Climb on Board the Omnibus
By Cash Gill
8 min read
New appropriations bill offers opportunities
Despite the dire rumors that hung like a dark cloud over the federal tax and budget negotiation processes for the past year, the Consolidated Appropriations Act of 2018, also known as the Omnibus Spending Bill, that emerged contains aspects that can have a positive impact on the affordable housing industry. These include the introduction of Income Averaging (IA), increases to the HOME Program, increases to the nine percent Low Income Housing Tax Credit (LIHTC) Program, increases in Section 8 funding and Contract Administration, increases in funds for HUD 202 properties and a large expansion of units in the Rental Assistance Demonstration (RAD) Program.
In order to measure the temperature within our industry in response to inclusions in the bill, I reached out to a group of experienced professionals in a variety of capacities. Among those interviewed were:
- Thom Amdur – executive director of the National Housing and Rehabilitation Association
- Andrew Baily – executive vice president of Millennia Housing Development
- Holly Bray – senior director of Love Funding
- Tom Davis – director of the office of recapitalization at HUD
- Chris Hite – principal and president of Sugar Creek Capital
- Jason Maddox – president of The Maco Companies
- Tracy Peters – senior managing director of RED Capital Group
- Richard Price – partner at Nixon Peabody
Individually, these are key players in the industry. Together, they form a kind of virtual focus group that I thought would reflect the overall industry viewpoint.
Income Averaging
Previously, to qualify for LIHTC, a property had to meet one of the following set aside tests:
- At least 20 percent of the units had to be both rent restricted and occupied by households with incomes at or below 50 percent of area median income (AMI), or
- At least 40 percent of the units had to be both rent restricted and occupied by households with incomes at or below 60 percent of AMI.
The Omnibus Spending Bill adds a third option based on income averaging. Under this provision, at least 40 percent of the units must be both rent-restricted and occupied by individuals whose incomes do not exceed the imputed income limitation. The average of the imputed income limitations designated cannot exceed 60 percent of AMI. The designated imputed income limitations must be calculated in ten percent increments from 20 to 80 percent.
As an example, if a unit is designated as a 40 percent unit it must be occupied by a household who at initial occupancy has an income equal to or less than 40 percent of AMI and who is continuously charged rent that is equal to or less than 30 percent of 40 percent of AMI.
There is still a lot to be determined about how IA will be implemented, controlled or monitored by HFAs, as well as what rules will be enacted.
Within our panel of interviewees, those that view the properties as straightforward financial investments (lenders, syndicators, attorneys and policy makers) see the immediate positives, such as a broader base of potential renters, which would automatically create additional demand and lower capture rates. Those that will deal with IA day-to-day have concerns about the varying level of oversight that will be required. “IA will be great for opening a broader group of applicants, but it may be hard to monitor,” said Jason Maddox. “Speaking from a strictly management perspective, it could be quite cumbersome to monitor ongoing compliance.” Andrew Bailey added, “Something that everyone is wondering is whether or not it will affect deals that have already been placed in service.
It will likely only be for new deals that haven’t been placed in service yet.”
But the general consensus is that the new IA option is going to be popular.
HOME Investment Partnerships Program (HOME)
The Omnibus Bill appropriates roughly $400 million for the HOME Program. The money from this program is usually a small amount of the overall deal and is used to fill gaps when other soft money is not available.
“We don’t get too involved in requesting funds. That is typically the developer’s job,” says Holly Bray, offering the lender’s perspective. “However, we are pleased to see a transaction that includes HOME funds since the funds fill a vital gap in the capital stack which often determines whether or not a deal is viable. HOME Funds also demonstrate a community’s commitment to the transaction, which is always a good thing.”
“HOME funds for four percent deals and nine percent deals will fill gaps,” adds Tracy Peters. “While we haven’t seen a lot of CDBG funds for deals, the increase in HOME funds will give people access to soft money for their transactions.”
To developers, HOME has its ups and downs. “While the HOME funds can be helpful, the regulations that go along with them make them almost not feasible if you consider the time and manpower it takes to obtain and monitor the use of them,” says Andrew Bailey. “But using HOME funds for an entire portfolio can sometimes be extremely advantageous. Each deal gets a small portion of HOME money, but that adds up to be a very large amount for the entire portfolio.”
Increase in Nine Percent LIHTC
With a more than ten percent increase in the nine percent LIHTC, there will be a large increase in the amount of money to be allocated nationwide. No one on our panel had anything but a positive reaction to the increase in the nine percent ceiling, which is to be expected. But the usage of the new allotments is uncertain. “There will be more deals with the increase,” says Richard Price. “While it’s hard to say whether the deals will be any bigger or smaller, it is clear that some of the deals will get more credits, to the extent they can, in order to offset the reduction of value in the overall credit pricing.”
Amongst our group, there was concern about the failure to address the four percent credit. “The four percent deals are the ones that actually need the help more than the nine percent deals,” says Chris Hite. “One thing that hasn’t been talked about enough is the fact that the four percent deals are penciled in at a certain amount with only a razor’s edge amount of flexibility. With interest rates rising, it’ll be impossible to do a lot of those deals.”
“While the bill, as a whole, had a very good outcome for all of us,” says Tracy Peters, “it is still important that the four percent credit get fixed. This is a big thing to happen to fill the gap with the reduction in value per credit. How do you prioritize the additional dollars? Timing may be another issue. There is no language that states when the increase will begin, if there will be set asides or any of the other important details that will need to be considered with this increase.“
Increases for RAD, Housing for The Elderly (202s), and PRAC
HUD’s Section 8 Program got a slight increase of two-to-three percent for Housing Assistance Payments, but the RAD Program got a huge boost. RAD’s first component cap was raised from 225,000 to 455,000. The bill requires that all those units be filled by 2024. “With 90,000 units on the waiting list, nearly half of the expansion is covered just by that list,” says Tom Davis, director of the program. “There is no reason it should take until 2024 to fill the 455,000 units. As we pass the 90,000-unit mark, the number of deals where the numbers absolutely work become less frequent, so the rate of increase of applications may continue on at its current pace or maybe it will slow a bit. It’s hard to tell at this point, but with almost half of the units on the wait list, the 455,000-unit mark should ultimately be reached well before 2024.”
Davis continues, “The addition of RAD for the 202 Project Rental Assistance Contract (PRAC) portfolio creates a nice preservation opportunity for those properties and can help avoid the kind of capital backlog problem that has developed elsewhere. Under RAD, the Section 202 PRACs will have a chance to convert to project-based Section 8 contracts. There are a host of questions HUD is trying to resolve before putting out the implementing notice.”
“Getting RAD for PRAC will create a great opportunity for older 202 properties that have been locked into annual renewals with no growth opportunity and no restructuring or recapitalization opportunities,” says Thom Amdur.
“In addition to the increase for the first component, the Omnibus expands the eligibility requirements for the second component by including 202 PRAC properties,” adds Holly Bray. “The PRAC properties have been difficult to reposition because the subsidy does not take into account debt service. This change will allow a 202 owner to convert the PRAC into a long-term PBRA or PBV. The office of recapitalization is working on a notice to implement the RAD for PRAC.”
Bills always require clarification. Because much of this is new, there will be a need for consultation with experienced people in the industry setting precedents and providing information to HUD and HFAs as they fill in the holes. But everyone interviewed was in agreement that the bill brings a sigh of relief and a splash of optimism for an affordable housing industry that sweated out the eventual outcome.
Story Contacts:
Thom Amdur Jason Maddox
tamdur@dworbell.com jason@macocompanies.com
Tom Davis Tracy Peters
thomas.r.davis@hud.gov twpeters@redcapitalgroup.com
Andrew Bailey Holly Bray
abailey@mhmltd.com Hbray@lovefunding.com
