Maximizing your Section 8 Contract

Maximizing your Section 8 Contract Presented by Gates Dunaway and Ann Gass LeadingAge National Meeting Boston, MA November 2, 2015 WHAT DO WE MEAN BY MAXIMIZING? Are your Section 8 rents below market*? Increase through one of the two Mark-up procedures Are your Section 8 rents above market* (202, Option 4)? Protect them through a prepayment and refinancing *Rent Comparability Study (RCS) is used to determine market 1

WHY WOULD WE WANT A RENT INCREASE? Increased Net Operating Income (NOI) leverages additional debt, which can be used for: Additional Capital Repairs Equity take-out Developer Fee Service Enhancements OVERVIEW OF TODAY S SESSION I. Overview of Section 8 Contracts and Renewal Guide II. Options for Marking-up Rents (a) (b) Option 1 Contracts Option 2 Contracts III. Protecting over-market rents for Option 4 Contracts IV. Other issues related to refinancing V. Case Studies 2

Part I SECTION 8 CONTRACTS and the RENEWAL GUIDE SECTION 8 RENEWAL GUIDE Guidance for renewing contracts and applying for rent increases. Implements Multifamily Assisted Housing Reform and Affordability Act (MAHRA). Updated guide was released in August and will apply to all renewal requests submitted as of November 5, 2015. 3

Option 1 2 Ch. 15 Description Mark-Up-To-Market (MU2M) Other renewals with rents at/below Market Allows for the promise of post-rehab rents Section 8 Renewal Options Initial and Renewal Rents Market (determined by RCS) OCAF or Budget-based, capped at Market Rents increased to market using MU2M or MU2B Annual Adjustments Year 2-5 OCAF OCAF or Budget-based, capped at Market OCAF 3 Referral to Recap/Mark To Market Typical Owner/ Property For Profit Any Any 4 Recap Exempt Renewals Lesser of Budget or OCAF Budget-based, capped at Market, or OCAF 202 Direct Loans, HFA Financed 5 Early M2M (Pre)/ Preservation - LIHPHRA, ELIPHA (221d3/236) 7 6 Opt-Outs Adapted from HUD trainings given from 2012 2014 Part II Options for Marking Up Rents 4

MARKING UP RENTS OWNER ELIGIBILITY OWNER TYPE ELIGIBLE FOR MU2M? ELIGIBLE FOR MU2B? Nonprofit No Yes MARK-UP-TO-MARKET GENERAL ELIGIBILITY CRITERIA For-profit/ Limited Dividend Owner For-profit/ Limited Dividend Purchaser Yes For Profit Purchaser Yes No No Yes Yes MARKING UP RENTS RENT COMPARABILITY STUDIES (RCS) Performed by state-certified general appraiser Rents will be compared to 140% of median rent* If median RCS rent is greater than HUD s 140% rent, HUD will contract for a 3 rd party RCS. Rents will be set at lower of Owner s RCS or 105% of HUD s 3rd party RCS *See http://portal.hud.gov/hudportal/hud?src=/program_offices/housing/mfh/mfhsec8 5

Option 1 Contacts MARK-UP-TO-MARKET OVERVIEW OF OPTION 1 MARK-UP-TO-MARKET Purpose: increase rents to market Must meet specific eligibility criteria 6

Option 1 Contracts MARK-UP-TO-MARKET GENERAL ELIGIBILITY CRITERIA Aggregate rents less than RCS rents REAC score >59 Satisfactory rating on last MOR FASS finding closed or plan in place MARK-UP-TO-MARKET GENERAL ELIGIBILITY CRITERIA OPTION 1A Entitlement Must meet all of the following conditions: RCS rents at or above 100% of FMR No use restrictions No mod rehab assistance contract No history of receiving voucher assistance after contract has been terminated OPTION 1B Discretionary Must meet one of the following conditions: Vulnerable Populations Vacancy Rates Community Support HUD Approval Option 1 Contracts 7

RENT INCREASE REQUEST Option 1 Contracts You can request a MU2M at any time. For Option 1B, include documentation of discretionary eligibility. Must include RCS. Must request 5 year contract. Can request up to 20 year contract DETERMINING RENTS Option 1 Contracts Rents will be increased to the final RCS rent HUD will cap the new rents at 150% of the FMR or the RCS rent. Future annual rent adjustments will be OCAF. If the contract term is more than five years, the rents will be reset every five years using an updated RCS. 8

TIMING CONSIDERATIONS Order the RCS to determine market rents. Allow time for HUD to review and approve. Once HUD has approved the MU2M request, proceed with refinancing using the newly approved rents. Rents will go into effect 120 days after you submit the MU2M request. Option 1 Contracts THE CONCERNS Most non-profit owners not eligible. Limitations on implementing rent increases for non-section 8 units. 9

Option 2 Contacts MARK-UP-TO-BUDGET OVERVIEW OF OPTION 2 Option 2 Contracts Rents must be below market, as determined by RCS. Rents are increased using OCAF or budget-based method, but always capped at market. Contract terms can be 1 to 20 years. 10

OPTION 2 GENERAL ELIGIBILITY CRITERIA Option 2 Contracts Aggregate rents less than RCS rents RENT INCREASE REQUEST Option 2 Contracts Budget must support rent request Use the debt service for the new financing in budget HUD allows debt service coverage in the budget HUD allows vacancy loss in budget BUDGET MUST JUSTIFY RENTS 11

RENT INCREASE REQUEST Option 2 Contracts Must include RCS, which will cap the rents Future annual rent adjustments are OCAF, with five year resets using an updated RCS Chapter 15 Post-Rehab Rents 12

Chapter 15 - Preservation Purpose: Transferring ownership or funding capital repairs. Rents: Mark-Up-To-Market or Mark-Up-To-Budget HUD may approve post rehab rent level, based on improved market potential. Post rehab rents take effect when the rehab is complete. Chapter 15 - Preservation Program Types Capital Repairs Transfer Rent Increase Types MU2M MU2B 13

Chapter 15 - Preservation GENERAL REQUIREMENTS 20 year HAP contract and Use Agreement Preservation Agreement (if applicable) Must combine contracts RCS with "as is and after rehabilitation market rents GENERAL REQUIREMENTS Chapter 15 - Preservation Project capital needs assessment Sources and uses statement A detailed description of the proposed transaction NOT ELIGIBLE: Mark-to-Market restructured Contracts with above-market rents LIHPRHA and ELIHPA contracts 14

CAPITAL REPAIRS PROGRAM Chapter 15 -Preservation Submit documentation for environmental and physical accessibility review Relocation plan Not Troubled Current on debt service and replacement reserve TRANSFER PROGRAM Chapter 15 -Preservation Purchaser requirements: Have experience Be in compliance with non-discrimination and equal opportunity requirements Be in good standing with HUD REAC greater than 60 15

RENTS Chapter 15 - Preservation Budget must support rent request Use the debt service for the new financing in budget HUD allows debt service coverage in the budget HUD allows vacancy loss in budget RCS will cap the rents Future annual rent adjustments are OCAF, with five year resets using an updated RCS. THE CONCERNS Chapter 15 - Preservation Requires up front financial investment Typically requires refinancing to support higher rents Can be time-consuming and complicated Non-Section 8 units may need to be increased to same rents as subsidized units. 16

TIMING CONSIDERATIONS Chapter 15 - Preservation New debt supports higher rents Lender needs higher rents to size debt RCS determines rent cap Determining rents is an iterative process since it requires the new debt to be sized. TIP: Size the debt based on the RCS Market Rents. TIMING CONSIDERATIONS (continued) Chapter 15 - Preservation Discuss with HUD and Lender when to submit the rent increase application. Rents based on as-is condition will take effect at the closing on the new financing; rents based on post-rehab will take effect at completion of construction. IT CAN BE A LONG PROCESS; ALLOW ENOUGH TIME! 17

Part III Protecting Over Market Rents for Option 4 Contracts OVERVIEW OF OPTION 4 Option 4 Contracts Available to non-fha-insured, including 202s Allows for rents above market Renewal rents: Lesser of BBRI or OCAF adjusted Annual rent increases: OCAF adjusted 18

THE CONCERN Option 4 Contracts 202 Direct Loan 202 Direct Loan matures. 202 Use Agreement, Loan payment, and R4R deposit go away Rents decreased at next renewal The Matures loan payment and reserve deposit go away. Rents decreased at next renewal. HUD/PBCA COORDINATION Option 4 Contracts Always allow 120 days for processing of renewal request by Contract Administrator (CA). CA works with HUD to confirm how the new loan impacts the budget and the timing of the new contract and rents. It is important to keep both HUD and the CA in the loop as you progress through this process in order to ensure that you can close on time. 19

PREPAYING TO RETAIN OPTION 4 Option 4 Contracts HUD requires a new 20-year 202 Use Agreement as a condition of prepayment. New Use Agreement allows property to retain Option 4 status past original maturity date. TIP: To retain Option 4 contract when refinancing with an FHA loan, a 202 owner should plan to prepay and refinance their 202 loan in accordance with HUD Notice H 2013-17. REFINANCING TO RETAIN RENTS Option 4 Contracts Lender will require new 20 year HAP contract. Refinancing secures debt service payment, reserves and debt coverage in budget. TIP: To retain over-market rents plan to execute a new 20 year HAP and refinance to replace old debt service with new debt service. 20

TIMING CONSIDERATIONS Option 4 Contracts 202 prepayment application requires lead time to prepare. Allow enough time for 202 prepayment application review by HUD. Be sure to include the 202 prepayment request and approval time in the overall financing timeline. RE-REFINANCING Option 4 Contracts Re-refinancing with FHA debt may result in loss of Option 4 and over-market rents at HAP renewal. To retain their Option 4 contract and above-market rents they must either: Refinance with a non-insured conventional loan. Opt for an Interest Rate Reduction Program lowering of their interest rate. This does not allow for equity take-out or repairs. 21

Part IV Other Considerations PROPERTY TAXES Other Considerations Loss of 202 or 236 Use Agreement may result in loss of property tax exemption. Change in ownership can affect property taxes. Discuss with municipality and with lender. 22

8(bb) TRANSFER AUTHORITY Obsolete structures or opt outs Transfer within portfolio, within state No increase in budget authority allowed HUD Notice H 2014-14 Other Considerations RAD 2 FOR RAP/RENT SUPPLEMENT Other Considerations Rent Supp and RAP contracts cannot be renewed. RAD Component 2 converts to PBV or PBRA contract. New long term contract can secure new financing and subsidy for long term. 23

PBV for MATURED LOANS Other Considerations Special allotment of PBV for properties with Section 236 and 202 Direct loans that mature before 10/1/2015. Can add rental subsidy for unassisted residents. HUD Notice PIH 2015-07 Part V CASE STUDIES 24

CASE STUDY #1 Section 236 MU2B Fargo, North Dakota 184 Units Unit Type Before MU2B After MU2B Studio $425 $460 2 Bedroom $500 $585 3 Bedroom $625 $680 ANNUAL TOTAL $1,141,200 $1,301,280 MU2B INCREASE: $160,000 CASE STUDY #1 (continued) Section 236 MU2B Fargo, North Dakota Construction Budget Total Construction Budget per Unit Before MU2B After MU2B $1,260,000 $2,422.000 $6,836/unit $13,165/unit 25

CASE STUDY #2 Section 202 MU2B Havre de Grace, MD 57 unit high-rise Unit Type Before MU2B After MU2B Studio $618 $787 1 Bedroom $784 $999 1 Bedroom Large $870 $1,109 ANNUAL TOTAL $465,048 $592,500 MU2B INCREASE: $127,452 CASE STUDY #2 (continued) Section 202 MU2B Havre de Grace, MD Construction Budget Total Construction Budget per Unit Before MU2B After MU2B $0 $936,566 $0/unit $16,431/unit 26

CASE STUDY #3 Section 202 Ft. Worth, Texas 80 unit high rise Original 202 Loan Post Maturation Operating Expenses $366,758 $366,758 Debt Service $253,100 $0 Reserve $25,620 $0 TOTAL $645,478 $366,758 CASE STUDY #3 (continued) Section 202 Ft. Worth, Texas Original 202 Loan Post Maturation New 223f Loan Operating Expenses $366,758 $366,758 $366,758 Debt Service $253,100 $0 $187,644 Reserve $25,620 $0 $26,600 Vacancy Loss $0 $0 $29,200 Debt Service Coverage $0 $0 $18,764 TOTAL $645,478 $366,758 $631,966 27

For more information contact: BLUEPRINT HOUSING SOLUTIONS Ann Gass anng@blueprinthousing.org www.blueprinthousing.org (512) 474-5332 THE GATES DUNAWAY GROUP Gates Kellett Dunaway gates@gatesdunawaygroup.com www.gatesdunawaygroup.com (404) 274-1957 28