New Developments, Rethinking Preservation
By Thom Amdur
4 min read
Historically, when policy makers and advocates discuss preservation, we are referring to the preservation of rental assistance contracts that are associated with older HUD and/or USDA Rural Development assisted properties (i.e. Section 8 Project-Based Rental Assistance, Section 515, etc.). But in recent years, the national dialogue around preservation has evolved. While preserving existing rental assistance contracts remains a priority, there is a growing understanding that there are now also millions of new affordable units developed through the Low Income Housing Tax Credit (LIHTC) that are ten-plus years old and require some moderate or substantial rehabilitation and recapitalization. Furthermore, there are increasing pressures on the limited amount of nine percent credits and gap resources because the federal government is increasingly prioritizing the preservation of the public housing portfolio by leveraging the state resources and the LIHTC. All are critical community assets, and strategies must be developed to address each of these needs.
Last Spring, National Council of State Housing Agencies (NCSHA) adopted updated best practices encouraging housing finance agencies to research and analyze anew their preservation policies and develop appropriate strategies. We wholeheartedly endorse this directive and are developing our own best practices to maximize preservation opportunities through the use of multifamily tax exempt bonds.
At its Board meeting in December, the Florida Housing Finance Corporation (FHFC) became one of the first states to overhaul its preservation priorities, since NCSHA adopted its new best practices, by endorsing a new Portfolio Preservation Action Plan. This document, which was the culmination of more than a year of portfolio and policy analysis, creates a “road map” to “implement strategies to promote recapitalization of aging properties already in our [SAIL] portfolio.”
It features six distinct strategies, two of which are highlighted below.
The first strategy seeks to remove a regulatory barrier that will, in practice, unlock existing resources for preservation. It creates a path for older SAIL properties that require some capital investment (i.e., $5,000 to $10,000/unit), but do not require significant rehab funding to remain viable. FHFC identified that proceeds from refinancing the first mortgage could be used for this rehab, but that existing SAIL rules creates a barrier to this approach by only allowing an increase in the amount of the first mortgage if a proportionate amount of the increase is used to reduce the outstanding SAIL loan balance, rather than using the entire amount of the proceeds for rehab. FHFC is now revising this rule to allow a refinance to include new funds for capital improvements. Simply by removing a regulatory barrier, FHFC will facilitate capital investment in properties without having to appropriate new resources.
A second strategy of FHFC will ensure Year 30 LIHTC properties with SAIL financing remain viable and in good physical condition through the end of the extended affordability period (Year 50). To start, FHFC will allow Year 30 properties to utilize the new Income Averaging election. For older properties that may not be viable through the end of the extended affordability period, FHFC will consider more proactive adjustments. Properties in Year 28-plus may undertake a “viability analysis,” which includes a capital needs assessment, market study/review and an underwriting operations for the final 20 years of the affordability period. If the property is found to be unviable for the remainder of the restricted use period, FHFC will consider amending the use restrictions to allow units above 60 percent AMI to financially stabilize the property.
This strategy acknowledges the reality that over an extended period of time property conditions change, markets evolve, black swan events occur and even the best-laid plans do not always come to fruition. Building flexibility into programs to acknowledge an uncertain future is a critical strategy that should be a part of all affordable housing preservation plans. It gives confidence to private sector participants that they will have the ability to address an uncertain future in partnership with HFAs.
Every state and local jurisdiction will have its own unique sets of preservation challenges. This demands proactively assessing and addressing the local preservation dynamics before projects opt-out or deteriorate with market-driven solutions and engaging early and often with owners and development partners to find workable market solutions.
