Dear Ms. Feingold and Ms. Hooks:

The Massachusetts Housing Finance Agency (MassHousing) appreciates the opportunity to testify at the second field hearing held by the congressionally-mandated Commission on Affordable Housing and Health Facility Needs. In requesting our testimony, the Commission has noted its particular interest in MassHousing's experience in combining tax credits with the Section 202 Program, and our assessment of current programs and federal administrative or legislative suggestions that would remove financial barriers to development and increase the effectiveness of public programs. We have structured this testimony accordingly.

1. MassHousing's Involvement in Housing and Service Programs for the Elderly



2. Endorsement of Section 202 Program as a Successful and Cost-Effective Model of Housing and Care for Massachusetts Elders



3. Historic Barriers to Section 202 Development in Massachusetts



4. Benefits of Permitting the Use of Low Income Housing Tax Credits in Section 202 Developments



5. Recommendations for Further Legislative and Administrative Action to Promote Program Effectiveness

MassHousing was created in 1966 by state legislation as a self-supporting organization to increase the availability of affordable rental and homeownership housing in Massachusetts. Since making our first loan in 1970, we have provided more than $6 billion to finance more than 60,000 apartments and 40,000 home mortgages throughout the state. The quality of our portfolio and innovative housing programs has earned us a reputation as one of the premier housing finance agencies in the country, and this leadership position is particularly strong in the field of housing for the elderly:

• In the 1970's and 1980's, MassHousing financed dozens of rental developments for elderly individuals and households through the HUD Section 8 and Section 236 subsidy programs.

• In the 1980's MassHousing recognized the growing need for services among elders who had aged in place in its elderly developments, and with the assistance of a Robert Wood Johnson Foundation Grant -- the first of its kind awarded in the nation -- MassHousing introduced supportive services to this portfolio.

• In the early 1990's, MassHousing created its ElderCHOICE assisted living financing program in response to the need for assisted living housing that could accommodate frail elders who were not in need of institutional care, but relied on round-the-clock oversight and assistance with daily living activities on an unscheduled basis. The program received a Ford Foundation Innovations in American Government Award and has been credited by the state's Division of Elder Affairs with saving the state over $5000 per resident per year (1994 dollars) when compared with the cost of nursing home care.

• In the Spring of 2000, the Agency implemented a program to refinance existing Section 202 developments to leverage new capital resources for physical improvements and expansion of services. The program has received recognition from The National Council of State Housing Agencies for its ability to allow frail elders who might otherwise be forced to move to an assisted living or nursing care setting to age in place.

• In early 2000, MassHousing staff commenced efforts to promote changes to the Section 202 Program to facilitate the use of Low Income Housing Tax Credits with Section 202 funding. Such efforts have included advocacy at regional and national housing conferences; correspondence and meetings with top HUD officials; and written support to sponsors of specific proposals for funding of Section 202 projects in conjunction with tax credits.

• In July of 2000, MassHousing entered into a contract with the Department of Housing and Urban Development to assume Section 8 Contract administration responsibilities for over 400 developments in Massachusetts, including some 4500 units of Section 202 housing.

II.   Endorsement of Section 202 Program as a Successful and Cost-Effective Model of Housing and Care for Massachusetts Elders.

    


Based upon its experience in the contract administration and refinancing of Section 202 developments, MassHousing has found this housing inventory overall to be physically attractive, well managed and financially viable. In addition to providing high-quality apartments for independent elders, many of these 202 developments also provide for the service needs of residents by coordinating, or in some cases contracting directly for, a wide array of services, including meals, activities programs, personal care assistance and homemaking services. It is, in fact, the ability of Section 202 owners to adapt and innovate around the varying needs of their residents that has made the Section 202 inventory such a versatile, valuable resource for serving both fully independent and frail low income elders.

Notwithstanding the tremendous contributions that Section 202 and other elderly housing programs have made to housing the Commonwealth's low-income elders, the need for additional affordable elderly housing opportunities remains acute. Well over one-half of Massachusetts residents aged 75 and older are considered "very low income" (earning less than 50% of area median income) by federal housing standards¹. In contrast, the vast majority of Massachusetts' 351 communities dedicated less than 10% of their overall housing stock to low-income use. Waiting lists for elderly public housing remain long in many Massachusetts communities (e.g., over 2000 elders are currently on the Boston Housing Authority's waiting list), and waiting lists for MassHousing's low-income assisted living communities commonly exceed total low income units by margins of three to one. Despite the recent economic downturn, vacancy rates in the Boston area remain below 1%, and the median rent for a one-bedroom apartment is $1,325.

It is on the basis of this housing need, as well as the demonstrated success of the Section 202 Program, that MassHousing strongly endorses the production of additional Section 202 properties in Massachusetts.

III.   Historic Barriers to Section 202 Development in Massachsuetts:


Historically, three barriers have hindered more effective development of Section 202 projects -- and particularly service-enriched Section 202 developments -- in Massachusetts:

1. Development costs in Massachusetts far exceed Section 202 funding limitations: Massachusetts (and particularly the Boston Metropolitan area) unfortunately bears the well-known distinction of having among the highest housing costs in the nation.

Such high costs emanate from a variety of factors, including limited availability of land; high labor costs; stringent building codes, environmental and accessibility laws; and arcane and complex permitting processes which differ from community to community. As a result, total development costs of newly developed studio and one bedroom apartments typically start at roughly $130,000, and can reach as high as $200,000 or more per unit². In contrast, maximum Section 202 funding - even when adjusted for high-cost, building type and other factors - is limited to approximately $105,000. Thus, gap financing has long been a prerequisite to participation in the Section 202 Program for Massachusetts and similarly situated high-cost areas of the nation.

2. Effective limits to project size as an impediment to service delivery: The Section 202 Program is relatively small, with the FY2001 appropriation providing a total of $39.2 million in capital advances to develop 375 Section 202 units in the New England region. Due to the very high demand for Section 202 funding relative to available funding, and a desire to distribute program funding geographically, recent program awards have typically been limited to project sizes of not more than 40 units. This limitation has not permitted the economies of scale necessary to effectively deliver services, particularly since only a portion of residents in newly-developed Section 202 developments typically require moderate to extensive services.

3. Administrative barriers to mixed-income Section 202 developments: Massachusetts government and private-sector housing organizations have long supported mixed-income housing as good public policy. In addition to promoting socio-economic diversity and discouraging concentrations of poverty, mixed-income housing can foster financial stability - and, indeed, even help cross-subsidize low income units. It is not surprising given this tradition that a number of sponsors of Section 202 developments would prefer, if given the chance, to produce Section 202-assisted developments that also integrate market-rate or moderate-income units throughout the development. This income mixing would also help to address the effective limits to project size discussed above.

   However, the HUD 202 Program was historically designed to provide a single source of funding to cover all development costs. While over time, HUD has allowed the addition of equity or soft debt as gap financing, to date, HUD has not permitted the combination of non-202 units, supported by first-mortgage amortizing loans and other resources, in a 202 development.

IV.   Benefits of Low Income Housing Tax Credits for Section 202 Developments


Permitting the use of Low Income Housing Tax Credits in conjunction with Section 202 funding could help to solve each of the above-noted barriers to developing service-enriched Section 202 projects in a number of ways: First, syndication of the housing tax credit typically generates $30-45,000 (4% tax credits) or $75-105,000 (9% tax credits) in equity per low income unit. Such equity will generally be sufficient to close the funding gap between 202 funding limits and actual development costs in high cost areas, and to defray costs of additional project units as well. Second, notwithstanding rent and income limitations, tax credit units in Massachusetts typically support some level of amortizing debt, augmenting sources to cover costs of non-202 units in a mixed-income development. Finally, by facilitating the feasibility of developing mixed-income projects, increased project size and economies of scale in service delivery can be achieved.

V.   Recommendations for Further Legislative and Administrative Action to Promote Program Effectiveness


A major barrier to the use of tax credits in Section 202 developments was recently eliminated with the enactment of the American Homeownership and Economic Opportunity Act of 2000 (P.L. 106-569). This legislation, approved December 27, 2000, enables use of the tax credit by expressly allowing ownership of Sec. 202 developments by for-profit limited partnerships, provided the general partner of the partnership is a nonprofit entity. However, a number of remaining obstacles -- largely administrative -- must be addressed prior to successful implementation of mixed finance Section 202s:

1)  Exclusion of Project Rental Assistance Contract (PRAC) from rent calculation and from treatment as federal subsidy for purposes of the tax credit:  Under Internal Revenue Code Section 42(d)(5)(A), federal grants will act to reduce a partnership's tax basis in the amount of the grant. Such a reduction would substantially reduce the equity raise from syndication of the credit in a Section 202 project, thus negating much of the benefit of the tax credit. While an explicit exemption exists for payments made under Section 8 contracts, no such parallel provision currently exists for payments made under a Project Rental Assistance Contract.  Administrative relief from Section 42(d)(5)(A) will be needed via revenue ruling or alternative guidance from the IRS. Alternately, a legislative amendment to the Code will be required, expressly exempting payments made pursuant to a PRAC from classification as a federal grant.

2)  Issues Related to the Overlay of Housing Finance Agency Loan Administration on HUD Section 202 Program Administrative Oversight.   Customarily, projects receiving capital advances and PRAC subsidies under Section 202 receive regulatory oversight by HUD field offices with regard to a host of functions, including but not limited to: use of replacement reserves; collection and application of insurance and tax escrows; administration of PRAC subsidy; physical property inspections; and monitoring for compliance with use restrictions. In many cases, these oversight functions will be at best redundant with an HFA/first mortgage lender's oversight of the project's construction and operation. To ensure efficient program administration, we suggest that HUD delegate to housing finance agencies its oversight functions that duplicate those functions performed by HFAs. In addition, where possible, HUD should contract with housing finance agencies to administer the operations of Section 202 developments in accordance with applicable program requirements and procedures. Given their public accountability and strong track record in administration of federal housing programs (including the Section 236 program, Section 8 contract administration, and Mark-to-Market Program), HFAs are uniquely situated to perform such functions.

In other cases, rules or administrative procedures governing the Section 202 Program may be at odds with the HFA's responsibilities as a lender. For example, several potential conflicts exist between the Section 202 Program and the HUD Risk Sharing Program used by many housing finance agencies to insure multifamily loans:

• Subordination of Risk Sharing Note to Sec. 202 Affordable Housing Covenant:   The 202 Program would require that the Section 202 Affordable Housing Agreement be recorded ahead of, and senior to, any first mortgage loan. We urge HUD to provide confirmation that this arrangement will not create added liability on the part of the HFA lender under the Risk Sharing Program due to decreased project value in the event of a Risk Sharing Insurance Claim.

• Subordination of HUD Capital Advance Loan to Housing Finance Agencies' First Mortgage Loan:  Although not statutorily required to do so, HUD has typically structured its capital advance under Section 202 as a non-interest bearing loan secured by a first mortgage on the property. The new legislation and NOFA language are silent on whether HUD intends to subordinate its capital advance mortgage to a housing finance agency's first mortgage loan. We urge HUD to confirm its willingness to do so.

• Length of PRAC Contracts and Risk Sharing Underwriting:   Similar administrative conflicts may be encountered with regard to the length of PRAC contracts under the 202 Program versus underwriting pursuant to the Risk Sharing Program. Pursuant to recent HUD Notice of Funding Availability (Federal Register Vol. 66, No. 38, February 26, 2001), and in accordance with the waiver authority provided in the HUD Appropriations Act, the Secretary has reduced the PRAC term from 20 to 5 years, noting that HUD anticipates that at the end of the contract term, renewals will be approved subject to the availability of funds. As a Risk Sharing Lender, MassHousing is not adverse to underwriting 30- or 40-year debt on the basis of shorter term renewable contracts, nor does any provision of the HUD/HFA Risk Sharing Regulation prohibit such underwriting³. Moreover, HUD's authority to approve or deny risk sharing is limited to certain retained reviews (which do not include review of underwriting assumptions) and the HFA's standing and compliance with respect to its duties as a risk sharing lender. However, HUD field office and headquarters staff have questioned the permissibility of underwriting debt for a term that exceeds the length of the rental assistance contract, and in fact, have not yet responded to a 9-month old request for refinancing of an existing Section 202 project involving such an arrangement.  We urge HUD to confirm that 202 subsidy can be used in conjunction with the Risk Sharing Program without regard to the initial length of renewable PRAC contracts⁴.

3)  Apparent requirement to create additional units as a prerequisite to the use of tax credits in Section 202 developments.  HUD Notice H 2001-11, issued 7/02/01, providing Fiscal Year 2001 policy and program requirements for the Section 202 Program, requires that sponsors of "…mixed-finance or mixed use projects describe their plans and the actions they have taken to create a mixed-finance/mixed use project by developing additional units (Notice H2001-11, 2.C. Italics added). While the development of additional non-Sec. 202 units with tax credit or other subsidy will be possible and desirable in many cases, there will be other cases where tax credit funding is necessary simply to close the gap between development costs and Sec. 202 funding limitations - particularly in such high cost areas as Boston.   HUD should provide administrative clarification to permit the creation of mixed finance projects in which 100% of project units will receive Section 202 funding.

In short, MassHousing believes that effectiveness of the Section 202 Program can be increased by eliminating remaining barriers to the use of low income housing tax credits with Section 202 funding. As noted above, the majority of these barriers are administrative in nature and, as such, represent issues that all of us could, and should, begin to tackle immediately and resolve expeditiously.

Thank you for your consideration of this testimony, and I look forward to working with you on this important affordable housing issue in the future. If you or other commission members have any questions regarding this information, please do not hesitate to call me at 617-854-1360.



Sincerely,

Nancy Andersen
Manager of Rental Development



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¹ Source: 1990 Census and HUD Income limits as published in the Federal Register.

²Total per unit development costs of four Section 202 or independent elderly developments recently funded by MassHousing averaged roughly $140,000. If assisted living developments were included in this mix, such costs would rise to roughly $169,000. Source: MassHousing Rental Development and Affordable Housing Trust Fund Databases.

³24 CFR Part 266 stipulates "projects receiving rental subsidies…may be insured under this part only if the mortgage does not exceed an amount supportable by the lower of the unit rents being or to be collected under the rental assistance agreement or the unit rents being collected at unassisted projects in the market.." (266.200(d)). No restrictive language regarding contract term exists in the regulation.

⁴It is also noteworthy that Title VIII Subtitle A of the American Homeownership and Opportunity Act of 2000 (PL 106-569), expressly states that "for purposes of underwriting a loan insured under the National Housing Act, the Secretary may assume that any Section 8 rental assistance contract relating to a project will be renewed for the term of such loan". While the reference in this act to loans insured under the National Housing Act applies to HUD insurance programs other than the Risk Sharing Program, an analogy could be drawn to PRAC subsidies and Risk Sharing insurance.