HUD Policy for Amending Use Agreements for LIHPRHA Deals – October 28, 2016 (Notice H 2016-16)

HUD Policy for Amending Use Agreements for LIHPRHA Deals – October 28, 2016 (Notice H 2016-16)

 

HUD published Notice H 2016-16 on October 28, 2016. This Notice provides guidance on the circumstances under which HUD may consider amended and restated Use Agreements for properties assisted under the Low-Income Housing Preservation & Resident Homeownership Act of 1990 (LIHPRHA). Amended and restated Use Agreements may be approved in order to incentivize and facilitate the prepayment and refinancing or acquisition transactions to preserve the viability of certain affordable properties.

 

Background

 

HUD financed thousands of affordable properties during the 1960s and 1970s. Many of the projects utilized rental assistance from Section 8 or RAP programs. The FHA 221(d)(3) and Section 236 programs were common financing vehicles and provided for 40-year mortgages with the right to prepay after 20-years. Properties that were in desirable areas and that showed appreciation in value were prime candidates for pre-payment.

 

The first prepayments were in the early to late 1980s. The result was hundreds of thousands of apartments converting from affordable to market rate. The federal government implemented a number of strategies to prevent the prepayments, including LIHPRHA.

 

LIHPRHA offered owners fair market-value incentives to: (1) extend low-income affordability for the remaining useful life of the property [not less than 50-years]; or (2) transfer their properties to nonprofits, tenant organizations, or community-based organizations who would keep the housing affordable. HUD’s authority to provide incentives under LIHPRHA lasted about six years. In 1996, Congress restored the Owner’s right to prepay federally insured mortgages and stopped the funding of LIHPRHA incentives.

 

HUD is currently supervising an inventory of approximately 640 properties with 75,000 units subject to LIHPRHA. These are mostly low-income housing developments with mortgages insured under Section 221(d)(3)-(d)(5) below-market interest rate (BMIR), Section 221(d)(3) market interest rate, and Section 236. All LIHPRHA projects are fully or partially assisted under the Section 8 program.

 

Many LIHPRHA properties are in need of significant repair. Owners may now seek to prepay the FHA-insured mortgage and to refinance their properties with new forms of debt and equity, including the Low-Income Housing Tax Credit (LIHTC) in order to make project improvements.

 

The LIHPRHA Use Agreements in place at these properties may impose restrictions on Owner distributions and refinance proceeds beyond the statutory required restrictions. For example, some agreements restrict Owners from obtaining any proceeds from refinancing, while others prohibit the use of LIHTC equity. Such restrictions hamper the ability of Owners to execute refinancing or acquisition transactions.

 

Previously, the LIHPRHA statute allowed Owners to take distributions up to 8% of “Preservation Equity” as calculated at the time of the original LIHPRHA closing. The LIHPRHA statute was recently modified to allow an Owner, who is currently subject to a Use Agreement to be entitled to distribute annually, all surplus cash generated by the property, once HUD has determined that the Owner is in material compliance with the LIHPRHA Use Agreement. This includes compliance with prevailing physical condition standards.

 

Many current Use Agreements restrict periodic distributions to 0% to 6% of initial equity. In these cases, in order to permit unlimited distributions, the Use Agreement will have to be modified.

 

Applicability

 

In addition to applying to properties subject to LIHPRHA, the Notice also applies to properties subject to a Use Agreement under the Emergency Low Income Housing Preservation Act (ELIPHA). Use Agreements under ELIPHA expired on the maturity date of the original FHA-insured or HUD-Held mortgage. Most ELIPHA Use Agreements have therefore recently expired or will expire in the near future. In these cases, it is unlikely that Owners will desire an amendment to an ELIPHA Use Agreement. However, if Owners wish to do so, HUD will consider requests for amendments of ELIPHA Use Agreements that meet the requirements of this Notice. Unfortunately, Owners subject to ELIPHA Use Agreements are not eligible for unlimited distributions of surplus cash or the release of funds accumulated in a residual receipts account. Owners subject to LIHPRHA are eligible for both of these benefits.

 

Requirements for Amending & Restating Use Agreement

 

HUD will allow the amendment and restatement of the property’s LIHPRHA Use Agreement to permit the Owner to receive proceeds from the refinance of the property, to allow the Owner to receive unlimited annual distributions from surplus cash, and to receive funds accumulated is a residual receipt account as allowed by statute.

 

Properties must meet the following requirements in order to amend a Use Agreement under LIHPRHA:

 

1. Compliance with business agreements – such compliance must be demonstrated by:
   1. The project must have a current REAC score of 60 or above, or demonstrate how an amendment to the Use Agreement will result in correction of deficiencies;
   2. Owners must be in current compliance with all applicable nondiscrimination and equal opportunity requirements;
   3. The project must have an approved up to date Affirmative Fair Housing Marketing Plan;
   4. The project must have received satisfactory Management & Occupancy Review (MOR) ratings for the prior three review cycles;
      1. If this requirement is not met, the Owner must provide a list of the corrective actions that will be taken relative to MOR issues;
   5. The Owner must be current in the submission of Annual Financial Statements, all excess income owed to HUD must be repaid in full;
   6. Any FHA-insured, HUD-Held or state insured mortgage on the property must have been current for the prior three-years; and
   7. There can be no outstanding notices of default or violation.

 

Except for changes in the Use Agreement permitted by this Notice, all other requirements of the Agreement must remain in place.

 

When an Owner has an Amended & Restated Use Agreement under LIHPRHA that allows for unlimited distributions, the Owner is allowed unlimited distributions of surplus cash. I.e., the distribution must be taken from surplus cash, and may not be listed as a line-item expense in the Section 8 HAP Contract budget.

 

If the project is considered troubled, HUD will require an experienced owner/managing agent who has demonstrated the ability to successfully own and manage troubled projects.

 

If there is a HAP contract in place at the property, and the project is seeking prepayment approval from HUD, the Owner must execute a renewal contract with a 20-year term.

 

Processing of Requests for Amended & Restated LIHPRHA Use Agreements

 

1. The owner submits a request to the HUD Regional Center or Satellite Office;
2. HUD will review the request for amendment to the Use Agreement;
   1. This request must be reviewed within 30-days.
   2. The Regional Center will then submit the request to the Office of Asset Management and Portfolio Oversight at HUD Headquarters for consideration.
3. HUD HQ will advise the Regional Center Director if and when the amendment is approved, and the Regional Center will execute the amended Use Agreement.

 

Owners with properties subject to this Notice should obtain a copy of the Notice and determine whether the provisions of this guidance apply to their properties, and if so, whether they want to avail themselves of the benefits that can result from amendment of the LIHPRHA Use Agreements.