NH&RA has also been meeting with HUD officials to discuss forthcoming changes to underwriting standards, lender qualifications, and other areas in the FHA multifamily mortgage insurance programs to assure that the reforms encourage rather than deter FHA financing of affordable rental housing projects in a timely and cost-effective manner.



 

Memorandum

To:                   Carol Galante; United States Department of Housing and Urban Development

Cc:                   Christopher E. Tawa, United States Department of Housing and Urban Development

From:              Peter Bell, National Housing & Rehabilitation Association

Re:                   Comments to Proposed Changes — HUD Programs 221(d)(4); 223(f)

 

Thank you for taking the time to support our efforts at the National Housing & Rehabilitation Association (“NH&RA”). On behalf of NH&RA, we appreciate the opportunity to provide input and comments as to the proposed changes to the HUD 221(d)(4) and 223(f) programs. I have broken our comments down into three distinct categories:

·        Section 8 Assisted Housing (at least 90% of units covered by Section 8 contract)

·        Low Income Housing Tax Credit (LIHTC) Properties (minimum of 40% of the units restricted at tax credit rents)

·        Preservation of Affordable Housing (at least 7 years remaining on regulatory agreement/rent restrictions) (collectively, Section 8 Assisted Housing, LIHTC and Preservation Affordable Housing Properties are referred to as “Affordable Properties”).

We recognize the Department’s need to evaluate its risk given the economic period in which we find ourselves.  We want to work with the Department to ensure that such changes are implemented in manner that most effectively both protects the Department but also ensures continued development, preservation, protection and promotion of the Affordable Properties referenced above. Our comments to the proposed changes to the respective HUD programs are as follows:

HUD 221(d)(4)

Vacancy Rate: 

HUD should allow underwriting of a 5% all-in vacancy rather than a 7% minimum as has been discussed assuming historical occupancy at the subject property supports such underwriting.

 

The vast majority of Section 8 assisted housing throughout the country operates well below a 5% all-in vacancy.  Similarly with Preservation Properties and LIHTC properties, HUD should consider the restricted rent in relation to an unsubsidized market rent when applying the proposed changes. In many of the larger Metro markets, restricted rents (tax credit or otherwise) can be 10% or in some cases as much as 100% below market rents. In these instances, properties consistently maintain vacancies well below 5% all-in. HUD should allow the MAP Lender to underwrite to a 5% all-in vacancy assuming that the MAP Lender has adequately demonstrated a meaningful market rent advantage of at least 10% and sustained occupancy levels at the subject property and comparable properties at or below 5% all-in.

Initial Operating Deficit (“IOD”) 

·        The requirement for a minimum Initial Operating Deficit (“IOD”)  equal to 4 months or more of debt service should not apply to Section 8 assisted housing given stability of tenancy so long as material tenant displacement costs are addressed by appropriate escrow funding.  Nor should it apply to LIHTC or Preservation Deals with a rent advantage of at least 10% given stability of tenancy so long as material tenant displacement costs are addressed by alternate escrow funding.

Construction Contingency

·        For all Affordable Properties construction contingency on sub-rehabs at 10% to 15% should be modified to allow flexibility to direct change orders for additional property upgrades, funding of additional reserves, etc, prior to requiring a reduction of the HUD mortgage; this will ensure such properties receive the necessary resources they need to ensure long term viability.

Working Capital Escrow

·         For all Affordable Properties, Working Capital Escrow (“WCE”) increase from 2% to 4% should not be required given the stability of tenancy.

·        IOD and WCE escrow amounts should not require double counting of certain items like reserves which are held at the partnership level, so long as the MAP Lender can demonstrate that partnership held reserves can only be released to the Borrower upon similar or more restricted terms that HUD allows via WCE and IOD requirements

·        Properties that have at least 40% tax credit restricted units should be defined as and underwritten as LIHTC properties per the comments above

HUD 223(f)

See comments above regarding vacancy rates.  In addition we have the following general comments:

·        Increase in DSCR from 1.11 to 1.15 is acceptable to affordable housing industry

Final General Comments

·        We understand that the Department intends to implement a master committee review structure which will add additional layers of review.  We do not necessarily object to HUD enhancing its review process per se, we do caution that processing efficiencies and timing on all HUD programs must be improved in order to be a meaningful debt resource to the affordable housing industry. 223(f) closing in 90 to 120 days and 221(d)(4) in 120 to 150 days are needed to be competitive, particularly as the economy improves. We encourage and support efforts to create specialties among lenders and a separate HUD underwriting team for various HUD programs like HUD has done in the LEAN program for healthcare.

·        Finally, we know the Department is eager to bring its loan document forms into the 21^st Century and we applaud such efforts.  That said, we urge the Department to consider carefully its balance of risk and promotion of affordable housing; to the extent that recourse obligations and overly broad default language leave borrowers exposed to varying interpretations of local offices and/or the Inspector General’s office regarding violations without regard to whether they are material or not (or even whether they are consistent with HUD policies), borrowers that have an option will pursue other than FHA insured financing. Further, we encourage the Department to ensure that the distinction between project funds and partnership funds is restored in its Regulatory Agreement form; this will ensure that sources of funds which are not contemplated as part of the HUD underwriting nor are generated by the Project , (e.g. partnership contributions and advances, grants, gifts, etc.) can be used to pay for all of the costs inherent in Affordable Properties that HUD’s regulatory structure does not permit to be paid from Project funds (e.g. asset management, tax credit monitoring and deferred developer fees, supportive services etc.)

·        HUD should consider publishing a “Strong MSA” list similar to what Fannie Mae and Freddie Mac publish. Properties located in these published MSAs could obtain waivers at the local HUD Office level on new underwriting changes on critical matters like vacancy rate, sizing of IOD, sizing of working capital escrow, etc.

·        HUD should consider allowing the local HUD Office to approve waivers for proven strong repeat borrower of HUD programs

·        HUD should consider authority to local HUD Offices for waiver authority for all matters involving promotion and preservation of Affordable Housing

About NH&RA

NH&RA is a  non-profit trade association made up of professionals involved in affordable housing, historic rehabilitation and New Markets Tax Credit development.   Our members include developers, owners and managers of affordable housing as well as conventional and FHA lenders, equity providers, attorneys, accountants, market analysts, appraisers, architects, consultants and public agencies involved in the development, finance and operations of multifamily affordable housing. 

 

To learn more about NH&RA visit our website www.housingonline.com.