The U.S. Department of Agriculture’s (USDA) Rural Development (RD) mission area issued an Unnumbered Letter that places restraints on the use of three types of incentives used to avoid prepayment of mortgages at Section 515 multifamily properties. The Unnumbered Letter notes that funds for RD’s Section 521 Rental Assistance (RA) program have been constrained by the FY13 budget rescission and FY14 appropriation. With less RA funding, it is difficult for RD to offer RA as an incentive to multifamily property owners to renew Section 515 contracts. If owners exit the Section 515 program they may raise rents to market levels, which many residents could not afford.
RA is designed to make housing financed by RD’s Section 515 program affordable to very low income households, those with income at or below 50% of area median income. RA is similar to HUD’s Section 8 project-based rental assistance program.
Due to the limited availability of RA, RD’s Office of Multi-Family Housing is placing restrictions on the use of three of the six incentives available to encourage Section 515 owners to remain in the program. If owners seek incentives to not prepay, the Unnumbered Letter requires state RD offices to provide the national office with a justification for using one of the three newly restrained incentives. The justification must explain why RA is needed to retain the project, and why the affordable housing is important to the community.
The three incentives subject to the Unnumbered Letter are:
- An offer of additional rental assistance or an increase in rental assistance.
- An offer to make an equity loan.
- An offer of rental assistance to protect tenants who are rent-burdened, paying more than 30% of their income on rent and utilities, or who will become rent-burdened as a result of any rent increase due to the owner’s acceptance of another incentive offer, such as an equity loan that raises the cost of debt service.
The Unnumbered Letter states that an equity loan should only be offered when it is financially feasible without additional RA.
The other three incentives not subject to the Unnumbered Letter’s limitations are:
- An offer to allow the owner an increase in annual return on equity.
- Properties with HUD project-based Section 8 may receive rents greater than otherwise considered necessary by RD in order to defray the cost of long-term repair and maintenance.
- Properties with Section 8 assistance may receive an interest credit subsidy on a loan in order to lower the interest rate. Other RD interest credit programs may also be offered.
The Unnumbered Letter is at http://www.rurdev.usda.gov/SupportDocuments/uljuly14.pdf
More information about Section 515 and RA is on page 152 of NLIHC’s 2014 Advocates’ Guide, http://nlihc.org/sites/default/files/2014AG-152.pdf