IPED 2008 REAL ESTATE UPDATE December, 2008 San Juan, Puerto Rico PRESENTATION OF HUDS SECTION 202 ELDERLY HOUSING PROJECTS Michael Hawes Reardon, Esq. Nixon Peabody LLP

PROGRAM HISTORY Enacted as section 202 of the Housing Act of 1959, but has undergone several evolutions THREE BASIC PERIODS A to 1975 – Direct Federal Loans without operating subsidy B to 1990 – Direct Federal Loans with long term section 8 housing assistance payments contract C to Present – Capital Advance with long term section 8 Project Rental Assistance Contract (PRAC) D. American Homeownership and Economic Opportunity Act of 2000 – changed program structure to allow for ownership by for-profit limited partnerships

SECTION 202 LOAN PROGRAM A.Direct Loan Program for Non-Profits 1.Non-Profits - participation in program limited to non-profit sponsors and borrowers - sponsor applies to HUD for funds and then establishes non-profit entity to own the specific project ono earnings inure to the benefit of members ogoverning board which is representative of the community and is responsible for operation of the project oapproved by HUD as to financial responsibility - HUD regulations limit the non-profit owner entity to an incorporated private institution or foundation with 501(c)(3) or (c)(4) IRS ruling

SECTION 202 LOAN PROGRAM (cont) 2. Loan Terms - Generally, loans were for a 40-year term - Interest oin early years of program interest was set a 3% oin later years, interest established by HUD annually at the cost of borrowing of the Federal Government orange of rates starting in mid-1970s with the highest 9.50% during the early 1980s

SECTION 202 LOAN PROGRAM (cont) B.Rent and Occupancy Terms 1.Older Loan Projects (pre-1975) - generally, older projects limited occupancy to low and moderate income families - need to closely review Regulatory Agreement - rents and adjustments are budget-based to meet debt service and operating expenses of the project

SECTION 202 LOAN PROGRAM (cont) 2.Newer Loan Projects (post-1975) - generally, newer projects limit occupancy to low and very low income families - since 1975, most project have 100% section 8 funding and are similarly to section 8 in terms of income, rent, and generally, occupancy requirements - need to review section 8 HAP contract to determine income and rent restrictions ounits available pre-October, 1981 – 25% low income ounits available post-October, 1981 – 15% low income - rents generally are based on section 8 requirements – family pays 30% of adjusted income - rent adjustments may be AAF or Budget-based

SECTION 202 CAPITAL ADVANCE PROGRAM Title VIII of Cranston-Gonzalez National Affordable Housing Act – 1990 – supportive housing for elderly A. Capital Advance – 1991 to present 1.Funding through Capital Advance not Direct Loan - basically a grant or forgivable loan to the non-profit owner - no interest and no repayment so long as project remains available for very low-income elderly persons for 40 years - HUD secures this use restriction through a note, mortgage, regulatory agreement and use agreement

SECTION 202 CAPITAL ADVANCE PROGRAM (cont) B.Project Rental Assistance Contract (PRAC) 1.All units shall be available for very low-income persons 2.Terms of rental assistance - rental assistance no longer provided under section 8 - basic income and rental terms are the same as for the section 8 program - rents are adjusted on a budget basis 3. Twenty v. Five Year PRAC term

AMERICAN HOMEOWNERSHIP AND ECONOMIC OPPORTUNITY ACT – enacted by Congress in December of 2000 A. Section 811 – Prepayment and Refinancing of Section 202/8 Projects (See HUD Housing Notices ; ) 1.Upon request of Owner, Secretary shall approve a prepayment as long as: - sponsor agrees to operate project in manner advantageous to resident under the 202 loan agreement or the rental assistance contract - refinancing results in lower interest rate and reduction in debt service payments

AMERICAN HOMEOWNERSHIP AND ECONOMIC OPPORTUNITY ACT – enacted by Congress in December of 2000 (cont) - Issues: owhen is HUD approval required – Notes orates on older loans – 3% osubordination of older loans to new financing ohow to calculate debt service reduction (exclude debt service on rehab portion of new debt 2.Acceptable Project Ownership - really only applies where HUD approval is required - a limited partnership whose general partner is a nonprofit organization or a corporation solely owner and controlled by a nonprofit organization

AMERICAN HOMEOWNERSHIP AND ECONOMIC OPPORTUNITY ACT – enacted by Congress in December of 2000 (cont) oIssues: LLC not an acceptable owner Nonprofit general partner – 501(c)(3) status For-Profit GP controlled by nonprofit May be an LLC May not have two managing members 4.Use of Savings on Refinancing - rehab, modernization, retrofitting, improved common areas - construction of additional facility – including assisted living facility - increased supportive services – limitation to 15% of costs - conversion of efficiency units

AMERICAN HOMEOWNERSHIP AND ECONOMIC OPPORTUNITY ACT – enacted by Congress in December of 2000 (cont) 5.Use of Reserves - Residual Receipts - $500 per unit minimum oonly applies when minimum amount in account o15% may be used for supportive services - Reserve for Replacements - $1,000 per unit minimum osame purposes as uses of savings on debt services ogenerally, HUD prefers use for hard construction costs

AMERICAN HOMEOWNERSHIP AND ECONOMIC OPPORTUNITY ACT – enacted by Congress in December of 2000 (cont) 6.Other Limitations - Developer Fee o15% of acceptable developer costs as defined by State LIHTC program, or oMaximum allowed under State LIHTC program - Limitation on Distributions o6% distribution from surplus cash oMay include new LIHTC equity

AMERICAN HOMEOWNERSHIP AND ECONOMIC OPPORTUNITY ACT – enacted by Congress in December of 2000 (cont) B.Section 8 and Other Issues 1.Projects still under original Section 8 HAP contract - no rent increase allowed in conjunction with refinancing approval - may need to justify current rent levels – 8(c)(2)(C) US Housing Act of Section 8 Renewals - exception project renewals not subject to rent comparability study - initial renewal rent the lesser of existing rent plus an OCAF or a budget- based rent - during term of renewal contract adjustments by OCAF or a budget-based increase at request of owner - lesser of test will apply each time the renewal contract expires and is renewed - owner may choose another renewal option, but then subjects renewals to rent comparability study

AMERICAN HOMEOWNERSHIP AND ECONOMIC OPPORTUNITY ACT – enacted by Congress in December of 2000 (cont) 3.Sale Proceeds to Nonprofit Seller - Notice provides for proceeds equal to difference between unassisted market value and outstanding mortgage - HUD policy has been unclear - Escrow Agreement for use of sales proceeds for other affordable housing purposes 4. Flexible Subsidy Loans 5. Multi-Project Transactions 6. Use with Capital Advance Projects

AMERICAN HOMEOWNERSHIP AND ECONOMIC OPPORTUNITY ACT – enacted by Congress in December of 2000 (cont) C. Section 831 – Eligibility of For-Profit Limited Partnerships Changed basic definition of private non-profit organization to include a for-profit limited partnership - sole general partner must be an organization which meets following criteria ono earnings inure to the benefit of members ogoverning board is representative of the community and is responsible for operation of the project oApproved by HUD as to financial responsibility - or must be a corporation wholly owned or controlled by such an organization

AMERICAN HOMEOWNERSHIP AND ECONOMIC OPPORTUNITY ACT – enacted by Congress in December of 2000 (cont) D.Section 832 – Mixed Funding Sources - removes limitation on use of only non-Federal sources for amenities and other design and construction features - provides that assistance provided under section 202 may be treated as amounts not derived from a Federal grant. E. Implications of these funding changes - allows broader flexibility for the development of elderly housing projects using other forms of assistance, including LIHTCs - allows for the development of mixed-income projects including both section 202 restricted units and non-section 202 units