[Federal Register Volume 61, Number 128 (Tuesday, July 2, 1996)]
[Notices]
[Pages 34664-34667]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-16790]
[[Page 34663]]
_______________________________________________________________________
Part V
Department of Housing and Urban Development
_______________________________________________________________________
Office of the Assistant Secretary for Housing--Federal Housing
Commissioner
_______________________________________________________________________
Mark-to-Market/Portfolio Reengineering Demonstration: Notice of
Demonstration and Initial Program Guidelines; Notice
Federal Register / Vol. 61, No. 128 / Tuesday, July 2, 1996 /
Notices
[[Page 34664]]
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT
[Docket No. FR-4099-N-01]
Office of the Assistant Secretary for Housing--Federal Housing
Commissioner
Mark-to-Market/Portfolio Reengineering Demonstration: Notice of
Demonstration and Initial Program Guidelines
AGENCY: Office of Assistant Secretary for Housing--Federal Housing
Commissioner, HUD.
ACTION: Notice of demonstration program and initial guidance.
-----------------------------------------------------------------------
SUMMARY: This notice announces a demonstration program that is designed
to restructure the financing of projects that have FHA-insured
mortgages and that receive Section 8 rental assistance. The purpose of
this Congressionally authorized demonstration is to test the
feasibility and desirability of multifamily projects meeting their
financial and other obligations with or without FHA insurance and with
or without above market Section 8 assistance and utilizing project-
based assistance or, with the consent of the project owner, tenant-
based assistance. In negotiating agreements with eligible project
owners, HUD must act to, among other things, take into account the need
for assistance of low- and very low-income tenants; address structural
problems of projects; and protect the financial interests of the
Federal Government. This notice also provides initial guidance on how
the Department plans to operate the demonstration program. HUD
anticipates that, over time, it will publish additional guidance that
reflects in more detail how the program will operate as well as the
experience derived through the execution of successful agreements with
project owners.
DATES: This demonstration program guidance is effective July 2, 1996.
In a separate notice, HUD will publish information requirements that
demonstration participants will need to comply with.
FOR FURTHER INFORMATION CONTACT: George Dipman, Office of Multifamily
Housing, Department of Housing and Urban Development, 451 Seventh
Street, SW., Washington, DC. 20410-4000; Room 6174; telephone (202)
708-3321. (This is not a toll-free number.) Hearing or speech-impaired
individuals may call 1-800-877-8399 (Federal Information Relay Service
TTY).
SUPPLEMENTARY INFORMATION:
I. Background:
This demonstration, titled FHA Multifamily Demonstration Authority,
is authorized by section 210 of the Departments of Veterans Affairs and
Housing and Urban Development and Independent Agencies Appropriations
Act (Pub. L. No. 104-134, 110 Stat. 1321, April 26, 1996). It reflects
concern of both the Congress and the Administration about social issues
and budgetary costs associated with the renewal of Section 8 project-
based assistance contracts on multifamily properties having FHA-insured
mortgages. As of August 1995, the HUD portfolio contained 8,563
projects, with a total of over 850,000 units, that have HUD insured
loans supported by Section 8 rental assistance contracts. Under
existing contracts, most of which are due to expire over the next few
years, many projects receive project-based Section 8 rental assistance
for rents that exceed those charged on comparable, unassisted units
within the local market. At the same time, these projects often have
substantial unmet capital needs. The Federal assistance, in the
aggregate, is costly. If assistance contracts were to be renewed on a
long term basis, based on current contract rent levels, the annual cost
to the Federal Government would increase dramatically by the year 2000.
Consequently, Congress has opted not to renew Section 8 contracts on
these projects for more than one year, while the Department seeks
alternative solutions to the housing and budget issues.
For many project owners, if their level of Section 8 assistance is
reduced or eliminated, and all else remains constant, the likelihood is
that they will be unable to continue to meet project financial
obligations, including mortgage debt service payments, current and
future capital needs, and operating expenses such as project reserve
and repair costs. This could lead to mortgage defaults, deterioration
of this important housing stock, and the possible displacement of
thousands of low-income families and seniors nationwide.
Over the past year, Congress, owners, lenders, tenants, and other
interested parties have proposed various alternative solutions to this
long term and serious problem. Congress has authorized this
demonstration, enabling HUD to test various methods of restructuring
the financing of these projects. One goal of the demonstration program
is to test alternative creative solutions that will provide long-term
viability of the properties as affordable housing, which will benefit
local communities and their tenants.
The remaining sections of this notice provide the following
information:
Section II. Summarizes provisions of Section 210, including project
owner eligibility requirements, and tools that HUD can employ to carry
out the demonstration.
Section III. Describes HUD's primary objectives in implementing the
demonstration, and how HUD anticipates working with owners in reaching
agreements.
Section IV. Employs a Question and Answer format to address a
variety of specific issues, and is intended to further clarify HUD's
approach to implementing the demonstration program.
Section V. Describes certain certifications that HUD makes in
connection with publication of this notice of demonstration program.
II. Section 210--Goals, Mandates and Tools
A. Eligible Program Participants
Eligible projects, defined in the legislation, include those
multifamily properties
1. Whose owners agree to participate; and
2. Whose mortgages are FHA insured and which receive project-based
assistance under Section 8 of the United States Housing Act of 1937;
and
3. Whose present Section 8 rents are, in the aggregate, in excess
of the Fair Market Rent (FMR) for the area in which the project is
located.
B. Goals
Consistent with the legislative objectives, HUD's goal will be to
carry out this demonstration program in a manner that will:
1. Result in significant discretionary cost savings through the
reduction of above-market Section 8 assistance through early
terminations and restructuring of long-term project-based assistance
contracts.
2. In the least costly fashion--
a. Maintain existing housing stock in a decent, safe, and sanitary
condition;
b. Minimize the involuntary displacement of tenants;
c. Restructure mortgages in a manner that is consistent with local
housing market conditions;
d. Support fair housing strategies;
e. Minimize any adverse income tax impact on property owners; and
f. Minimize any adverse impact on residential neighborhoods; and
3. Protect the financial interests of the Federal Government.
[[Page 34665]]
Congress provided, in addition, that in determining the manner in which
a mortgage is to be restructured or the subsidy reduced, the Secretary
may balance competing goals relating to individual projects in a manner
that will further the purposes of this demonstration.
C. Mandates
Section 210 provides that, under the demonstration, HUD can pursue
these goals with respect to project mortgages securing up to 15,000
units. Moreover, Congress has appropriated $30,000,000 for the cost of
modifying mortgage loans, as such costs are defined in section 502 of
the Congressional Budget Act of 1974, as amended. Also, the legislation
authorizes HUD to directly enter into joint venture arrangements with
third parties, under which the Secretary may assign some or all of the
functions, obligations and benefits of the Secretary, and to purchase
reinsurance, enter into participations, or otherwise transfer the
economic interest in contracts of insurance or mortgage insurance
premiums on such contracts of insurance. (This notice, however, does
not address the implementation of the third party joint venture
component of the demonstration. Guidelines for joint venture partners
shall be released at a later date.)
D. Tools
The demonstration program will use a variety of tools and
authorities to restructure the financing of assisted FHA-insured
projects. The basic approach will work through the voluntary
participation of the project owners and lenders to move rents and
operating costs toward market levels immediately or over time, and to
reduce the outstanding principal balance to reflect any decline in net
operating income that may result. The restructuring process attempts to
put the projects on a sound financial and physical footing with market
rents, sufficient to service the remaining debt and operating costs,
including replacement reserves.
Reasonable rehabilitation costs may be supported first through the
release of reserves and residual receipts accounts, and then by further
reduction of the principal balance. Extraordinary rehabilitation needs
may require capital infusions from partners and state and local
government assistance.
Existing tenants will continue to be assisted with tenant based
Section 8 assistance or by project based Section 8 assistance. Section
8 assistance for projects with contracts expiring in 1997 shall be
renewed only after annual budget authorizations by Congress. To support
mixed-income developments, some tenants who receive tenant-based
assistance and vacate the project may be replaced with families that
are not eligible for Section 8 assistance.
Post workout refinancing methods may include leaving the existing
FHA-insured loan in place, refinancing the mortgage with an FHA-insured
mortgage under an FHA refinancing program, obtaining a new loan and FHA
insurance, and financing through conventional sources.
Existing tax law will apply to reengineered, assisted FHA projects.
Mitigating any tax consequences resulting from debt cancellation will
be the responsibility of the owner. HUD will consider any approach that
is revenue neutral to the property owners and investors.
Depending on the particular characteristics of a project, HUD and
an owner and, where applicable, with the consent of affected third
parties, could enter into a restructuring agreement that includes, but
is not limited to, one or more of the following actions:
1. Restructuring rents at or above market where, in the latter
instance, market rents are insufficient to cover operating costs
irrespective of debt service;
2. Forgiving and cancelling any FHA-insured mortgage debt that a
demonstration project cannot carry at market rents while bearing
reasonable operating costs;
3. Paying all or a portion of a project's debt service, including
monthly payments from the appropriate Insurance Fund for the full
remaining term of the insured mortgage;
4. Replacing FHA mortgage insurance with uninsured debt or
continuing FHA mortgage insurance, if warranted;
5. Not renewing expiring existing project-based assistance
contracts with the provision of tenant-based assistance to previously
assisted households;
6. Providing project-based assistance with rents at or below fair
market rents for the locality and negotiating other terms acceptable to
HUD and the owner;
7. Deciding to remove, relinquish, extinguish, modify, or agree to
the removal of any mortgage, regulatory agreement, project-based
assistance contract, use agreement, or any restriction that had been
imposed by the Secretary, including the restriction on distribution of
income; and
8. Requiring the owner of an assisted property to apply any
accumulated residual receipts toward effecting the purposes of the
reengineering initiative.
III. HUD's Portfolio Reengineering Program--Overview
HUD's Portfolio Reengineering program, which will implement the
Demonstration, is designed to soften the impact of Section 8 budget
reductions. Under its Portfolio Reengineering program, HUD seeks to
reduce Federal assistance payments while stabilizing projects
physically and financially and reducing reliance on Federal insurance,
and to do so with the least possible disruption to tenants and
neighborhoods.
These objectives will be accomplished by, among other things, (1)
reducing rents and operating costs to market levels; (2) making
corresponding reductions in the principal balances of outstanding
mortgages; and (3) improving the ability of the current assisted
residents to pay market rent levels. Reengineering may also provide
tenants with tenant-based rental assistance or continued project-based
rental subsidies at lower rent levels.
HUD will implement the demonstration through a combination of HUD
field and headquarters staff, private consultants and third parties or
joint venture partners. As previously noted, these guidelines do not
address guidelines for the involvement of joint venture partners.
Guidelines for joint venture partners will be released at a later date.
Project readiness will be a significant criterion for allocating
demonstration resources. HUD seeks reengineering projects with very
real prospects for support from the existing mortgagee, owners, new
lenders, and the community, including tenants.
Under the demonstration, HUD intends to ensure that affected
tenants and representatives of the local community and government have
a meaningful opportunity to review and react to a proposed agreement
before any agreement is finalized.
Reviews of proposals made under the demonstration will be conducted
on an ``open window'' batched basis with monthly reviews by a loan
workout committee that will consider various workout approaches as
described in section II. D. Proposals that contain a number of the
following characteristics will be given priority if demand for the
demonstration exceeds authority and resources. HUD may add additional
priority criteria, in future notices that provide additional guidance
under the demonstration. HUD prefers projects and proposals that meet
the following criteria:
1. Have Section 8 contracts that extend beyond 1997, and which
reduce
[[Page 34666]]
rental assistance over the remaining life of the contract, or use
rental assistance to prepare the project for market rents;
2. Reduce rents to market rents, rather than to an above-market
level;
3. Minimize the impact of credit subsidy requirements resulting
from the modification of the existing mortgage debt or the provision of
new FHA insurance;
4. Maximize reduction of Federal expenditures through--
a. Low principal reduction (i.e. minimum partial payment of claim);
b. Section 8 savings; or
c. Reduced operating costs;
5. Eliminate project-based rental assistance in favor of tenant-
based rental assistance;
6. Eliminate or reduce the existing FHA mortgage insurance;
7. Achieve restructuring through the use of non-HUD personnel;
8. Preserve some long-term affordability;
9. Serve housing needs of low- and very low-income tenants; and
10. Illustrate efforts to raise the economic value of property by
increasing the earning power of the existing tenant population through
initiatives such as education, job training and entrepreneurship.
IV. Ongoing Clarification of Demonstration Guidelines
The primary goal of the Portfolio Reengineering Demonstration is to
provide HUD, Congress, and assisted FHA project owners and tenants a
testing ground for wide-scale restructuring and stabilizing of this
endangered housing resource. As the demonstration evolves, questions
that arise through field testing approaches to reengineering will be
answered through periodic published question and answer bulletins. The
following ``Qs and As'' address some issues already communicated to
HUD.
Q. One goal of the demonstration is to test alternative creative
solutions that will provide long term viability to the properties and
their tenants. What kind of alternative creative solutions would be
considered?
A. HUD will give highest priority in restructuring to owners who
can demonstrate a decreasing need for Section 8 assistance because of
the implementation of programs which enhance the ability of assisted
residents to pay an increasingly greater portion of the market rent.
The additional effects of increased tenant earning capacity will be to
reduce other governmental expenditures and increase tax receipts and
also to stabilize and enhance property values. Illustrations of
alternative solutions, in addition to reliance on the financing and
rehabilitation tools specified above, include investment of owner and/
or project resources targeted at resident job training and placement,
education, self-sufficiency, enterprise development, entrepreneurship
and social services; and commitments from community related
organizations to assist in similar endeavors. Owners whose proposals
include such initiatives should outline specifically the goals they
plan to achieve and how the implementation of such programs will result
in enhanced financial capacity for the real estate and the tenants.
Q. What is the definition of market rents?
A. Market rents refers to the rent achievable by the project
without rent subsidy when competing in the market place for new
tenants. Two or more market rent projections for a given project may be
considered in reengineering negotiations. For example, there may be a
market rent for a project in ``as-is'' condition, another rent for a
rehabilitated project, another rent for a project to which amenities
have been added, and still another rent that is achievable two or three
years after restructuring is completed and income mixing has occurred.
Q. How will operating expenses be determined for the purposes of
calculating the mortgage supportable after rents are moved to market?
A. HUD's due diligence contractor will evaluate project operating
statements, will reduce costs that are a product of HUD requirements
and processes that can be eliminated, and HUD will negotiate the
balance of any operating expenses that appear to exceed market levels
with the owner in light of industry standards for market rate
developments.
Q. Will HUD keep existing FHA insurance in place after
restructuring?
A. It is HUD's preference to extinguish existing insurance
immediately or over time and transition reengineered projects to
freshly underwritten permanent financing. This preference is driven by
both HUD budget considerations, and well established banking principles
regarding the restructuring of troubled assets. However, HUD will
consider extenuating circumstances that may justify leaving existing
insurance in place.
Q. Will projects with HUD held mortgages be considered for the
demonstration?
A. No. The demonstration is limited to insured mortgages.
Q. What rehabilitation levels and capital improvements will be
supported by the demonstration?
A. Restructuring must be designed to ensure the long term physical
integrity of the project. HUD will consider rehabilitation necessary to
achieve that objective. In addition, HUD will consider the addition of
amenities when the owner can demonstrate they will support higher
market rents that will reduce net long term costs to the Federal
Government. This could include, for example, improvements that promote
the economic self-sufficiency of the tenants. Any project
rehabilitation or capital improvements supported by HUD will comply
with 24 CFR part 50.
Q. What owner administrative costs will HUD allow to be offset in
the workout process?
A. Non-profit owners may include reasonable transaction costs and
administrative fees as eligible uses of funds in loan workouts.
Q. How will the demonstration approach projects in which market
rents are insufficient to support operating costs?
A. These projects are not included in the initial focus of the
demonstration, but will be addressed in future guidelines.
Q. Will the demonstration include projects in which restructuring
occurs in conjunction with a sale or transfer to a new owner?
A. Yes.
V. Other matters
Executive Order 12612, Federalism
The General Counsel, as the Designated Official for HUD under
section 6(a) of Executive Order 12612, Federalism, has determined that
the provisions in this NOFA are closely based on statutory requirements
and impose no significant additional burdens on States or other public
bodies. This notice does not affect the relationship between the
Federal Government and the States and other public bodies or the
distribution of power and responsibilities among various levels of
government. Therefore, the policy is not subject to review under
Executive Order 12612.
Executive Order 12606, The Family
The General Counsel, as the Designated Official under Executive
Order 12606, The Family, has determined that this notice does not have
potential for significant impact on family formation, maintenance, and
general well-being, and, thus, is not subject to review under the
order. The notice implements a statutorily
[[Page 34667]]
authorized demonstration program and is intended to find ways of
reducing the impact on families that might otherwise not be caused by
the nonrenewal of Section 8 project-based rental assistance.
Dated: June 26, 1996.
Nicolas P. Retsinas,
Assistant Secretary for Housing--Federal Housing Commissioner.
[FR Doc. 96-16790 Filed 6-27-96; 4:03 pm]
BILLING CODE 4210-27-P
