Subsidies and Non-Profit or Limited-Profit Ownership Reduce Exit Risk in USDA 515 Housing Program

By Raquel Harati, NLIHC Research Analyst  

Recent research published in Housing Policy Debate titled, “Preservation of Affordable Rural Rental Properties by Understanding Owners, Managers, Subsidies, and the Local Market,” examines the factors that influence whether multifamily properties exit out of the USDA Section 515 program. Using the National Housing Preservation Database (NHPD), the authors found that 16% of properties funded by the USDA 515 program have exited the program since its inception. Properties with for-profit owners are more likely than properties with limited-profit and non-profit owners to exit the program. For-profit owners accounted for slightly more than half of all property exits. The presence of additional subsidies reduces the likelihood of exit for a property, and the impact of additional subsidies is stronger for non-profit owners.  

The USDA’s Section 515 program supports roughly 404,000 affordable rental homes in rural areas. The majority of tenants in Section 515 properties are seniors and people with disabilities. The average tenant’s annual income is just $13,600. The extremely low incomes of tenants make them especially vulnerable when the properties where they reside exit the program, putting them at risk of higher rents.  

A property can exit the Section 515 program at the expiration of its required affordability period and full payment of the mortgage. The program’s required affordability period varies from a minimum of 30 years, up to 50 years depending on the property’s original loan agreement. Owners of older properties can prepay their mortgage and exit the program earlier than the initial mortgage period. The median age of a USDA 515 property as of March 2024 was 37 years, indicating that expiring affordability and prepayment options allow many of these vital properties to exit the program. Additionally, an estimated 90% of Section 515 units will reach loan maturity between 2028 and 2045.  

To determine the probability of a property exiting the program, the authors examined five key characteristics of properties: owner and manager scale (measured by the number of units in their portfolio), owner and manager typology (e.g., for-profit, limited profit, non-profit, multiple owner types, or public entity) building-level characteristics (e.g., number of units, bathroom sizes, and property age), current and historic additional subsidies, and local economic conditions that indicate market competitiveness. The researchers utilized data from the NHPD paired with economic data from the Census Bureau to analyze the influence of the five key types of property characteristics on exit risk.  

Among the variety of factors the authors explored, ownership type had the greatest influence on properties’ exit risk with non-profit and limited profit owners approximately 34% and 43% less likely to exit the program than for-profit owners. Older properties with fewer bedrooms faced higher risk, with each 10-year increase in age associated with a 3% increase in risk of exit. Properties located in strong local economic markets and in areas with high rates of unemployment faced greater risk of exit. Additional active subsidies reduced properties’ risk of exit by 4.5% and additional historical subsidies were associated with a 12% reduction in risk. Active subsidies had a larger positive impact for non-profit and limit-profit owners than for-profits owners, while past inactive subsidies had a larger negative impact, suggesting that non-profit and mission-driven organizations face significant financial stress in maintaining affordability restrictions without additional subsidies. 

The authors suggest policymakers at the state and local level will need to be creative in providing resources to properties with the highest exit risk given the potential lack of foreseeable federal funding for the USDA 515 program. Properties with characteristics that put them most at risk should be prioritized in any preservation strategy. Jurisdictions can identify these characteristics using the NHPD. Potential state and local strategies include offering program incentives to eligible owners to keep them in the program, imposing notice requirements to inform owners of upcoming loan maturity to plan for future financing and subsidies, and providing local housing authorities and tenants the right of first refusal to purchase an existing property. In addition to state and local strategies, sustaining affordability for these at-risk properties will also require additional federal resources through extending section 521 rental assistance after mortgage maturity and funding recapitalization.   

The full article can be found here.