HUD’s Office of Recapitalization has published Preservation Options for Section 236 Properties, a guide outlining the options that owners have to preserve Section 236 properties as affordable housing. HUD encourages owners to take action this year because all Section 236 loans will mature in the next three years. Upon maturity, property owners may convert units to market rate or take other actions that result in the loss of affordable homes to low income households. The guide describes existing incentives to recapitalize Section 236 properties in order to preserve their affordability.
Section 236 was created in 1968 to enlist the private market in developing affordable rental homes. Private lenders made 40-year market-rate loans that were either insured by HUD or financed by a state Housing Finance Agency. HUD provided the owner with an interest reduction payment (IRP) that subsidized the owner’s mortgage down to a 1% interest rate. The IRP was fully funded to flow each month to the mortgage lender for the entire 40-year term. Through a regulatory agreement or use agreement, the owner agreed only to rent to households with incomes at or below 80% of the area median income and to limit rents to HUD-approved, cost-based rents. Eventually, many properties received additional assistance in the form of Rent Supplement (Rent Supp), Rental Assistance Payment (RAP), and/or a Section 8 Project-Based Rental Assistance (PBRA) contracts.
The guide describes an owner’s financing options, including refinancing to raise capital, prepaying the original Section 236 loan, decoupling the balance of an IRP from the original mortgage and applying the IRP subsidy stream to a new loan as part of a prepayment and refinancing transaction, and finding relief from balloon payments due on some flexible subsidy loans. The guide also describes rental assistance options, including renewing expiring Section 8 contracts with a potential increase for contract rents, providing Tenant Protection Vouchers to residents, and converting properties to PBRA or Project-Based Vouchers under the Rental Assistance Demonstration’s Component 2.
The guide also discusses the option of prepaying the Section 236 loan, which not only enables the owner to leverage new debt to make capital improvements but also usually triggers eligibility for tenants to receive Enhanced Vouchers (EVs). With an EV, residents have the right to remain in their unit with the voucher covering the cost between what the household was paying for rent and the new market-based rent.
Some Section 236 loans can be prepaid “as-of-right” without HUD approval. These are usually called Section 219 prepayments. Owners must deliver a prepayment notice to each tenant between 150 and 270 days prior to prepayment. Rents cannot be increased for 60 days after prepayment.
Owners of Section 236 properties that were originally developed by nonprofits, as well as some properties with both Rent Supp contracts and Section 221(d)(3) mortgages, cannot prepay without HUD approval. These are usually called Section 250(a) prepayments. Owners must give residents 150-day advance notice. Low income residents will continue to pay Section 236 rents because a new Section 250(a) Use Agreement will take the place of the original Section 236 Regulatory Agreement and remain in effect through the end of the original mortgage term.
Preservation Options for Section 236 Properties is at http://bit.ly/1qAdYdP
More information about Section 236, Rent Supp, RAP, and Project-Based Section 8 is on page 4-19 of NLIHC’s 2016 Advocates’ Guide at: http://bit.ly/1WhSAWx
More information about Tenant Protection Vouchers and Enhanced vouchers is on page 4-44 of NLIHC’s 2016 Advocates’ Guide at: http://bit.ly/1MZ9PtL