Consider Your Options Before Closing your HUD Loan
Preservation – the New Mantra for Affordable Housing
When it comes to real estate, the adage heard many times over is: location, location, location. Yet, when it comes to affordable senior housing, the mantra is often: preservation, preservation, preservation! Many long-time, nonprofit owners have a location and a successful operation, but how do you effectively preserve and rehab an aging, older property as your 40-year HUD mortgage agreement comes to an end?
Background of HUD 202
All over America, HUD housing built in the 60’s and 70’s is in danger of physical deterioration or loss of affordability as many HUD mortgages near their closing pay-off cycle. In the last four decades, HUD funded about 8,000 40-year mortgages for low-income, subsidized housing. Funding for this program came to a halt in 2012 when Congress discontinued allocations for new construction under the HUD 202 Mortgage program. Under HUD 202, regulatory agreements with property owners covered a range of requirements, such as detailing the population served, Income levels, property tax avoidance, service coordination, fair housing and Federal reasonable accommodation, among others. As a benefit, rental subsidies for Section 8 allowed tenants to pay 30 percent and HUD to pay the balance. These agreements helped create affordability and ensure the mission of providing affordable housing for the most vulnerable in our society.
What’s Changed? Why Choose Preservation?
As many of these mortgages, and their related regulatory agreements, are now nearing payoff status, times have changed and several factors are coming into play:
- Many of the HUD buildings are now 40 years old and in need of rehab and modernization for new building codes and ADA standards.
- Paying off your HUD loan will likely result in the loss of any subsidized social service coordination.
- The population of baby boomers are growing exponentially from current estimates of 50 million in 2019 to 75 million by 2025, creating more demand for senior housing and less supply as construction loans dwindle.
- When mortgages are paid off, restrictions ensuring low-income housing go away and property owners have the option to sell, thus escalating the potential spiraling effect of diminishing affordable housing. The Urban Institute reports 2.4 million units have already lost their affordability restrictions and the national percentage of affordable rental units has decreased from 60% to 43% and continues to drop.
- Combine all of these explosive variables and you see the reason for the new mantra: PRESERVATION – PRESERVATION – PRESERVATION!
What Are Your Options?
For those dedicated to the preservation of low-income housing, several new preservation incentives are making their way to the forefront:
- Long term Section 8 contracts (20+ years) – By securing rental subsidies for residents, owners also ensure stronger cash flow in the future.
- Increasing rent to market rents, but of course not raising the resident share of the rent – In many cases, HUD is subsidizing the increased rate.
- Permission to prepay existing mortgages – Today, owners are being given more options.
- Possible equity take out, making money available to nonprofit property owners – Owners may pull out money for their nonprofit mission.
A range of financial options are also coming into play, such as moving away from a single corporate investor to a limited partnership with a layered approach and multiple investing partners (e.g., bank, state, city and investors). A layered approach likely includes multiple budgets with staged timelines for predevelopment, construction and permanent financing.
Let Us Help You!
As a leader in the affordable housing industry, CCH can assist in navigating the tsunami of changing times. For those committed to ensuring the continued preservation of low-cost, quality senior housing, CCH can supply a full-service development team, leveraging our experience to provide sound financial consultation and referrals to architects, general contractors and specialists such as engineers, rent study and appraisers, etc. Let us walk you through the steps involved in construction, rehab and take-out equity to help you reach the best decision for you and to ensure there will be affordable senior housing available for generations to come.
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