PRESERVING AND IMPROVING SUBSIDIZED RENTAL HOUSING STOCK SERVING OLDER PERSONS:
RESEARCH AND RECOMMENDATIONS FOR THE COMMISSION ON AFFORDABLE HOUSING AND HEALTH FACILITY NEEDS FOR THE 21ST CENTURY

Michael Bodaken
Kyra Brown

March 1, 2003

Executive Summary

We live in an aging nation. This demographic reality is irrefutable. As we proceed through the first decade of the 21st Century, our nation will be increasingly challenged by problems that confront our current and future elderly households. Safe, accessible, and affordable housing is critical to good health and function at any age. But the relationship between housing and health is, perhaps, more apparent when one is faced with the frailties associated with old age. As we age, more and more health care is provided at our homes. Future demographic drivers call for numerous innovations to meet the affordable housing and supportive services needs of older persons. Much has been written about the production of new units to meet these needs. This document, written for the Commission on Affordable Housing and Health Facility Needs for Seniors in the 21st Century focuses on preserving and improving existing senior affordable housing.¹

While the goal of preservation may be obvious, it is not always clear how this stock should be recapitalized and improved. Affordable senior housing, like its occupants, is undergoing an "aging process." Most of it was developed through private/public partnerships more than two decades ago and much of the stock is itself in need of updating and repair. Not surprisingly, as the average age of the population in this housing has climbed, so have their needs. The dilemma that confronts us is how to both preserve what we have and, simultaneously, meet the changing needs of those who call it home.

The goal of this study is threefold:

(1) To provide specific data on the existing subsidized elderly rental housing stock in the United States.

(2) To summarize that data in a comprehensive, easy-to-read format for the Commission on Affordable Housing and Health Facility Needs for Seniors in the 21st Century and the general public. This report will include information on what properties have already been "converted" to market rate units where the majority of the units are occupied by older persons, the ages and races of the existing occupants, and the number of properties serving primarily the elderly that may be capable of refinancing in the not too distant future.

(3) To make recommendations on how to preserve and improve existing subsidized elderly homes. Our analysis includes a discussion of new tools approved by HUD to preserve elderly, HUD-insured properties. These include: prepayment of existing Section 202 loans; the use of 501(c)(3) bonds, private activity bonds, and low-income housing tax credits to revitalize this stock; the possible curtailment of debt in Section 202 properties; and policy recommendations to facilitate the conversion of existing subsidized housing serving primarily the elderly to assisted living facilities.

We begin with a general summary of the various federal programs that serve the rental housing needs of older persons. In particular, we focus on those programs that have HUD Section 8 or other types of federal subsidies. The document proceeds to analyze what we have chosen to designate as "primarily elderly" properties, that is, properties where over 50% of the households served are older persons, age 62 or over. In our study, we found that in recent years, more than 250 properties that primarily serve the elderly have prepaid their HUD FHA-insured mortgage or opted out of their Section 8 contracts, in the process releasing over 20,000 apartments from their previously regulated rents. We expect this trend to continue since many properties that primarily serve older persons have high interest rates with current rents below market. At the same time, we believe a good case can be made to current and future owners of this housing that their economic interests and preservation of affordable housing can be readily aligned.

Indeed, signs of hope are emerging. New HUD tools are at our disposal to renovate subsidized, senior housing. Additionally, state and local housing finance agencies, increasingly aware of this housing problem, are providing greater resources for its resolution. Some subsidized housing owners are already converting their facilities to assisted living sites to accommodate the changing needs of their tenant profile. In this study, the Trust explains how an owner of primarily elderly, subsidized housing can use some of these tools to rehabilitate the property without raising the occupants' rents. The Commission should encourage these trends and propose other meaningful, cost-efficient programs to save this unique housing resource.

Moreover, our recommendations recognize the devolution of housing programs and resources to state and local governments. As the Commission will see, a great many states are already devoting considerable resources, including low-income housing tax credit set asides, for the preservation of the primarily elderly, subsidized housing stock. However, much more can be done. The data reveals that this problem will grow in the coming decades. The federal government still has a strong role to play, including encouraging state and local governments to "steer" their resources towards maintaining this unique housing stock. The adoption of the Affordable Housing Preservation Act of 2001 would be a significant step in that direction.

The recommendations that follow flow directly from the Trust's initial analysis of the data and our belief that the federal government cannot abdicate its role to save this housing. No one expects the federal government to do this by itself. But, the federal government can play a significant role by: (1) Setting aside existing resources for preservation; (2) Increasing the flexibility of existing HUD tools for preservation; and (3) fully funding programs that match state and local efforts to preserve primarily elderly, subsidized housing.

Recommendations

RECOMMENDATION #1: Recommend that an ongoing database be established providing project specific information on primarily elderly, subsidized properties that a) have Section 8 contract rents at or below market and/or b) have loans with significantly high current interest rates. These properties arguably have a high risk of mortgage prepayment and should be placed on an "early warning" list to be shared with state housing finance agencies, HUD, the Rural Housing Service and the general public.

RECOMMENDATION #2: Recommend that state housing finance agencies set aside or prioritize the use of low-income housing tax credits and private activity bonds to preserve and improve affordable, subsidized, primarily elderly housing.

RECOMMENDATION #3: Recommend that Congress strongly encourage HUD to facilitate "Mark Up to Market" Section 8 contract rents for elderly, subsidized properties with current rents below market to prevent Section 8 opt outs by private owners and permit current nonprofit owners the resources needed to meet their ongoing operating costs. Additionally, it is absolutely critical that nonprofit owners of such properties receive distributions from their properties to meet other mission-related activities.

RECOMMENDATION #4: Recommend that useful information be provided to owners of existing HUD-insured, Section 236 properties primarily serving older persons. The distribution of information should include a simple explanation of how the owner can take advantage of HUD's Section 236 "decoupling process" to rehabilitate the property and keep it affordable.

RECOMMENDATION #5: Recommend Congress urge HUD to immediately establish a program for use of the recaptured interest reduction payments that are now in an IRP Pool at HUD. Furthermore, Congress should urge HUD to use at least a third of these for the preservation and improvement of existing HUD-insured, Section 236 properties primarily serving older persons.

RECOMMENDATION #6: Recommend Congress urge HUD to permit subordination of its Section 202 mortgage to new debt brought in with tax credits where the new debt and tax credits actually enhance the property's value and livability.

RECOMMENDATION #7: Recommend Congress encourage HUD to prepare a report to explain to Section 202 owners the comparative costs and benefits of prepaying its current loan with 501(c)(3) bonds or refinance with new debt and low-income housing tax credits.

RECOMMENDATION #8: Recommend that Congress revisit the issue of waiving all or part of the existing debt on Section 202 properties supported by Section 8.

RECOMMENDATION #9: Recommend Congress fund a meaningful study of how to best facilitate conversion, where appropriate, of existing subsidized housing to assisted living facilities. This study should document the costs of such conversion, and in particular, conduct a cost/benefit analysis of such conversion. The study should determine whether conversion to assisted living prevents premature institutionalization, and it should ask practitioners to provide detailed training on how to efficiently undertake these conversions. Congress should allow industry practitioners and others to provide detailed testimony on the recent Senate Bill 1886, the "Assisted Living Tax Credit Act," introduced by Senator Dodd (D-CT), which allows for a business credit for supported elderly housing.

RECOMMENDATION #10: The Commission should urge Congress to immediately consider, amend and adopt Senate Bill 1365, the Affordable Housing Preservation Act of 2001. The Commission should urge Congress to amend the Senate Bill 1365 to include Section 202 housing as eligible for grants provided pursuant to the Act. Further, the Commission should recommend that at least $300 million of funds should be devoted to the Affordable Housing Preservation Act of 2001 and that no less than a third of these funds should be devoted to the preservation and improvement of primarily elderly, subsidized housing.

1. The National Housing Trust wishes to acknowledge the generous and unstinting assistance of the following individuals in the preparation of this document for Commission on Affordable Housing and Health Facility Needs for Seniors in the 21st Century: Andrew Kochera, AARP Public Policy Institute; Don Redfoot, Ph.D., Senior Policy Advisor, AARP; Gary Eisenman, Related Capital Companies; and Michael Reardon, Nixon, Peabody, LLC.