Narrative

A. The Need to Preserve and Improve Affordable Rental Housing for Older Persons

We live in an aging Nation. The demographics are irrefutable:

• Growth in senior households (ages 65 and older) will surge in the coming decades. By 2030, the senior population will double to nearly 70 million, bringing their share of the total U.S. population to 20 percent. The number of those aged 85 and older will nearly quadruple, going from 3.5 million to 14 million by 2030.¹



• Further, almost a third of the growth between now and 2010 of one-person households will be for those over age 65.²



• Assisted communities are home to only 3% of the Nation’s senior population.³ Nevertheless, as elderly households age in place, the need for future affordable assisted living increases. The possibility of converting elderly, subsidized dwellings to assisted living facilities is just now being explored.



• 4.6 million elderly households are renters; almost a third of these households–1.5 million–pay more than 50 percent of their incomes for rent and/or are living in substandard housing.



• The median net worth of elderly rental households is less than $7,000 compared with the median net worth of $141,000 for elderly homeowners.⁴



• Older renters in subsidized housing are two to three times as likely to report disabilities than older homeowners.⁵



• Wealth and income disparities will widen, limiting the housing choice of poor elderly households: “[t]he sharp disparity in wealth among baby boomers will carry well into their retirement years, leaving many lower income seniors with few housing and special care options. Elderly renters will face particularly onerous housing cost burdens.”⁶



• The number of older persons residing in subsidized housing (over 1.9 million) is actually greater than the number of persons residing in our Nation’s nursing homes.⁷



• In recent years, nearly 900,000 unsubsidized, affordable housing units have been lost from the affordable housing stock due to demolition or rising rents; an additional 150,000 subsidized units have been converted to market rate housing.⁸ Most subsidized senior housing facilities have long waiting lists. For instance, the AARP study of Section 202 facilities shows there is a Nationwide average of nine older applicants for every vacant Section 202 apartment that becomes available each year. A similar waiting list confronts those who are in line for a low-income housing tax credit unit.⁹

B. Types of Existing Subsidized Rental Housing Primarily Occupied by Older Persons

Over the past 40 years, the Federal government has, through a private/public partnership, produced more than 800,000 apartments specifically designed to provide decent, safe and affordable homes to poorer, older persons. This apartment inventory constitutes the most significant source of affordable housing for our Nation’s elderly population. The following describes the programs that produced this important housing resource.

Section 221(d)(3) BMIR and Section 236

The Housing Act of 1961 authorized the Section 221(d)(3) below-market interest rate (BMIR) program. The program insured 40-year mortgages made directly to nonprofit and limited dividend sponsors. Typically, the interest rate was 3 percent. The Housing and Urban Development Act of 1968 added Section 236 to the National Housing Act, which combined 40-year mortgage insurance with subsidized interest payments to the lender for the production of low-cost housing. The interest rate subsidy lowered the effective rate to the owner to 1 percent. Eventually, many of these projects received additional project-based Section 8 assistance to provide additional rental assistance payments to owners on behalf of very low-income (50% median-income or less) tenants..¹⁰ Nearly 1 million apartments were produced under the Section 221(d)(3) BMIR and Section 236 programs. Under both programs, the owner had the “right to prepay” the mortgage after 20 years and end the affordability restrictions.

Some Section 236 projects are nonprofit sponsored developments specifically designed for older persons. Indeed, a flurry of these Section “236/202” elderly developments occurred between 1969 and 1976, in large part due to the moratorium on construction of elderly Section 202 properties between 1969 and 1976.

According to data analyzed by the National Housing Trust for the Commission, 657 properties with 91,956 Section 221(d)(3) BMIR and Section 236 affordable, subsidized apartments are primarily (50% or more households in property are 62+) elderly properties. Many more elderly households—163,958 households according to HUD data—reside in 221(d)(3) BMIR and Section 236 apartments in properties that are not primarily elderly..¹¹

Section 202 program

Congress enacted the Section 202 elderly housing program in the Housing Act of 1959. The Section 202 program has been successful, producing more than 320,000 apartments, of which approximately 170,000 are also assisted with Section 8 housing subsidies. Since 1959, the Section 202 program has gone through three basic program structural changes. The recent Affordable Housing for Seniors and Families Act has initiated a fourth basic structural change in the program.

Initial Program Structure. When enacted in 1959, the Section 202 program provided direct loans from the Federal government to eligible nonprofit entities. Originally, the loans were typically for a 40-year term at a 3 percent interest rate, although later HUD determined the interest rate based on the cost of government borrowing. The loans could be used to cover the costs of new construction or substantial rehabilitation of rental housing for the elderly and the handicapped and the loans could not be repaid without the approval of the government. The requirements for the operation of the projects were embodied in a Regulatory Agreement that controlled the rent levels to ensure project affordability. However, there was no rental assistance provided to the project owners. Tenant rents were set at the level necessary to cover the cost of repaying the loans and project operations. While much of this stock is in decent physical condition, there has not been sufficient income to allow for major capital improvements.

Introduction of Section 8 Rental Assistance. As the cost of government borrowing increased, the interest rates on Section 202 elderly housing projects rose, making it more difficult to maintain affordability in the projects. In 1975, HUD was authorized to provide Section 8 assistance to Section 202 elderly housing projects. Between 1975 and 1990, HUD provided direct loans to eligible nonprofit borrowers under a 40-year note and mortgage. Simultaneously, HUD provided properties with 20-year Section 8 project-based rental assistance contracts. With the exception of projects that closed between approximately 1977 and 1981, the notes and mortgages on these projects cannot be prepaid without the approval of HUD. Operations of these projects are governed by a Section 202 Regulatory Agreement and Section 8 housing assistance payments contract. Today, the Section 8 contracts are renewed on an annual basis at rents that are the lesser of the existing rent multiplied by the applicable operating cost adjustment factor (OCAF) published by HUD or at a budget-based rent.

Capital Advance Program. In the National Affordable Housing Act of 1990, Congress significantly altered the structure of the Section 202 elderly housing program. First, Congress provided for two separate and distinct programs for older persons and for persons with disabilities. New construction under the Section 202 program is now exclusively for older persons—defined by HUD as persons 62 years of age and older. Second, Congress changed the program from a loan program to a capital advance program. Under the capital advance program, HUD basically provides a grant to the project that the owner is not required to prepay unless the owner does not operate the project in accordance with the program requirements for the 40-year term of the capital advance. HUD has structured the program so that the obligation of the owner to operate the project in accordance with the Section 202 program requirements is secured by a zero-interest, 40-year note and mortgage, which is not required to be repaid unless the owner is in default. Third, Congress decided that the rental assistance received by Section 202 projects would no longer be provided through the Section 8 housing assistance payments program. Instead, HUD provides a renewable rental assistance contract (PRAC) to Section 202 projects. The operation of the PRAC is essentially the same as the Section 8 housing assistance program, but the appropriations for the rental assistance are provided under the Section 202 program and not under the Section 8 program.

Affordable Housing for Seniors and Families Act. In December of 2000, Congress again made significant changes to the structure of the Section 202 program. First, Congress amended the Act to provide for a change in the nature of eligible ownership entities. Over the years, one of the constants in the Section 202 elderly housing program was the requirement that the project be owned by a nonprofit entity. In the new legislation, Congress amended the eligible owner definition of “private nonprofit organization” to include for-profit limited partnerships, in which the sole general partner is an organization that qualifies as a private nonprofit organization, or corporations that are wholly owned and controlled by a private nonprofit organization. Through this amendment, Congress intends to bring to the Section 202 program additional funding sources that have previously not been available to these projects, including most particularly the possible use of low-income housing tax credits. Second, Congress enacted legislation that requires HUD to approve the prepayment of Section 202 loans with a prepayment plan under which (i) the owner agrees to operate the project under terms at least as advantageous to tenants as required under the original Section 202 program terms or the Section 8 housing assistance payments contract and (ii) the prepayment may involve refinancing of the loan if the refinancing results in a lower interest rate and reductions of debt service. At least 50% of any Section 8 savings resulting from the refinancing shall be made available to the owner for purposes such as increased supportive services, rehabilitation or retrofitting of buildings and units, or the construction of additional facilities for the project which could include facilities such as additional community space or assisted living facilities.

In addition to providing the owner savings resulting from a refinancing, the new law contains other provisions that may be used in the prepayment and refinancing plan, including:

• The law requires the Secretary to make available to the owner funds in the project’s residual receipts account (these accounts accrue when the annual income to the owner from tenant payments and HUD rental assistance payments are more than are needed to meet project debt service and operating expenses) and the reserve for replacement accounts. The residual receipts account must be maintained at a minimum of $500 per unit and the reserve for replacement account must be maintained at a minimum of $1,000 per unit.



• The law limits the amount of residual receipts funds made available for supportive services to fifteen percent of the costs of increased services, but does not specify other activities that the owner can undertake with the residual receipts funds made available to the owner. It provides that the reserve for replacement amounts made available may be used for rehabilitation and retrofitting, and the construction of an addition or other facility, including assisted living facilities, at the project or in the community as described above.

Section 202 Refinancing Candidates. The new Section 202 prepayment and refinancing legislation could help preserve some of this valuable housing stock. However, the utility of the prepayment provisions will depend on the individual circumstances of the project, including factors relating to when the project was developed and the willingness of the current owner to “share control” with other partners.

The following table summarizes various types of Section 202 properties and the predicted likelihood that these properties will or will not prepay their current HUD loans and/or pursue now available low-income housing tax credits for rehabilitation or other uses.

	Current Terms of Mortgage/ Rental Assistance	Right to Prepay?	Residual receipts and Replace. Reserves?	Who “owns” the reserves?	Likely to use Section 202 prepay option?	Likely to compete for tax credits?
Initial Section 202 Program	40-50 years at 3%	Only with HUD approval	Not much	Owner	Yes, if HUD will subordinate existing note.	Yes, if can refinance with subordination of existing HUD note
1975-1990 Section 202 Program	40 year market rate mortgage; always with Section 8 contract for only 20 years.	Only with HUD approval unless built b/t 1977-1981. Where HUD approves, must show that tenants are advantaged by the prepayment.	Often substantial	Generally, the owner if notice of selection given before end of 1979	Yes, if current rate is above approximately 9%	Yes, if can work out details on what entity provides tax credit guarantees, etc.
Current Section 202 Capital Advance Program	40 year capital advance-grant	N/A	Yes	HUD	No	Yes, but only if HUD will subordinate its loan to new debt that comes with tax credits.

For those projects that do not have a right to prepay without HUD approval, HUD requires that the owners demonstrate that the proposed prepayment is advantageous to the tenants. Such advantages could include extensive retrofitting and renovation, construction of new, co-located facilities such as a clinic, community space, or assisted living facilities, a rent freeze or rent subsidy for unassisted tenants, or increased supportive services. In addition, HUD requires the owner to execute a Use Agreement in the form established by HUD that requires that the project continue to be operated in accordance with the Section 202 program requirements.

In Section F, Point 4 below and Tab 8, the Trust and the Related Companies have produced a proforma example of a potential refinancing of a Section 202 property with low?income housing tax credits. While not all Section 202 properties should be refinanced, we do believe the Commission should aggregate better data on the rents and loan balances of Section 202 properties. Then, we suggest that these owners be contacted about the potential costs and benefits of refinancing with low-income housing tax credits.

Finally, a number of hurdles exist with respect to the development of new projects under this mixed finance development method, particularly when the sponsor plans to use low-income housing tax credits. ¹²

Section 515 program

The Section 515 multifamily housing program was authorized in 1962. The Rural Housing Service (RHS) of the U.S. Department of Agriculture currently administers the Section 515 program.¹³ The Section 515 program is a direct loan program under which private sponsors receive low-interest rate loans from the Rural Housing Service in return for renting to persons with low and moderate incomes. Unlike the Section 221(d)(3) BMIR and Section 236 programs, Section 515 is still financing the construction of affordable housing though funding cuts in recent years have substantially reduced the number of new units being constructed.

Approximately 67 percent of Section 515 units, mostly those constructed in the 1970s, also receive Section 8 rental assistance or rental assistance under the RHS Section 521 program, whose terms and conditions are quite similar to Section 8. Generally, projects developed before December 15, 1989 may prepay their mortgages after twenty years and end the low-income use restrictions.

According to data published in 2001 by the Rural Housing Service, approximately 177,577, or 41 percent of households residing in Section 515 units are elderly.¹⁴ In the Trust’s analysis of HUD-assisted properties, we found that 798 Section 515 properties with 21,571 Section 8 assisted units are primarily (50% or more households in property are 62+) elderly properties.

Section 515 Occupied Units	432,246
Section 515 Units Occupied by Elderly Households	177,577
Section 515 Units with Project-Based Assistance	317,727
Section 515 Units with Project-Based Section 8	50,628
Section 515 Units with Project-Based Section 8 (Primarily Elderly)	21,571

C. Overall Data on Senior Households Residing in HUD Subsidized Housing, Section 515 RHS Housing and Housing Developed with Low Income Housing Tax Credits or the HOME Program.

A Picture of Subsidized Households in 1998, published by HUDUSER in August 1998, enumerates the vast array of Federally subsidized and public housing occupied by older persons.15

	Total	Age 62+
HUD Programs
Public Housing	1,120,000	358,400
Section 202	319,502	319,502
Section 221(d)(3)	109,861	21,437
Section 236	429,567	146,053
Section 8 new/rehab	744,889	343,673
Tenant-based Section 8	1,420,000	213,000
Rural Housing Service
Section 515	453,275	190,829
Federal Incentives
Low-Income Housing Tax Credits	433,427	108,357
HOME	125,000	20,016
TOTAL	5,155,621	1,721,266

These numbers produced, in part, from A Picture of Subsidized Households in 1998 show that 1.7 million older persons live in subsidized housing. However, this number includes all elderly households in properties that may not primarily house elderly households.

D. The Overall Data for "Primarily Elderly" Subsidized Housing

For purposes of this report, the National Housing Trust generated new information for the Commission that examines subsidized properties that primarily house the elderly. For the Commission to make recommendations, especially recommendations about the preservation of properties that primarily house the elderly, we recommend the Commission first focus on those properties where the majority of the occupants are elderly (50 percent or more households are 62 or over) and/or the client group for the property is classified by HUD as elderly. The subsidized "primarily elderly" rental housing stock currently constitutes more than 10,000 properties with over 800,000 assisted units throughout the United States. The annual median income of residents in subsidized housing is approximately $8,200 (in 1998 dollars). Approximately 21.6 percent of households in primarily elderly properties are minorities and 67.4 percent are female-headed.

E. Conversion of Primarily Elderly Subsidized Housing to Market Rate Properties: Opt Out and Prepayment Statistics

The preservation of primarily elderly, subsidized housing becomes increasingly important as one reviews data documenting the conversion of this stock to market rate rentals. Since FY 1996, the number of affordable, subsidized, elderly properties has declined because some of the properties have been converted to market rate rentals. Federally subsidized rental housing enables many poor, older persons to live in affordable housing without having to move or worry about being able to afford the rent. The sense of security provided by this housing is placed at risk where owners decide to convert to market rate housing. The potential loss of this housing places older Americans in competition with others in seeking affordable rents in a market with fewer and fewer choices. This random process, like a game of “musical housing” leaves poor elderly with few options. Owners may convert to market rate rentals by either prepaying their HUD-insured mortgage or “opting out” of their Section 8 contract:

• According to National Housing Trust data, 99 primarily elderly properties with 11,024 apartments have prepaid their HUD-insured mortgages through September 2001, and had their affordability restrictions removed.



• According to data produced for this report, owners have opted out of Section 8 contracts in 155 properties through September 2001, covering 9,040 Section 8-assisted, primarily elderly apartments. All told, the number of subsidized, primarily elderly apartments converted to market rent in the recent past is more than 20,000 apartments Nationwide.16

This trend will presumably continue as the Trust has determined that at least 4,400 elderly properties consisting of over 324,000 Section 8-assisted apartments have Section 8 contract rents less than market (defined as 110% of FMR) and, for purposes of this report, are defined as “at-risk” of being converted to market rate rentals.17 Of these, nearly 180,000 apartments have Section 8 rents below 90% of Fair Market Rent.18

The conversion from subsidized to market rate properties is particularly difficult for older persons. AARP found in a recent study that:

“Many residents in these elderly projects are frail and would face substantial difficulties in today’s housing market. Due to their limited incomes and incidence of disability, locating alternative affordable housing suitable to their needs would be difficult if owners were to convert their projects to market rate housing. Many of the elderly projects have special design features (such as grab bars and elevators), special services (such as meals or housekeeping), and special staffing (such as service coordinators). When these residents lose their homes in subsidized projects, they are losing more than rental assistance and a community of friends – quite often they are losing supportive services and project features that are critical to their continued independence.”19

Analysis of Primarily Senior Housing and Units Currently At Risk

More detailed tables with State-by-State information are included in Tabs 2 through 4, which describe the elderly subsidized housing landscape in greater detail. Also included in Tab 9 is an exemplar of a "total State" expiring Section 8 database for primarily elderly properties.

Notably, the more than 800,000 elderly, subsidized housing units tend to have the following characteristics:

• In general, this housing has Section 8 contract rents above the fair market rent, but a majority of the stock is probably below the market rents for the surrounding neighborhood-approximately 45% of the stock have Section 8 rents at or below 110% of the Fair Market Rent.²³



• A very large percentage of HUD Section 202 loans have high interest rates (above 9%). The Trust found that 1,674 Section 202 properties with 99,271 units have interest rates at or above 9%. This means that, depending on the condition of the property and prevailing interest rates, the refinancing of these loans may well make sense for the property and its nonprofit ownership. ²⁴

F. Current Federal, State and Local Initiatives to Preserve and Improve Elderly, Subsidized, Rental Housing

1. Increasing Use of Tax Credits to Preserve and Improve Elderly, Subsidized Housing

The Low-Income Housing Tax Credit program is widely regarded as the Nation’s most successful and productive affordable housing program. The tax credit program annually produces between 75,000 and 100,000 affordable apartments Nationwide. In 2000, the low-income housing tax credit and private activity bond allocation provided to the States was increased by approximately 50% (25% increase per year over 2 years). To determine the use of such credits, State housing finance agencies hold annual hearings to examine the most important housing needs in their respective jurisdictions.

Again, much has been or is being written about the use of tax credits to produce quality elderly, affordable housing. For this report, we focused on the use of tax credits to preserve existing primarily affordable housing. It turns out that allocation of low-income housing tax credits to existing affordable, subsidized, rental properties for the elderly is an increasingly important resource for their preservation in the Nation’s affordable housing inventory.

To assess the interest of the various State agencies in preserving subsidized, elderly, rental housing, the National Housing Trust undertook a survey of State housing finance agencies charged with the responsibility of allocating competitive 9% low income housing tax credits for its respective jurisdictions. We asked a set of questions designed to determine the allocation priority, if any, of low-income housing tax credits and private activity bonds to preserve subsidized, elderly, rental housing.

Here are some of the State Housing Finance Agency survey highlights:

• 38 State housing finance agencies responded to the survey;



• Over half of the respondents, 22 in all, had some form of set aside or priority in their scoring system for allocating scarce 9% low income housing tax credits to creation or preservation of elderly housing;



• 25 of the responding States anticipate the use of non-competitive private activity bonds and 4% credits for the preservation of elderly, rental housing.



• 15 State respondents anticipate that the demand to use private activity bonds and 4% credits to preserve elderly, subsidized, rental housing will increase over the next 5 years.

The results of the survey are included in Tab 5.

2. Prevent Section 8 Opt Outs and Allow Nonprofit Owners a Reasonable Rent to Meet Ongoing Operating Expenses: Encourage HUD to Facilitate Marking Below-Market Section 8 Contract Rents Up to Market:

For approximately 2 years, between 1998 and 2000, a spate of Section 8 contracts was terminated. Notably, some of these properties housed elderly residents. Stories about elderly residents being evicted for failure to pay sky-high, market level rents created a news controversy across the U.S.²⁵

These developments prompted a reaction from the Federal government. In 2000, HUD implemented a program to reduce the number of Section 8 contract terminations. Designed to give owners of below-market, Section 8 properties rents that were more equivalent to “street rent,” HUD Notice 99-36 permitted owners to “mark up” the property’s below-market Section 8 rents to market rents. Importantly, owners were permitted to obtain increased cash flow from the property as well. As noted in the table above, some 4,409 Section 8 primarily elderly properties with 324,001 assisted units currently have Section 8 rents arguably below market.²⁶ Presumably, if owners of these properties were given an appropriate incentive to keep their properties affordable, they would be less likely to opt out of their Section 8 contracts. There are really two separate issues raised by an opt out of a Section 8 contract, depending on the ownership entity:

1. 1. A for-profit owner of a primarily elderly, Section 236 property has a duty to its investors to assure reasonable cash flow. The Mark Up to Market procedure, if applied correctly, should permit the owner to increase cash flow, effectively reducing the incentives to opt out.



2. An equally positioned nonprofit owner may not be as likely to opt out, but that same nonprofit owner would want to make sure the operator could meet reasonable expenses. Allowing the nonprofit owner the option of Marking Up to Budget, not to exceed market rents, helps the nonprofit meet its ongoing operational and repair needs. Moreover, many of these nonprofit owners would be willing to take distributions from these “Mark Ups” and, in turn, dedicate these distributions to their mission of saving or producing affordable housing. Therefore, HUD should allow the nonprofit owner to receive distributions for this purpose.

3.Interest Reduction Payment Decoupling of Primarily Elderly Section 236 Properties

Section 236 of the National Housing Act of 1968 authorized below-market interest rate insured loans to private builders who agreed to develop affordable units reserved for low-income families and seniors. The program lowered the loan’s interest rate to 1%. The difference between a market rate mortgage and the 1% mortgage is called an “Interest Reduction Payment.” (IRP). The entire stream of IRP funds were allocated at the time the mortgage was approved, creating a revenue source available to the project for entire term of the mortgage. The Trust has determined that 628 Section 236 properties with 88,716 apartments are occupied primarily by older persons. Approximately 85% of these properties, 532 properties with 75,762 apartments (51,934 of these with Section 8 assistance), have Section 8 rents that are presumably below market levels.

Pursuant to HUD Notice 00-8, an owner of a Section 236 property can refinance the asset through what practitioners refer to as “decoupling the IRP.”²⁷ The key to this concept is that HUD will allow an owner of a Section 236 property to transfer or refinance the property without loss of the existing Interest Reduction Payment. This can be a powerful finance tool, depending on the amount of the Interest Reduction Payment and the amount required to reposition the property. The result can be a win-win for both owners and the residents of these properties. The essentials of the program are summarized in the following table.

Summary of Section 236 IRP Decoupling Program

A significant number of Section 236 decoupling transactions have already taken place. The National Housing Trust and others have concluded transactions that combine the Section 236 IRP Decoupling concept with private activity bonds and four percent low-income housing tax credits. Maintaining the IRP for the remaining term, typically about 13 years, is a critical funding resource for making the transaction financially feasible. In these transactions, one set of bonds is issued on the revenue stream of the property, and another set is issued on the IRP stream of income. Standard & Poors rates the IRP payments as investment grade, thereby making this debt instrument more attractive to investors. Tenants are protected against a significant rent hike through the continuation of the project-based Section 8 contract or the receipt of enhanced vouchers to eligible residents, which are triggered, as a matter of law, by the prepayment of the Section 236 mortgage.

The benefits of decoupling the IRP in these transactions are substantial. A 25-30-year- old property is rehabilitated and amenities updated in the range of $10,000 to $15,000 per unit. Valuable affordable housing stock is preserved and improved for another 30 years. Because many of these transactions use tax-exempt bonds and tax credits, States—not the Federal government—are choosing which properties to preserve.

Not every primarily elderly, Section 236 property can benefit from decoupling the IRP. Another tool, however, is available, which the Commission should strongly urge HUD to employ to save primarily elderly, subsidized housing. In 1998, Congress gave the HUD Secretary the right to retain IRP in a “pool” that could be set aside for rehabilitation of Federally assisted and insured properties.²⁸ To date, none of these funds have been expended. According to HUD’s February 2002 budget submission to Congress, approximately $300 million of these funds are now available. At a time of shrinking resources, it is ironic that HUD has not acted to use these funds in the manner Congress intended. The Commission should urge HUD to immediately establish a program for use of these funds and, furthermore, seek at least a third of these funds to be used for primarily elderly, subsidized housing stock

4. Prepayment of Section 202 Loan with 501(c)(3) Bonds

Where the project’s current interest rate is relatively high, where competition for tax credits is significant, and where the repair needs are not considerable, the current nonprofit owner may be wise to establish a 501(c)(3) pool to provide bond financing for senior, subsidized housing.²⁹

In order to determine the feasibility of refinancing a Section 202 property with 501(c)(3) Bonds, the Related Company and National Housing Trust have created a sample proforma for the Commission demonstrating how this bond tool could help rehabilitate a property.

We titled the property “Anytown Apartments.” Anytown is a 180-unit Section 202 property with an original mortgage of $7.4 million. That mortgage has a current interest rate of 9.25% with a 40-year term. The unpaid principal balance is $5.7 million. Current debt service is $702,000 annually. Cash flow is approximately $67,000 annually. The current, stabilized debt and cash flow are included in Tab 7.

We then constructed a scenario in which the current owner prepaid the current loan and refinanced with 501(c)(3) bonds. The results are as follows:

• We reduced the current debt service from $702,000 to $667,000, for a savings of $35,000 annually;
• We provided the operator an additional $3,000/unit that could be used for reconfiguration or rehabilitation of the apartments;
• Cash flow was maintained at current levels;
• The owner and its technical assistance advisor have up to $100,000 to split between them in pursuit of their own missions.

Clearly, this option is generally limited to properties with higher interest rates. Nevertheless, the Trust found that 2,056 primarily elderly properties with 133,743 total units have interest rates at or above 9 percent and may be refinancable using 501(c)(3) bonds.³⁰

5. Use of Tax Credits to Refinance Section 202 properties

Using Anytown Apartments as our sample property, the Related Companies and the National Housing Trust constructed a proforma in which the current nonprofit owner prepaid the Section 202 loan, refinancing with private activity bonds and 4% low-income housing tax credits. The results of the proforma, included in Tab 8, are as follows:

• The debt service was reduced from $702,000 to $697,000, for a savings of $35,000 annually;
• Rehabilitation assistance of an additional $16,000/unit that could be used for reconfiguration or rehabilitation of the apartments;
• Cash flow was maintained at current levels;
• The owner and the technical assistance advisor have up to $700,000 to split between them in pursuit of their own missions.

Comparative Analysis of “Anytown Apartments”
(Current Operations, Refinancing with 501(c)(3) Bonds
and Refinancing w/ Private Activity Bonds and Tax Credits

The use of low-income housing tax credits as a significant refinancing tool requires that HUD subordinate any remaining existing debt to the new debt brought in by the owner or purchaser. That will allow the property to retain its current Section 202 loan and, perhaps, use the operating cost savings to fund increased services on site. The Trust makes two suggestions that the Commission might consider in its deliberations concerning the potential use of low-income housing tax credits to preserve and improve Section 202 properties.

6.Debt Forgiveness for Outstanding Section 202 Loans Supported by Section 8

The American Association of Homes and Services for the Aging (AAHSA) has proposed “PRAC Conversion,” to convert approximately 260,000 elderly housing units assisted with Section 8 contracts to a project rental assistance contract (PRAC) and would substitute a capital advance for the unpaid principal balance of the Section 202 loan. Henceforth, the property would receive operating assistance under a PRAC, based on the actual property budget. Presumably, the new property would have sufficient equity to refinance the property. Whether HUD would permit the PRAC to be used to pay for debt service associated with this refinancing is not clear.

This approach could have a significant up-front, one-time budget cost.³¹ This cost would presumably be offset by the benefits to the occupants and the operators of these properties, as the conversion effectively reduces their reliance on ongoing Section 8 assistance. The Trust has not studied this matter closely, nor do we opine on the wisdom or lack thereof of forgiveness. At the same time, it is plainly obvious that this forgiveness would relieve these properties of enormous subsidies, which could be at risk of loss at some point in the future. Moreover, to the extent that forgiveness of this debt would, in fact, assist nonprofit operators in maintaining the existing Section 202 stock, we believe the Commission could ask Congress to revisit this issue, with a particular focus on the current owners’ needs as well as the salvation of the Section 202 inventory.

7. Conversion of Subsidized Housing to Assisted Living Facilities

If “aging in place” has any meaning for poorer senior citizens living in subsidized, rental housing, it means that they are able to grow older with dignity. As reported in a recently published study by Harvard University’s Joint Center for Housing Studies:

“There are a significant number of expenses and inefficiencies associated with this separation of health and housing services. ... When seniors, often the most stable forces in the neighborhood, are forced out in search of more adequate and affordable health and housing services, communities suffer.”³²

In part, this means that their present housing can be reconfigured or modified to function as an assisted living facility. Research is currently emerging that indicates that this may be a trend the Commission should recognize.³³ Some research indicates that providing assisted living services to a targeted population in subsidized, elderly projects could reduce costs toward nursing homes. If premature placement in nursing homes can actually be reduced, this option should be fully explored.

HUD appropriations for fiscal years 2002 and 2003 included funds to retrofit subsidized elderly housing projects for assisted living. This permits the seniors to remain in the same residential development even if their need for supportive services increases. The program provides funding for the physical reconfiguration of the units, but not for support services. Assisted living was recently authorized as an eligible site for use of HUD rental assistance vouchers. The need for affordable assisted living has also become evident to those who syndicate low-income housing tax credits. Senate Bill1886, introduced in December 2001 by Senator Dodd and titled the “Assisted Living Tax Credit Act,” would create a new “supported elderly housing tax credit.”

In January 2002, Robert Wilden, past national director of elderly housing at HUD, and Donald L. Redfoot, Senior Policy Advisor at AARP’s Public Policy Institute, published a report on converting subsidized housing to assisted living facilities.³⁴ They note that the number of elderly residents residing in subsidized housing (over 1.9 million) is actually greater than the number of persons residing in our Nation’s nursing homes.³⁵ The authors analyzed over 20 housing developments that provided assisted living services in subsidized housing. Housing funding sources ranged from public housing funds to low-income housing tax credits.³⁶ In particular, they noted that a large number of Section 236 developments apparently have occupancy problems because the owners cannot lease up the efficiency apartments. In at least a few of the cases they studied, converting these efficiency units to assisted living apartments actually helped the owner meet its operating expenses.³⁷

The authors made clear that this was an exploratory set of case studies. Nevertheless, it provides some very useful, if preliminary, insights:

• The means by which sponsors “converted” subsidized housing to assisted housing facilities varied widely;



• The types of services provided varied considerably.

There clearly is no precise data on the nature or breadth of “premature placement” in nursing homes. But it seems obvious that the time is ripe for a full-blown study of the costs and benefits of funding more assisted living facilities for poorer, older persons.

8. Matching Grants for Preservation of Primarily Elderly, Subsidized Housing

As the authority for housing programs is increasingly delegated to State and local governments, Congress should encourage State and local governments to meet the preservation needs of primarily elderly, subsidized housing. The expansion of housing initiatives at the State and local level has crucial ramifications for Federal housing policy. Indeed, Federal housing policy can be tailored to encourage State and local preservation initiatives. For example, a bill currently pending in Congress, if amended, could generate hundreds of millions of State and local funds to preserve affordable, primarily senior housing.

The Affordable Housing Preservation Act of 2001 (Senate Bill 1365) is sponsored by Senators Kerry (D-MA), Grossly (R-IA), Dayton (D-MN), Einstein (D-CA), Schemer (D-NY), Sardines (D-MD), Beaux (D-LA), and Wellstone (D-MN). The Act authorizes Federal matching grants for State or local funds committed to preserving and improving affordable housing. Grants may match State or local funds on up to a two-for-one basis. By providing a two-for-one match, the Act essentially triples the amount of State or local funds earmarked for preservation. Where a State has not devoted its own funds for preservation, the Act authorizes that grants be provided at 50% of tax credits, HOME funds and other Federal funds “steered” to the preservation of affordable housing. According to the Act, Section 202 properties are currently not eligible for the preservation matching grants.

Conclusion

As the growth of senior households surges in the coming decades, the need for affordable rental housing for seniors will also increase. While production of new units may be necessary to meet this need, the preservation and improvement of existing affordable senior housing is critical. Existing affordable senior housing, like its occupants, continues to age and will require maintenance, modernization, and services in order to meet the needs of the older population. Fortunately, tools are being developed and used that give us hope that this stock can be preserved. This report has documented the uniqueness of this housing inventory and explained how this resource can be preserved and improved.

1. Joint Center for Housing Studies of Harvard University, Housing for Seniors, 2001.

2. Joint Center for Housing Studies of Harvard University, The State of the Nation’s Housing: 2001, p. 10.

3. Ibid.

4. Ibid.

5. AARP Public Policy Institute, Adding Assisted Living to Subsidized Housing: Serving Frail Persons with Low Incomes, Wilden and Redfoot, January 2002.

6. Housing forSeniors, 2001.

7. National Center for Health Statistics, 2000 and data derived from AARP study, January 2002.

8. Compilation of data from National Housing Trust and the Joint Center for Housing Studies’ The State of the Nation’s Housing: 2001.

9. “Serving the Affordable Housing Needs of Older Low Income Renters: A Survey of Low Income Housing Tax Credit Properties” (Executive Summary), Andrew Kochera, AARP Public Policy Institute, January 2002.

10. Generally rental assistance from the Federal government covers the difference between what the tenant is obligated to contribute towards rent—typically 30% of his/her income—and the rent charged by the landlord. Because tenants’ incomes are so low, their payment often does not pay the operating cost of the property. At least 13,686 project-based properties, containing 914,847 Section 8-assisted apartments, will have their Section 8 contracts expire during the next five years.

11. U.S. Department of Housing and Urban Development, Office of Policy Development and Research, A Picture of Subsidized Households in 1998, August 1998.

12. Generally, in order to qualify for 9% tax credits, the Section 202 capital advance funds will need to be made available to the project by way of a loan in order to include these funds in eligible project basis. Another similar issue is the treatment of the PRAC payments that are provided to the project as rental assistance. The Internal Revenue Service has determined that the provision of Section 8 rental assistance, and Section 9 operating subsidy in the context of mixed finance development public housing projects, are not Federal grants that require a reduction in tax credit basis. However, even though for all intents and purposes the PRAC is the same as Section 8 assistance, it is legally authorized under Section 202 and not under Section 8.

13. This program was once known as the Farmers Home program.

14. U.S. Department of Agriculture, Rural Housing Service, Results of Fiscal Year 2001 Fair Housing Occupancy Survey, 2001.

15. The National Housing Trust wishes to thank the AARP Public Policy Institute for its summation of this data, reproduced here from various reports published by the Institute. Attached at Tab 1 is a Summary of Federal Rental Housing Programs produced by the AARP in May 2001.

16. See Tab 2 for elderly opt outs and mortgage prepayments by State.

17. See Tab 3 for State by State listing of at-risk properties.

18. See Tab 4 for 90% FMR Table by State.

19. AARP Public Policy Institute, Adding Assisted Living to Subsidized Housing: Serving Frail Persons with Low Incomes, Wilden and Redfoot, January 2002.

20. Ability to refinance is defined any Section 236-insured property with rents at or below market (<=110 percent FMR) and other non-236 properties with interest rates of 9 percent.

21. Prior to 1990, Section 202 financing was available to developers of housing for both elderly and disabled, low-income households. This report focuses only on those properties that are for seniors, and therefore, the total number of units will be less than the number of units for the Section 202 program as a whole.

22. Other Section 8 is defined as any Section 8-assisted property that is not insured under the Section 202, Section 236 or Section 221(d)(3) BMIR programs. Some of these properties may not have a HUD-insured mortgage.

23. Fair Market Rent is not really a proxy for "market" or "street rent." Because Fair Market rent is a derivative of the 40th percentile of rents paid by recent movers, Fair Market Rents are often lower than what is often considered market rent in a neighborhood. As a consequence, HUD housing practitioners often use 110% of FMR as a general proxy for market rent.

22. This is not to suggest that residents of Section 202 properties would necessarily be adversely affected by prepayments by their owners. Quite the contrary; as the proforma examples in this paper indicate, refinancing at a lower rate may enable the nonprofit borrower to complete required repairs, increase reserves and maintain rents at current levels.

25. Selected stories about the termination of Section 8 contracts for properties that housed elderly residents are attached in Tab 6.

26. Defined as 110% of Fair Market Rent.

27. HUD issued guidelines on decoupling the IRP on May 16, 2000 in HUD Notice 2000-8.

28. P.L. 105-65 established new authority for the Secretary to recapture interest reduction payment subsidies from Section 236-insured multifamily properties for purposes of providing rehabilitation grants to properties suffering from deferred maintenance. Section 531 of P.L. 105-65, enacted in 1997, authorized the HUD Secretary to make these grants for the capital costs of rehabilitation to owners who demonstrated need and also had insufficient project income to support such rehabilitation. Section 533 of the HUD FY 2001 Appropriations Act added the amendment that the program be structured as a grant or loan

29. The State of California is considering establishing such a loan pool for Section 202 properties. The term for the Section 8 loan would be approximately 30 years. The loan is sized commensurate with affordable rents at 30% of 50% of adjusted median income (AMI). The California Housing Finance Agency would use HUD Risk Share insurance on the bonds. Excess proceeds would be used for rehabilitation. The second loan is supported by the difference between 30% of 50% of AMI and the Section 8 rent, where the Section 8 contract rent is above 30% of 50% of median income. The second loan is for a shorter term (e.g. 10 or 15 years).

30. See Tab 10 for HUD-insured elderly properties with interest rates at or above 9%.

31. According to HUD, the one-time cost for this forgiveness depends on the type of "budget scoring" used to determine the impact on HUD's budget. Under the current scoring rules pursuant to the Budget Enforcement Act, the cost of forgiving approximately $7.8 billion would be either $3.6 or $10.6 billion in both budget authority and outlays in the year in which the debt is forgiven, depending on the scoring rules used. If taken outside of these rules, the cost would be effectively zero since HUD would recover the cost of forgiveness by saving Section 8 subsidy payments equal to the amount of forgiveness. Under current "pay as you go" rules, if the item were legislated by the authorizing committee, it would be a mandatory cost; if legislated as part of the VA/HUD Appropriations process, the discretionary costs would be "scored" against HUD's discretionary budget. See May 19, 2000 letter from HUD to Honorable Alan B. Mollohan, Ranking Minority Member, Subcommittee on VA, HUD and Independent Agencies.

32. Harvard University Joint Center for Housing Studies, Aging in Place: Coordinating Housing and Health Care Provision for America's Growing Elderly Population, October 2001.

33. "[T]he desire to remain in their current residence for as long as possible becomes more prevalent as age increases." Between 75 and 95% of seniors want to do so, with the number increasing as their age increases. AARP, Fixing to Stay: A National Survey of Housing and Home Modification Issues, May 2000.

34. AARP, Adding Assisted Living Services to Subsidized Housing: Serving Frail Older Persons with Low Incomes, January 2002.

35. Data derived from AARP and National Center for Health Statistics, 2000.

36. For purposes of their report, Wilden and Redfoot defined "assisted living" as support for activity for daily living (ADLs) and instrumental activities of daily living (IADLs). ADLs include bathing, dressing, toileting, transferring, and eating. IADLs include escort help for outside appointments, medicating monitoring, bill paying and health status monitoring. Finally, most sponsors surveyed provided 24-hour supervision and medication management. Not all projects provided all of the services defined in this footnote, but all were focused on increasing supportive services for their residents.

37. Ibid and conversation with Don Redfoot, February 4, 2002.