- If the property has a project-based Section 8 Housing Assistance Payment (HAP) contract, a 20-year Renewal Contract must be executed. This ensures 20 years of affordability for assisted units post-sale, instead of a potential non-renewal of the contract after an unrestricted sale.
- If the property is sold to another nonprofit, then a rent increase may be requested that adjusts rents to the actual cost of covering operating costs (“Mark-up-to-Budget”). If the Section 8 HAP contract rent increase takes into consideration the costs of needed rehabilitation, the rent increase may be approved in advance of the repairs and take effect once repairs are completed. If the property is sold to a for-profit owner, then a “Mark-up-to-Market” rent increase may be requested.
- To protect low and moderate income tenants who do not live in Section 8 units but live in other HUD subsidized units (such as in Rent Supplement, Rental Assistance Payment [RAP], Below Market Interest Rate [BMIR,] and Section 236 properties), the rents on non-Section 8 units may be increased my no more than 10%. The purchaser must submit a plan discussing the rent burden any proposed rent increase will have on unassisted tenants, and if necessary phase in such rent increases to minimize the burden. In addition, the purchaser must describe steps to protect current tenants from rent increases if their units are assisted with the Low Income Housing Tax Credit, bond financing, or vouchers. HUD’s Hub/PC Directors must assure that there is no voluntary displacement of existing tenants as a result of the sale.
- The purchaser must conduct a Capital Needs Assessment and submit a plan with a time table for repairs and a description of the funding dedicated to meeting the physical needs of the project over the term of the new Use Agreement or the HAP contract, whichever is longer. If the project receives federal financial assistance, such as project-based Section 8, the Capital Needs Assessment must have a plan for any alterations needed to address reasonable accommodation for people with disabilities (the Section 504 requirements).
- The new owner must have affordable rental property experience and the capacity to complete needed repairs and manage the property over the term of the Use Agreement or HAP contract.
Policy Notice H-2011-31 is at http://portal.hud.gov/hudportal/documents/huddoc?id=11-31hsgn.pdf.