Changes have been afoot with the Department of Housing and Urban Development’s loan program for housing for low-income seniors that have made it more attractive for nonprofit property owners to prepay and refinance their existing loans during the current low interest rate environment, writes Lancaster Pollard.
Modifications in Housing Notice 2012-08 apply to owners of Section 202 properties constructed before 1992 who are required to get HUD’s consent to prepay their original direct loan. There are certain requirements regarding annual debt service and necessary repairs depending on the timeframe during which properties were built, which Lancaster Pollard details.
Here’s an excerpt of what has changed and some benefits:
The major changes in the new guidance involve the use agreement, housing assistance payment (HAP) contract and the approved use of loan proceeds. Changes in each will impact property owners seeking to refinance. To ensure that the project continues to provide affordable housing to seniors, the notice requires 202 owners seeking to prepay their loan to enter into a use agreement that extends 20 years beyond the maturity of the original loan.
On a positive note, the extended use agreement also comes with a mandatory 20-year HAP contract. At the time of refinance, the owner will enter into a new HAP contract that adds 20 years to any remaining time of the old contract. For example, if an owner had 3 years remaining at the time of closing, the new HAP contract would be for 23 years.
Prior to the release of Housing Notice 2012-08, the developer fee was capped at 15% of total repairs to be performed at the property. The developer fee is now capped at 15% of acceptable development costs, which includes the cost of acquisition, loan prepayment, initial reserve deposits and transactions costs, including third-party reports, loan fees and closing costs. The developer fee is earned and paid at closing and the use of the funds is not regulated by HUD.
…The impact of this clarification can be minimized by ownership taking full advantage of this opportunity to recapitalize its facility. The incentives established by Notice 12-08, the FAQ and Sec. 8 renewal guide encourage the owner to take the full developer fee, fully fund the replacement reserve and to perform as many repairs and upgrades as necessary. The result is a modernized facility that is well positioned to continue providing safe and affordable housing to the area’s seniors. The byproduct is that the new 202 debt service is comparable to current debt service, which minimizes the potential for a contract rent reduction.
Lancaster Pollard supplies a chart to break down refinancing costs before and after the Housing Notice, and also mentions some disadvantages to Section 202 owners stemming from a clarification in the notice regarding how new 20-year HAP contracts are to be set.