Community Developments
Home | Spring 2008

 


  Contents

A Look Inside...  
A Place I Can Afford to Call Home
Saving America's Affordable Rental Housing Stock
Banking on Preservation
MB Financial
JPMorgan Chase
PNC
Wachovia
Preserving Oregon's Precious Affordable Housing Resource
State Housing Bonds Preserve Affordable Rental Housing in Massachusetts
Nonprofits Meet Housing Preservation Challenges
Chicago's Troubled Building Initiative
Compliance Corner
This Just In...OCC's Districts Report on New Opportunities for Banks
Print Friendly

Preservation of Affordable Multifamily Housing
Preserving Oregon’s Affordable Housing Resource

Photo of an apartment complex in Reedsport, Oregon
Forest Hills in Reedsport, Oregon.

by Lynn Schoessler, Housing Finance Section Manager, Oregon Housing and Community Services Department

 “Preserve precious resources.” This theme has become a principle in Oregon that guides the practices of many businesses and organizations nationwide. State housing finance agencies are no exception. In Oregon, the state housing finance agency, Oregon Housing and Community Services Department (OHCS), has applied the principle of resource preservation to retaining the state’s affordable housing stock.

Oregon is neither a leader nor a follower among the 46 states that prioritize preservation of affordable housing in allocating the LIHTCs and using their private activity bond cap. Affordable housing is a rental resource for both the urban and rural population of the state. Oregon has prioritized the federally subsidized rental units that have project-based Section 8 assistance from HUD or Section 515 assistance from the USDA. These affordable rental units are considered an irreplaceable resource in today’s environment of diminished federal housing support. Preserving these properties is such a high priority that the Oregon Qualified Allocation Plan (QAP) for the distribution of LIHTCs has set aside 30 percent of the tax credits for preservation projects1.

Oregon is a relatively small state with a population of 3.7 million. Its affordable housing stock includes more than 300 projects with over 10,000 units built with HUD Section 8 or USDA Section 515 rental assistance. These units are a crucial resource for Oregon’s lower income households. Their federal rent subsidy contracts have been extended to ensure that the flow of more than $39 million per year in rent subsidies will continue for the state’s most “housing vulnerable” residents. The owners of these properties must be able to recapitalize and rehabilitate these affordable units, many of which have deteriorated.

Oregon’s Preservation Strategies

In the 1970s, Oregon eagerly accepted HUD’s initial offer to provide rent subsidies for state-financed rental housing through the Section 8 program. The state ultimately financed 122 projects with more than 4,000 units before the program ended. Although Oregon has only 1 percent of the nation’s population (at that time), it has 10 percent of the national inventory of uninsured Section 8 projects. Preserving these properties is thus disproportionately important in Oregon. And because Oregon was one of the first states to initiate this finance arrangement and to deal with the expiring subsidy contracts, its approach to preserving these units is being watched nationally. OHCS is evaluating projects 12 to 14 months in advance of the loan maturity and expiration of the Section 8 contract by contacting owners to determine their interest in renewing contracts, selling the properties to nonprofit organizations, or opting out of the program. To date for projects with subsidy contracts that have either already expired or that are set to expire within the next year, 80 percent of the units, or more than 600 apartments, have been retained in the communities as deeply subsidized, affordable housing resources.

The optimal preservation strategy for OHCS is convincing the present owner to renew its Section 8 contract and continue to operate the property as affordable housing. The more challenging preservation scenario is arranging and financing new project ownership. Federal and local agencies and OHCS expert staff, particularly the area HUD or rural development office, must work together to assemble the resources necessary to finance the acquisition price, perform necessary rehabilitation, and establish renewed subsidy contracts. Oregon has been supported by staff at the federal agencies, and the efficiency of contract renewals is increasing. But approval of each contract renewal is considered “on a project-by-project basis only.”

In addition to its economic attractiveness, preservation of affordable housing is viewed as a “green” building activity. Renovation of existing buildings produces less construction waste, uses fewer new materials, and requires less energy than new construction. Preservation does not require new land development. And, to the degree feasible, Oregon’s use of weatherization funds to upgrade the energy efficiency of the units in its preservation strategy saves both energy and tenant utility expense. OHCS encourages the adoption of green building practices, and costs associated with implementation are eligible for reimbursement.

Missing Pieces for an Affordable Housing Preservation System

Preserving affordable housing, particularly those units with federal rent subsidies, is a priority for Oregon. OHCS has committed its resources to this activity in partnership with for profit and nonprofit owners as well as the lending community. And while a significant effort has been initiated, several activities remain to be undertaken for Oregon to have a comprehensive system for assuring project preservation. Three activities are the immediate focus of a broad partnership of preservation interests. The first effort is to create an accessible database and Web site for all preservation projects statewide. There is significant information available from separate federal and state agency sources, but nowhere is the information consolidated or accessible, much less searchable. OHCS is taking the lead on this activity and currently working to develop this database for the public’s use.

Another shortcoming of the nascent Oregon state preservation “system” is the lack of a financing pool to acquire properties for preservation and hold them until permanent financing can be assembled. Such a holding pool is urgently needed to purchase properties for sale by impatient owners that want to sell now, or to flip the properties to other than affordable housing uses, such as condominium conversions. The state housing agency is partnering with lenders and philanthropic organizations to develop a $50 million pool. This holding pool will address the immediate need to preserve federally subsidized properties by providing acquisition financing for nonprofit developers. In the longer term, the holding pool organizers expect it to assist in the preservation of the affordability of LIHTC properties when they reach the end of their required affordability period.

Preservation of affordable housing is a 10-year strategy for OHCS and its community partners. The Oregon legislature recently supported the preservation strategy and provided additional housing resources to OHCS. The preservation activity has just begun and will continue until Oregon reaches its goal to preserve 85 percent of its affordable housing.

1According to the QAP, “Preservation projects include, but are not limited to, those federally financed existing projects where at least 25 percent of the existing project’s units have project-based rental assistance which are currently offering rents below market, such as financing by HUD and USDA Rural Development...”

For further information, e-mail Lynn Schoessler or call him at (503) 986-2073.


Preserving the Northwest 12

The current acquisition and rehabilitation of 12 properties by Northwest Real Estate Capital Corporation (NRECC), a 501(c)(3) nonprofit organization, illustrates the complexity of preservation activities in rural areas. The projects, known as the “Northwest 12,” are geographically dispersed throughout rural Oregon. The furthest distance between projects is 400 miles; no project in the package is closer than 30 miles from one another. Project sizes range from 8 units to 50 for a total of 312 units in the 12 projects.

For the Northwest 12, average per unit costs include $38,850 for acquisition, $32,650 for rehabilitation, and $4,000 for soft costs, such as bond issuer and lender fees. These average total preservation costs of $75,500 per unit demonstrate the dramatic cost effectiveness of preservation compared with new construction expenses. New construction of affordable units typically costs $180,000 to $200,000 per unit depending on location. The extent of rehabilitation needed for the Northwest 12 is atypical; the cost savings would be greater if rehabilitation was carried out in the more typical range of $20,000 to $30,000 per unit. Also, as stand-alone transactions, rehabilitation of the smallest projects included in the Northwest 12 would not be economically feasible. By grouping the smallest properties with the larger acquisitions, the total package, including the 8 unit projects, became possible.

Because the competition for 9 percent tax credits is severe even with a set aside for preservation activities, NRECC elected to use the department’s tax-exempt bond financing and 4 percent LIHTCs. This financing also includes OHCS housing preservation trust funds and weatherization grant resources. (See Note at end of article)

Unlike many other states when tax-exempt bonds typically are used in conjunction with 4 percent LIHTCs for long-term financing, OHCS often elects to use the tax-exempt bond cap for short-term financing to access the 4 percent tax credits and projects. Oregon then uses conventional permanent loans along with the tax credits. The exhausting or “burning” of the tax-exempt bonds makes sense in Oregon because of a unique Oregon affordable housing finance tool called the Oregon Affordable Housing Tax Credit (OAHTC). OAHTC facilitates conventional financing at interest rates lower than tax-exempt bond financing rates. It provides a state income tax credit for affordable housing loans in which a lender reduces the interest rate by up to 400 basis points from market rates. The lender can then recover the gap between the rate provided to the affordable housing developer and the market rate through the state tax credit. Only fixed-rate financing is eligible for this program. In return for access to this program, sponsors and their lenders must demonstrate for a 20-year term that the benefit of the tax credit will be passed on entirely as reduced rents for their lower income tenants. (Low-income households are those having less than 80 percent of the area median income for OAHTC.) Alternatively, sponsors may use the benefit from the tax credit to support the financing of preservation of affordable housing, as NRECC is doing.

In the case of the Northwest 12, US Bank is acting as the conduit lender for acquisition and rehabilitation costs. At the end of the rehabilitation work, the bonds will be paid off, and US Bank will provide a conventional loan for the permanent financing, subsidized by the OAHTC tax credits, described previously. Each property’s permanent loan is expected to have an interest rate of 3.25 percent as a result of the OAHTC subsidy.

The coupling of OAHTCs with a conventional loan enables participating lenders to achieve an adequate rate of return on their loans. Claiming the tax credit at year end with the state tax return increases the yield on the loan to a market rate, as well as likely resulting in positive CRA consideration for the lender. Importantly, the lower cost of capital to the project sponsor is an important tool in financing the preservation of affordable multifamily housing.

The time to package and pursue the transaction for the Northwest 12 has been lengthy. Initial discussions with OHCS began in early 2006 and have continued ever since with HUD, the lender, and equity investor. The bond closing for the Northwest 12 took place in late September 2007, roughly 20 months after talks began.

Note: The 2007 Oregon Section 8 funds will ensure that existing housing is preserved and that federal rental subsidies, supporting these projects, are maintained.



Northwest 12 Multifamily Preservation Project Financing Package Overview

Sources of Funds

Tax Credit Equity

$ 9,318,112

Preservation Fund Grant*

1,704,986

Weatherization Grant

361,635

Loan w/ Oregon Affordable Housing Tax Credit

18,084,500

Total

$29,469,233

Uses of Funds

Acquisition

$ 12,121,200

Rehab Hard Costs

10,186,200

Soft Costs Including Development Fee

7,161,833

Total

$ 29,469,233

*The 2007 Oregon legislature dedicated $8.1 million to preserving Oregon's uninsured, Section 8 portfolio.

Source: OHCS



horizontal bar

OCC's Community Affairs Department

(202) 874-5556
E-mail CommunityAffairs@occ.treas.gov to receive a hard copy of Community Developments.
Articles by non-OCC authors represent their own views and are not necessarily the views of the OCC.