Preservation of Affordable Multifamily Housing

Glossary of Preservation Terms

Applicable Federal Rates (AFRs) 
This is the Internal Revenue Service’s (IRS) method of calculating the present value of 9 percent and 4 percent tax credits to investors. In accordance with IRS Section 42 (b)(2), the IRS publishes monthly applicable federal rates (AFRs) for the Low Income Housing Tax Credit program. These rates are indexed to 10-year U.S. Treasury bond yields.  See the IRS' monthly AFRs.

Enhanced Vouchers
Enhanced voucher are also known as preservation vouchers or sticky vouchers. These Section 8 vouchers (Housing Choice Vouchers) are generally available to income-eligible tenants of a property, the owner of which is prepaying a Section 221(d)(3) or Section 236 Department of Housing and Urban Development (HUD) mortgage, and residents receiving Section 8 project-based subsidies in developments in which the owner is opting out of his or her project-based Section 8 contract. Eligibility is limited to low- and moderate-income households living in the development at the time of prepayment or opt-out. Some additional exceptions to this general availability exist.  The enhanced voucher payment standard is set based on the actual (typically much higher) rent in each development, rather than the fair market rent upon which Housing Choice Vouchers are based. The vouchers are "sticky" because they stick with those specific residents, who can move out, taking the vouchers with them. However, the value of an enhanced voucher drops to the standard level based on the fair market rent for the community once the resident moves out of the original development.

Interest Reduction Payment (IRP)
HUD provides an Interest Reduction Payment (IRP) for Section 236 projects equaling the difference between the cost of the actual interest rate on the mortgage and a 1 percent mortgage rate. The FY 2000 Appropriation Act allows flexibility in the use of IRPs as a way to preserve affordability, allowing the IRP to be retained (see “Decoupling”), for example, even if the mortgage is refinanced, as long as the owner maintains affordability for five years beyond the original mortgage term.

Section 221(d)(3)
This oldest multifamily mortgage insurance program is aimed at producing affordable family housing.   It is active from 1963 through 1970 in two different forms:

• Below Market Interest Rate (BMIR). The Federal Housing Administration (FHA) provided loans at the federal government’s direct borrowing cost (ranging from 3 percent to 3.875 percent); and
  
  
• Market Rate/Rent Supplement (MR/RS). FHA-insured market rate loans and rent supplements are provided to all residents. Most of these developments converted from rent supplements to project-based Section 8 subsidies.

Section 221(d)(4)
This is one of the earliest FHA mortgage insurance programs for multifamily housing.  It was introduced in 1973 and is still used today. Typically used to finance market-rate housing, it was often paired during the late 1970’s and early 1980’s, under the Ginnie Mae (GNMA) "tandem" program with the Section 8 new construction and rehabilitation programs.

Section 236
Active from 1968 through 1975, this program provided both mortgage insurance and interest reduction subsidy payments (IRP) in an amount equal to the difference between actual debt service and debt service assuming a 1 percent interest rate. Some properties were financed by state housing finance agencies using the IRP portion of the program without FHA mortgage insurance. See also: Decoupling.

• Decoupling. This procedure permits owners or purchasers of Section 236 housing to retain the Interest Reduction Payments (IRP) contract and subsidy after refinancing or adding new debt to the existing Section 236 mortgage. The existing use restrictions must be extended for five years beyond the outstanding mortgage term. This procedure is authorized by Section 236(b) and (e)(2) of the National Housing Act, with guidance provided in HUD Notice H00-8. (See also Interest Reduction Payment.)

Expiring Use Restrictions (EUR)
Low- and moderate-income affordability requirements associated with subsidized mortgages or operating subsidies, which terminate when the mortgage is prepaid or when the affordability term associated with the subsidy program ends.

Low-Income Housing Tax Credit (LIHTC)
The Low-Income Housing Tax Credit (LIHTC) program was established by the Tax Reform Act of 1986. The program became active in 1987 and is now the primary federal program supporting the creation and preservation of rental housing affordable for low-income households.  It authorizes (subject to an annual per capita limit) state housing finance agencies and a limited number of other administrators to issue LIHTCs competitively to developers of affordable housing projects. LIHTCs may be used to support the acquisition, new construction, or rehabilitation of affordable housing.  Initial requirements that supported projects for 15 years were expanded to 30 years in 1989. The credits can be used by property owners to reduce federal income taxes or are often transferred to equity investors who contributed initial development funds for a project.  The LIHTC program includes two rates of subsidy: 9 percent credits and 4 percent credits. 

• 9 percent credits.  The 9 percent credits are used to support new construction and substantial rehabilitation projects that are not otherwise subsidized by the federal government. 
  
  
• 4 percent credits.  The 4 percent credits are used to support the acquisition of eligible, existing buildings and for new construction or rehabilitation projects that are also supported by other federal subsidy programs. The 4 percent rate also applies to projects that are financed through the issuance of volume-cap multifamily tax-exempt bonds (the associated LIHTCs are sometimes called 'as of right' credits because they are automatically attached to the volume-cap bonds).
  
  
• Qualified Allocation Plan (QAP).  The QAP is the guidance that agencies administering LIHTC provide to potential developers of tax credit projects.  It details the selection criteria and application requirements for LIHTCs and tax-exempt bonds.

For projects receiving either 9 percent or 4 percent rates, the relevant rate is applied to the qualified basis for the designated project annually for a 10-year period, resulting in a 10-year stream of tax credits.  These credits may be used by the developer/owner or sold to investors or syndicators to raise equity for the project.

Section 8 New Construction/Substantial Rehab
Section 8 new construction/substantial rehab was a form of project-based Section 8 assistance used in the original development and financing of affordable housing. Projects are both insured and uninsured (with conventional or state/local bond financing). These contracts are long-term (20-40 years). The program was active from 1976 to 1985.

Private Activity Bonds
Private activity bonds are distinct from other tax-exempt bonds because they are issued for private activities as opposed to governmental ones. However, they must fulfill public purposes, and each private activity bond issuer must hold public hearings to demonstrate such public purposes. One of the eligible public purposes is the creation or preservation of multifamily housing for low-income renters.  Private activity bonds are tax-exempt for the purchaser and are issued by state and local governments to support the stated public purpose.  This tax-exempt status enables issuing agencies to access debt capital at below-market interest rates to support the preservation of affordable housing.

• Tax Exempt Bond Volume Cap.  This is the congressionally determined annual per capita maximum amount each state is permitted to issue. The 2008 cap is $85 per capita, with a minimum of $262,095,000 million in private activity bonding authority allowed each state. The income-restricted apartments financed by multifamily bonds must remain affordable for at least 15 years. 

Project-Based Section 8
A program providing rental assistance for some or all of the units in a project occupied by eligible tenants for a specified contract term. Tenants pay 30 percent of the adjusted income for gross rent including utilities. The subsidy is attached to the unit and stays with the housing after the tenant leaves.  The initial contract term spans 1 and 10 years, subject to appropriations.  In the final year of the contract, the  landlord and the Public Housing Authority may renew the contract for up to five years, subject to appropriations.

Right of First Refusal
This is the right to match the terms and conditions of a third-party offer to purchase the property, within a specified time period. The holder must be notified of the third-party offer and may be required to close by a designated date.  Holders are typically tenant associations or nonprofit affordable housing organizations.

Section 202
A HUD program that provides interest-free capital advances to finance the construction, rehabilitation, or acquisition with or without rehabilitation of structures that will serve as supportive housing for very low-income elderly persons, including the frail elderly.  It provides rent subsidies for the projects to help make them affordable.

The capital advance does not have to be repaid as long as the project serves very low-income elderly persons for 40 years. Project rental assistance funds are provided to cover the difference between the HUD-approved operating cost for the project and the tenants' contribution toward rent. Project rental assistance contracts are approved initially for five years and are renewable based on the availability of funds.

Section 515
The USDA Section 515 Rural Rental Housing Loans are made by the Rural Housing Service of the U.S. Department of Agriculture to nonprofit, for-profit, cooperatives, and public entities for the construction of rental or cooperative housing in rural areas for families, elderly persons, persons with disabilities, or for congregate living facilities. Loans are typically made for a term of 30 years or more and are frequently subsidized to make the units affordable for low- and very low-income persons and households.

Section 521
USDA's Section 521 Rental Assistance Program subsidizes the rents of tenants in Section 515 Multi-Family Housing and Section 514/516 Farm Labor Housing, so that they pay no more than 30 percent of their incomes to shelter costs.