Conventional wisdom is that it is difficult, if not almost impossible, to finance, with a single loan, the preservation of older, affordable housing communities in need of repairs, capital improvements, additional reserves, or restructured ownership, following the termination of the 15-year service period on tax-credit projects.
NOT SO! With some creativity and a clear understanding of local housing market conditions, it is possible to create the hole-in-one of affordable housing preservation – a high-leverage, long-term recapitalization funded by a single HUD-insured loan.
How is this possible? Many affordable housing properties have Section 8 housing assistance payment contracts with rents below current market levels. Mark Up to Market (MUTM) is a HUD-approved process that allows Section 8 property owners to adjust rents to current market levels, preserving affordable housing while increasing revenue. In markets where multifamily rents have experienced considerable growth, a MUTM can give an affordable project the opportunity to improve its cash flow and increase its capacity to service debt. We recently conducted a MUTM for a non-profit affordable housing project that increased its bottom line by $250,000 annually.
HUD’s Section 223(f) program pairs well with MUTM by offering fixed-rate, 35-year financing with a low 1.11 debt-service coverage ratio and 90% loan-to-value. It also allows repairs of approximately $55,000 per unit, with no Davis-Bacon prevailing wage requirements.
Moreover, Section 223(f) loans underwritten at 80% loan-to-value allow an equity take-out, with no restrictions on the use of proceeds. Many low-leveraged communities recapitalize with Section 223(f) loans and use the cash for seed capital for additional affordable housing developments, funds to buy out tax-credit partners, or resources to further an organization’s mission. All with a single loan!
Please contact us if you want to know more about MUTMs and 223(f)s.
