HUD Appropriations Provision May Provide Opportunities for New Housing Credit Deals

By Caitlin Jones & A. J. Johnson
February 6, 2009 5 min read

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Tax Credit Advisor July, 2006: An obscure appropriations act provision offers opportunities for new, different, and multiple-property affordable housing transactions, including using the low-income housing tax credit.

But experts advise owners and developers to move quickly. The U.S. Department of Housing and Urban Development has authority to approve these deals only through September 30, 2007.

The new opportunities stem from Section 318 of the Fiscal Year 2006 HUD appropriations act (P.L. 109-115), signed in November. It lets HUD approve the transfer of affordable housing use restrictions, project-based rental assistance, and debt from one multifamily housing property to another. Ten criteria must be met to qualify for HUD approval, including that HUD determines the “transferring” project to be “either physically obsolete or economically non-viable.”

It’s believed only one transaction so far – in San Jose – has received HUD approval under Section 318. However, additional owners are in discussions with HUD.

Use Restriction Transfers

Washington, D.C. attorneys Timothy J. Aluise and Monica Hilton Sussman told the Tax Credit Advisor the most significant change made by Section 318 is to give HUD general authority to approve the transfer of use restrictions from an existing HUD-assisted or -insured property to a second property. Previously, this required getting special legislation passed for an individual transaction, noted Aluise, a partner in Hessel and Aluise, P.C.

The pair said HUD continues to have separate legislative authority, outside of Section 318, to approve the transfer of HUD project-based Section 8 rental assistance from one existing property to a second, existing property.

Sussman, a partner in Nixon Peabody LLP, described Section 318 as a “great opportunity” for affordable housing owners and developers. She said it is potentially very useful for existing properties that “are in the wrong location, or obsolete.I also think it’s a great opportunity for some of the [destroyed or damaged HUD-assisted or -insured rental properties] in the Gulf Zone as well.”

Sussman and Aluise discussed Section 318 in recent interviews with the Tax Credit Advisor, and on a May panel at the National Housing & Rehabilitation Association’s 2006 Spring Forum conference. Aluise and HUD officials also covered the topic at a May 24 Webcast training workshop co-sponsored by HUD’s Office of General Counsel and the America Bar Association.

Definitions, Requirements

Under 318, the use restrictions that may be transferred are those imposed by statute that mandates use of a property as low-income and very low-income housing.

Multifamily housing projects that are eligible for Section 318 transfers are existing properties that: have an FHA-insured mortgage; receive project-based assistance; received a direct loan or capital advance under the Section 202 elderly housing program; or are “housing or vacant land that is subject to a use agreement.”

Transferable project-based assistance includes: existing Section 8 contracts (old reg, new reg, and loan management set-aside contracts); Rent Supplement Payments; Rental Assistance Payments under Section 236; and Project Rental Assistance (PRAC) for Section 202 projects.

A proposed transfer must also meet 10 specific criteria, governing both the “transferring” project and the “receiving” project.

One is a HUD determination that the transferring project is physically obsolete or economically non-viable. Some of the other criteria include that: the receiving project has the same number of low-income and very low-income units as the transferring project; the owner or mortgagor notify and consult with tenants of the transferring project and get local government approvals; HUD determines the transfer is in the best interest of the tenants; tenants can’t be force to leave the old property until the units in the new property are ready; any financial risk to the Federal Housing Administration is reduced by the transfer; and HUD determines that the project won’t increase federal liability.

Different Approaches Possible

Section 318 permits many different possible affordable housing transactions, including with the use of the low-income housing tax credit.

Aluise and Sussman, for instance, said housing credits could be used to construct or rehabilitate a “receiving” property, to which use restrictions and subsidies could be moved. The receiving property might be developed by the owner of the transferring property, or by a different developer.

Transfer of project-based assistance could financially strengthen a housing credit project, and permit deeper income targeting. Michael Bodaken, president of the National Housing Trust, Washington, D.C., said Section 318, through the transfer of subsidies, could enable housing credit projects to serve even lower-income households than the relatively narrow income band generally served by the housing credit. “It allows you to go deeper on the income spectrum,” he said.

Aluise and Sussman indicated Section 318 could also enable owners to free up the built-up real estate value of certain existing obsolete or troubled properties now situated in prime areas, and benefit residents at the same time. For instance, an owner could transfer residents from an obsolete or troubled project to a new, better building nearby, and then demolish or renovate the old property for another use. Sussman suggested some of the free-up value might even be used by owners to subsidize the receiving property.

Many details of Section 318, including HUD’s interpretation of key language, are still unclear, such as the maximum distance permitted between transferring and receiving properties. Nevertheless, Aluise and Sussman advised owners to review their portfolios for potential Section 318 candidates, do some initial legwork, and make contact with HUD as soon as possible.

Janet M. Golrick, HUD Assistant Deputy Assistant Secretary for Multifamily Housing, on the May 24 panel said HUD program staff are encouraging owners and developers they work with “to get your deals in as quickly as possible.” She noted HUD field offices are now accepting proposals for transactions.

Golrick said HUD will be issuing a notice providing further guidance this summer.