Are you getting the most out of your Section 8?

Are you getting the most out of your Section 8? Maximizing your Section 8 income for Preservation By Gates Dunaway and Tammy Fotinos June 13, 2017 OVERVIEW OF TODAY S SESSION I. Section 8 Renewal Guide II. Establishing where your rents are III. Marking UP your Section 8 Rents IV. Protecting over market rents V. Other Rental Subsidies 5 1

WHAT DO WE MEAN BY MAXIMIZING? Are your Section 8 contract rents below market? Increase through a mark up to market Are your Section 8 contract rents above market? Protect them with a refinancing NOTE: This does not apply to Section 8 vouchers 3 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 2015, FAQ published October 2015, and various chapter updates since then. 7 2

Section 8 Renewal Options Option Description Renewal Rents Annual Adjustments Eligible Owners 1 2 Ch. 15 Mark Up To Market (MU2M) Other renewals with rents at/below Market Allows for the promise of post rehab rents Market (determined by RCS) OCAF or Budget based, capped at Market Rents increased to market using MU2M or MU2B OCAF only (5 th year anniversary set at comps) OCAF or Budget based, capped at Market (5 th year anniversary set at comps) Depends on option selected. See above. 3 Referral to Recap/Mark To Market 4 Recap Exempt Renewals Lesser of Budget or OCAF Budget based, capped at Market, or OCAF 5 Demonstration/Preservation LIHPHRA, ELIPHA (221d3/236) 6 Opt Outs Any Any Any 202 Direct Loans, HFA Financed, 515, Conventional Mortgage 8 What to know about YOUR HAP Contract 3

YOUR CONTRACT DETAILS Old reg or New reg? (residual receipts ) Original contract type Current term and expiration date What Option does it currently renew under? 7 ARE RENTS ABOVE, BELOW or AT MARKET? Must know this to create strategy Market established by RCS 7 4

WHERE ARE YOUR RENTS? Are rents below market? YES NO Are you doing significant rehab? Protect Option 4 over market rents with a refinancing YES NO Increase to postrehab rents under Chapter 15 Increase rents to as is rents under Option 1b IMPORTANT INFORMATION ON THE RCS PROCESS 5

RCS INFORMATION Cost of report = $3,000 $5,000 Good for 90 days (but don t let that stop you!) Reference Chapter 9 update May want to include as improved rents (we ll come back to this later) 7 RCS 140% TEST If RCS rents are below 140% of the area median zip code rent (as established by HUD), then HUD does NOT order their own RCS. If RCS rents are above this factor, HUD will have to order their own RCS CAUSES TIME DELAYS AND UNCERTAINTY 7 6

RENTS ARE BELOW MARKET: Mark them up! TWO BASIC METHODS Option 1 Mark up to Market Option 2 Mark up to Budget Note that being an Option 4 is not useful if rents are below market. Be prepared to switch from Option 4 to Options 1 or 2 to increase rents! 7 7

WHEN CAN YOU MARK THEM UP? ANYTIME! Early termination and new 20 year contract can be requested at anytime. Do not wait for renewal. Preservation exhibit to be added to contract time. 7 THE OLD WAY: Option 2 MU2B Requires a budget to support the increase of rents, capped by RCS market Subjects owner to HUD discussions on budget Must have new debt service if loan is maturing Issues in partially subsidized projects 16 8

THE OLD WAY: Option 2 MU2B Rents must be below market, per RCS Rents are increased annually using OCAF or budget based method, but always capped at market. Future annual rent adjustments are OCAF, with 5 year resets using updated RCS Contract terms can be 1 to 20 years If not HUD held, owner is willing to cut rents to comparable market rents with the renewal 17 THE NEW AND BETTER WAY: Option 1b MU2M Avoids the budgeting process Can be approved in 1 2 months Does not require new financing BUT be aware of where extra $$$ will be going (residual receipts??) 18 9

THE NEW AND BETTER WAY: Option 1b MU2M Basic Option 1 requirements : REAC score >60 Satisfactory rating on last MOR FASS findings closed or plan in place 19 OPTION 1 HAS TWO OPTIONS!! 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 housing conversion process started OPTION 1B Discretionary* Must meet one of the following conditions: Vulnerable Populations Vacancy Rates Community Support * Requires HUD approval 20 10

THE NEW AND BETTER WAY: Option 1b MU2M For Option 1b, include documentation of discretionary eligibility Must include RCS Minimum requirement for a 5 year contract, contract can be renewed up to 20 years If requesting an early contract termination, a new RCS is required and contract must be 20 years. 21 DETERMINING RENTS FOR OPTION 1 Rents will be increased to the final RCS rent Option 1a (entitlement) HUD will cap the new rents at 150% of the FMR or the RCS rent. No cap for Option 1b. 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 22 11

TIMING CONSIDERATIONS Order the RCS to determine market rents Allow time for HUD/CA to review, request corrections and approve Once HUD/CA has approved the MU2M request, proceed with refinancing using the newly approved rents. 23 DOING LOTS OF REHAB? Mark them up to postrehab rents! 12

Renewal Guide Chapter 15 PRESERVATION BY USING POST REHAB RENTS CONTRACT OPTIONS: Option 1 or Option 2 HUD may approve post rehab rent level, based on improved market potential. Timing of receipt of post rehab rents depends on financing 25 GENERAL CHAPTER 15 REQUIREMENTS 20 year HAP contract and Use Agreement Preservation Agreement (if applicable) Must combine contracts, if possible RCS with as is and post rehab market rents Project Capital Needs Assessment (PCNA) Sources and uses statement Detailed description of the proposed transaction 26 13

GENERAL CHAPTER 15 REQUIREMENTS Submit documentation for environmental and physical accessibility review Relocation plan Not Troubled Asset status Current on debt service and replacement reserve 27 GENERAL CHAPTER 15 REQUIREMENTS THESE CONTRACTS ARE NOT ELIGIBLE: Mark to Market restructured Contracts with above market rents LIHPRHA and ELIHPA contracts 28 14

CHAPTER 15 TRANSFER PROGRAM Purchaser requirements: Have experience Be in compliance with non discrimination and equal opportunity requirements Be in good standing with HUD REAC score greater than 60 29 CHAPTER 15 THE CONCERNS 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. 30 15

CHAPTER 15 TIMING CONSIDERATIONS New debt supports higher rents Lender needs higher rents to size debt Determining rents is an iterative process since it requires the new debt to be sized. RCS determines rent cap TIP: Size the debt based on the RCS Market Rents. 31 CHAPTER 15 TIMING CONSIDERATIONS (continued) 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! 32 16

BUT MY RENTS ARE ABOVE MARKET Protect them! OVERVIEW OF OPTION 4 Available to non FHA insured, including 202, 236 & 515 properties Allows for rents above market: exception rents Renewal rents: Lesser of BBRI or OCAF adjusted. Can result in a rent decrease below market Annual rent increases: OCAF adjusted or BBRI (with an RCS required to prove rents are not above market) 34 17

THE CONCERN 202 Direct Loan matures. The loan payment and reserve deposit go away. 202 Use Agreement, Loan payment, and R4R deposit go away Rents decreased at next renewal. 202 Direct Loan Matures Rents decreased at next renewal 35 HUD/PBCA COORDINATION Always allow 120 days for processing of renewal request by Contract Administrator (PBCA). PBCA 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 PBCA in the loop as you progress through this process in order to ensure that you can close on time. 36 18

PREPAYING TO RETAIN OPTION 4 HUD requires a new 20 year Use Agreement as a condition of prepayment New Section 8 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. 37 REFINANCING TO RETAIN RENTS 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. 38 19

TIMING CONSIDERATIONS 202 prepayment application requires lead time to prepare the supporting budgets, and to secure the new debt service. Allow enough time for 202 prepayment application review and approval by HUD. Be sure to include the 202 prepayment request and approval time in the overall financing timeline. 39 RE REFINANCING CONCERNS 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. 40 20

ANY OTHER RENTAL SUBSIDY ISSUES OUT THERE?? 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 Very, very Long time to process 42 21

RAD 2 FOR RAP/RENT SUPPLEMENT 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 43 PBV for MATURED LOANS Special annual allotment of PBV for properties with Section 236 and 202 Direct loans that mature before end of federal fiscal year. Can add rental subsidy for unassisted residents Waiting on new Notice and budget authority Large back log of need without sufficient budget authority 44 22

PBV for PRE PAID LOANS HUD 202 loans that pre pay may be eligible for new PBV assistance for unsubsidized residents. Discus with HUD at concept meeting, before prepaying. PBVs could be project based to increase leveraged debt. 45 LET S WALK THROUGH SOME SCENARIOS 23

Scenario #1 1. Old reg Section 8 contract, matures in 3 years 2. 202 Loan matures in 2 years, requires permission to prepay 3. Rents are above market 4. Property needs mod rehab WHAT SHOULD THE OWNER DO? 47 Scenario #1 WHAT SHOULD THE OWNER DO? Refinance before the loan matures with new loan that has debt service equal to or less than current debt service. Terminate HAP with new 20 year agreement using new DS. o Above market rents protected o 202 prepayment requirements met o NOTE Cannot re refinance using FHA debt 48 24

Scenario #2 1. Old reg Section 8 contract, matures in 3 years 2. 202 Loan matures in 2 years, does NOT require permission to prepay 3. Rents are BELOW market 4. Property needs minor repairs WHAT SHOULD THE OWNER DO? 49 Scenario #2 WHAT SHOULD THE OWNER DO? Terminate and sign new HAP agreement under Option 1b to take advantage of rent increase potential. If new financing not needed for repairs, consider allowing 202 to mature b/c of surplus cash benefits. o Below market rents increased o Increased potential for surplus cash to owner o Options to refinance in the future 50 25

Scenario #3 1. New reg Section 8 contract, matures in 5 years 2. 202 Loan matures in 8 years, requires prepayment permission 3. Rents are BELOW market 4. Property needs major capital improvements WHAT SHOULD THE OWNER DO? 51 Scenario #3 WHAT SHOULD THE OWNER DO? Terminate and sign new HAP agreement under Option 1b to take advantage of rent increase potential. Use higher NOI to leverage debt to address Cap X. o Below market rents increased o Cap X taken care of o NOTE: Loan debt service limited to less than current to receive 202 prepayment permission. Two step loan a possibility 52 26

For more information contact: BLUEPRINT HOUSING SOLUTIONS Tammy Fotinos tammyf@blueprinthousing.org www.blueprinthousing.org (512) 474 5332 THE GATES DUNAWAY GROUP Gates Kellett Dunaway gates@gatesdunawaygroup.com www.gatesdunawaygroup.com (404) 274 1957 27