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How Maturing Rural Development Mortgages Could Hurt Low-Income Tenants

August 24, 2016

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An issue has snuck up on many people within the affordable housing industry, including the U.S. Department of Agriculture’s Rural Development office (RD) itself: the maturation of mortgages in the RD 515 and 514/516 loan programs. The maturing of these mortgages creates a potential issue because once a property’s mortgage matures and is paid off, the property is no longer entitled to rental assistance (RA) for low-income individuals through the RD 521 program.

Over the next eight years, RD is projecting that more than 11,000 properties’ mortgages will mature. That equates to over 214,000 units of RA that will disappear. If these units of RA are lost, many low- to extremely-low-income renters will lose the assistance payments made on their behalf, and they won’t be able to afford to stay in their current living arrangements.

So why does the mortgage maturing mean property owners won’t be able to receive RA from the 521 program? When the loan and rental assistance programs were created, they were tied to each other by statute. So if a property no longer has an RD 515 or 514/516 mortgage, it is no longer entitled to receive RA from the 521 program.

While this is a potentially alarming situation, there are some options for property owners faced with the maturation of their RD 515 mortgage. In April 2015, RD issued a letter to the state directors of the multi-family housing program detailing the various options currently available through RD:

  • RD and the owners work together to re-amortize the remaining loan balance
  • Owners request debt deferral under the Multi-Family Preservation and Restructuring (MPR) program
  • Owners apply for prepayment (if eligible)
  • Do nothing and the property will exit the program

Re-amortization of the Loan

The length of the re-amortization period is something that can be left to the discretion of the owner. Some owners that have made additional payments throughout the life of the mortgage simply choose to re-amortize the remaining debt to the original Promissory Note date. Other owners choose to extend the length of the loan for as long as possible, which is up to 20 years after the original Promissory Note date. Stills others choose to re-amortize the balance over a much shorter period, such as an additional three years, to allow them more time to assess how they want to handle the situation.   As part of the re-amortization of the remaining balances, RA and the interest credit subsidy will still be available to the property.

For owners that choose this route, there are a couple items to be aware of. When the remaining balance is re-amortized, it will most likely substantially reduce the monthly amount of the debt service for the loans. While this may sound like a good thing, it could also lead to a reduction of the approved rent rates that the property receives. This is something that owners should try to address during the refinance negotiations and not during the budget process for the year following the re-amortization. If the debt service amount decreases by 50% or more, then the property might be required to obtain a capital needs assessment to determine the long-term capital needs of the property to determine if the replacement reserve account needs to be resized.

Debt Deferral

Owners with loans that are set to mature prior to 2019 and have more than six months remaining until the maturity date may submit an application to have their debt deferred under the MPR, and will receive additional points under the scoring system for these applications. The same issues of rental rates and budgeting are still present when utilizing this preservation method.

Prepay the Mortgage

While it may sound counterintuitive to prepay the mortgage and speed up the loan maturation process, it actually opens another option for keeping the current low-income tenants in place. Tenants at properties that prepay their RD mortgage are eligible for RD vouchers. The RD vouchers will be in the amount of the difference between the comparable market rent and the net tenant contribution toward rent. One potential downfall of this option is the amount of the maximum voucher will not increase along with future rent increases. Also, the tenants are free to take their voucher to any other property that will accept them.

Leave the Program

This is the option that leaves many within the affordable housing community nervous about the availability of quality, affordable housing for those most in need. If nothing is done to either prepay the mortgage or extend the final maturity date, the property will be allowed to leave the affordable realm.

An interesting opportunity that this option brings up is the potential transfer of the RA units to another property. Tenants at properties where the mortgage has matured have four months from the date of the maturity to transfer their RA unit to another RD property. Once a tenant moves with their RA unit to another property, the RA unit converts to a project-based unit and will stay at that property even if that tenant moves out in the future.

An owner could incentivize a tenant at one of their maturing properties to move, with their RA unit, to another one of their RD properties with vacancies that is not a 100% RA property. This would help the operations of a project in the owner’s current portfolio while freeing up another property to be converted to market rate.

Additional Considerations

Another option is the re-syndication/redevelopment of the property using the low income housing tax credit (“LIHTC”) program. Some states have included various provisions within their qualified allocation plans to award additional consideration to applications attempting to preserve older RD properties. Once these entities are redeveloped, the RD loans are also transferred from the old entity to the new and recast with new rates and terms.

Many states and their housing agencies are starting to develop programs to help projects in this situation to ensure the housing doesn’t fall into disrepair. For example, there are programs like the Minnesota Housing Finance Agency’s Rental Rehabilitation Deferred Loan program geared toward providing financing alternatives to smaller RD properties that may struggle to earn credits through the competitive LIHTC program.

Start Planning Now

If your RD 515/514 loan will be paid off within the next few years, it would be wise to meet with your financial advisor soon to discuss the best option for your situation.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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