Exhibit 1

Obstacles to Section 202 Recapitalization; Recommended Program Changes

Summary

With HR 202 and S 2733, HUD and Congress are showing increasing interest in facilitating purchase or recapitalization of older Section 202 properties. These properties often need capital improvements and expanded resident services, and possibly new and reinvigorated ownership. But current program rules create a host of obstacles – see below – that unwittingly inhibit successful Section 202 recapitalization. New initiatives are needed to make such recapitalization possible.

Financing and Operational Obstacles

  1. Short Section 8 renewals. Section 202/8 properties received 20-year Section 8 contracts now reaching expiration. Upon expiration, HUD will grant only year-to-year renewals. Lenders have shown they can handle long-term Section 8 contracts, and even short-term vouchers, but generally avoid properties with the uncertainty of year-to-year renewals. Congress should authorize longer renewal terms (up to 20 years), subject only to annual Section 8 appropriations, for Section 202/8 properties.
  2. Properties needing rents above market. Some §202 properties have rents above local market. Under current law, they are exempt from M2M … but that could change. As a result, non-profit or mission-oriented buyers are very reluctant to take on the default risk arising from future rent reduction. Lenders want to underwrite at true market rent levels or require large transition reserves, both of which threaten transaction feasibility. Congress should to explicitly authorize all future Section §202/§8 renewals at "rent levels no less than existing rents as adjusted annually by HUD’s published Operating Cost Adjustment Factor (OCAF)".
  3. Property does not keep savings. HUD rules generally provide that debt service savings arising from §202 refinancings are absorbed by dollar-for-dollar Section 8 subsidy reductions, leaving the property no better off. Last year's Appropriations conferees directed HUD to share at least 50% of any Section 8 savings associated with §202 refinancing, but this has not yet been formally incorporated. Congress should explicitly authorize debt service savings to be used for property purposes, including supportive services for residents.
  4. Buyer requirements unworkable. Because §202 is a non-profit program, HUD regulations generally preclude the seller from receiving any sales price. HUD can waive this, but the waiver requirements are strict and practically unworkable. (The buyer must put cash into the property equal to at least 10% of the unpaid loan balance – for which it receives no return – and, if there is a sales price, the seller must also pledge to use its sale proceeds to expand the supply of low-income housing.) HUD should eliminate the minimum 10% contribution for non-profit purchasers and broaden the allowable uses of sales proceeds.
  5. Cash distributions prohibited. §202 owners receive no annual cash distribution. Buyers who fund capital improvements or sales prices from non-project sources have no guaranteed mechanism to provide return on capital or debt service on new financing. Congress should permit an annual return for §202 properties (to be built into the income stream), similar to the structure used for non-profit purchases of preservation properties.
  6. No ability to use enhanced vouchers. HUD requires that §8 contracts on recapitalized §202 properties remain in place for at least their remaining term, instead of allowing §202 owners to convert to enhanced §8 vouchers for the residents. While property-basing will be the more common choice, §8 enhanced vouchers will work better if the property has rents below current market, if it needs operating flexibility, or if it is targeting a more mixed-income elderly tenancy. Congress should extend §8 enhanced voucher eligibility to §202/8 residents, as well as residents of similar properties – the early FHA-insured §202 properties, and Section §236 and §221(d)(3) properties owned by non-profit organizations.