What’s at stake for these affordable housing communities across America
Social gatherings can be awkward, even for extroverts. When I meet someone new, the topic of what we each do for a living is the question that follows the formal introduction. When asked, I respond with a large enthusiastic smile: “I manage affordable housing in rural areas across the Southeast!” Next comes the predictable pregnant pause, the head tilt, and the forced smile.
I am familiar with the preconceived notions that people have when they picture affordable housing. While they usually envision the distinctly urban housing projects that for many years represented the public’s idea of what public affordable housing looked like, I am proud to educate them on the wonders of rural affordable housing and the many unique characteristics of these homes. Most of my adult life has been spent developing and managing these communities, and I am passionate about the government programs that make them possible.
Our properties are special and home to amazing people with unique life stories. My career has been dedicated to the management and ownership of such affordable communities, with a heavy emphasis on one housing program: Farmers Home Administration Section 515, now known as the USDA Office of Rural Development (RD). RD 515 is among the few rental housing production programs specific to rural communities. To understand America’s affordable rural housing communities in 2021, we first must look at their history.
In 1946, following the effects of The Great Depression, the Farmers Home Administration (FmHA) was approved by Congress as a financing tool designed to reestablish self-sufficiency. The FmHA was renamed several times before becoming USDA Rural Development (RD). In the 1960s, the War on Poverty brought about new ideas on how to provide housing for the poor. This included moving away from government-owned housing and toward public-private partnership arrangements in which the private sector would build and manage affordable housing, and in the process, crucially, benefit from federal tax incentives.
Section 515 Rural Rental Housing was established in 1963 and has financed nearly 28,000 rental properties consisting of over 530,000 affordable units. Also included under RD’s financing umbrella are general water and sewer projects as well as housing for non-farmers in rural areas.
Fast forward a bit: What happened to those mortgages made in the 1960s with their expiring terms? An increase in rents and a displacement of residents. In the 1980s, owners of Section 515 loans started prepaying their mortgages, converted their communities to market-rate housing, and were no longer restricted to the RD rules and regulations. By the 1990s and into the 2000s, properties were clearly showing their age and needed funds for renovation.
Realizing the affordable housing crisis was only getting worse, federal agencies including RD contended with owners to stop mortgage payoffs. Owners fought back through filing lawsuits. While these owners did not have their prepayment rights restored, a 9–0 ruling by the U.S. Supreme Court stated that Congress had abrogated the contracts that had been signed by the government and owners (Franconia Associates v. United States). Owners could sue for damages to seek monies that they could have received if the properties had been sold. Properties with RD 515 mortgages prior to Dec. 15, 1989 were determined eligible for mortgage prepayment, leaving the existing housing stock at risk of rapid loss.
In the late 1980s, stakeholders joined forces to preserve affordable and subsidized housing for low-income households by utilizing available refinancing structures and the Low-Income Housing Tax Credit (LIHTC). The LIHTC has stood the test of time and proven to be a triple-win proposition by (i) providing developers with an additional “source” of project financing, (ii) securing for investors a dollar-for-dollar reduction on future federal tax liability, and (iii) requiring that affordability be maintained for upwards of 30 years.
From a policy perspective, the initiative—spawning out of President Ronald Reagan’s 1986 tax reform—has been the most successful and bipartisan affordable rental housing production program in U.S. history, assisting in the development and preservation of nearly 3.5 million affordable units across America’s vast countryside.
Conversely, industry headwinds are multi-layered and troubling. No new USDA-RD direct-financed rental housing has been developed in a decade, and the existing housing stock is reaching the end of the affordable road. In fact, a whopping 90% of all RD 515-financed properties are now more than 20 years old.
When an RD 515 loan nears maturity or is eligible for prepayment, an owner has several options to choose from
- Pay off at maturity
- Pursue RD’s prepayment process (resulting in myriad outcomes)
- Transfer ownership (which then obtains amortized financing)
- Recapitalize with additional and/or refinanced debt from a new lender
Past, present, future
The Housing Assistance Council performed a study in 2018 that estimated that by the year 2027, 815 properties and 20,000 units will leave the program due to maturing mortgages. After 2027, maturities will continue, putting another 93,000 units at risk.
While Section 515 has financed over 533,000 units across 28,000 properties since its inception, its current portfolio has shrunk to just 13,000 properties. Tenants living within these properties are some of the most vulnerable renters in the nation—67% are disabled or seniors, and the average household income is $13,600.
To begin the process of prepayment, the owner must make a formal request to RD, and the agency in turn notifies the tenants that the owner has applied to remove the property from the program. Understandably, tenants often react with panic. Some take steps to move even before discussions begin. RD also provides notices to the public and nonprofits that have asked in advance to receive such notices on its Preservation Information Exchange website. If the property is eligible for prepayment, RD must offer owner incentives to remain in the program. These incentives can include additional project-based rental assistance, an equity loan, permission to obtain a third-party equity loan, and an increase of the return on the owners’ investment (which is otherwise restricted by the program). If the owner accepts the offer, they must maintain affordability for at least 20 more years.
If the owner rejects RD’s incentive offer, then RD must make two determinations: Will minority residents (on the waiting list or in the community) be disproportionately affected by the loss of the affordable units, and is there adequate comparable replacement housing available for current residents? If RD finds there is an adverse impact to the residents and/or community, the owner then has four options
- Prepay the loan (subject to RD use restrictions)
- Appeal RD’s decision through USDA’s appeals process
- Keep the property in the RD program
- Offer the property for sale at market rate to a nonprofit or public agency, which must in turn keep the property for low- and very low-income tenants for the property’s remaining useful life
If an owner wishes to keep a property in the RD affordable housing stock but needs to recapitalize or request the reamortization of existing 515 debt, there are options to consider. These include Section 538 guaranteed rental housing loans, Multi-Family Preservation and Revitalization (MPR) demonstration program financing, the RD Preservation Revolving Loan Fund (PRLF), and additional project-based rental assistance. Reamortization under new rates and terms for the existing 515 loan provides a significant advantage over replacing the debt because the RD loan remains in place and the property retains its eligibility for project-based rental assistance. RD is willing to amortize even small loans reaching the end of their maturity date.
RD has the authority to make deals work, in good faith, with the objective to move the needle toward longer-term preservation. Therefore, the recent reorganization of RD has matched those negotiations and loan processing with well-trained, experienced RD personnel. Prior to restructuring, negotiations and loan processing resided with RD state and county personnel, who may or may not be equipped to handle complex transactions. Restructuring is designed to eliminate the learning curve and make all possible servicing tools available for preservation. RD is making it known, “We are open for business. Let’s make a deal!”
Businesses have heard the call, even before the RD restructuring. Large and small, property managers and owners alike have continually been able to identify and capitalize on the many solid investment opportunities present in the rural affordable housing market.
One of the most successful RD 515 preservation models began as an experiment in 2006 in a small conference room at Boyd Management, Inc. (BMI) in South Carolina. WWJ, LLC, an affiliate of BMI and one of the largest owners of RD 515 properties in the country, was faced with daunting preservation roadblocks and a large portfolio of RD assets. What began as a happenstance meeting between Greystone Bank President Bob Barolak and BMI President Ken Wheat turned into a long-term partnership of 515 preservation and good business.
I recently caught up with Tanya Eastwood, president and CEO of Greystone Affordable Development. Under her leadership, Greystone helped pioneer the preservation of rural affordable housing and has closed more RD preservation deals than any other organization in the United States, with no signs of stopping. I asked her about the success of this RD partnership and where she sees it heading in the near future.
“To date, we have redeveloped and preserved 369 properties [13,000 units] across 12 states, investing over $1.6 billion in development costs with an average of $35,000 per door in hard costs,” Eastwood says. “We have active pipeline transactions in various stages in 15 states.”
Voices from the field
The question for all of us to consider, then, is how do we preserve Section 515 rural housing and protect vulnerable residents while being fair to owners, investors, and any other stakeholders?
Nancie-Ann Bodell, deputy administrator of Multifamily Housing at USDA’s Rural Housing Service, has a plan and was quick to positively respond to my inquiry for an interview.
Barbara Jaco: We love the Rural Development 515 program and the residents we serve. That said, our industry is on edge with concern that government restructuring will gobble up the RD 515 program, merging it into—and managing it like— the U.S. Department of Housing and Urban Development (HUD). Are these concerns merited?
Nancie-Ann Bodell: We recognize RD 515 is a unique program, and that is important to preserve. This program will not be merged with HUD. We see a bright line drawn between these two housing programs, and it would be very difficult if not impossible to actually merge them. However, there are processes that HUD adopted that can be duplicated to gain efficiencies and solve problems. As stakeholders see these implemented, they respond with the merger concerns. One example where we can utilize a HUD practice at RD is through the utilization of third-party inspectors, whereby the process is more efficient and cost-effective.
BJ: What was the ultimate goal of RD’s recent major restructuring?
NB: The objective was to modernize a program built on a 1970s servicing model, and to do so in a way that would provide agency flexibility to attract capital into our rural markets. With aging owners and maturing mortgages, the agency had to restructure in order to evaluate the portfolio, and then place our focus where needed most.
BJ: What changes will impact management agents and owners in the near future?
NB: Our goal is to streamline and simplify rather than burden management agents and owners with meaningless work. This is a federal program, and requirements should be standardized and each have a purpose. We use the “no worse test“ in our decisions, which means if a new requirement places a burden that is worse than before, we won’t do it.
BJ: The average RD 515 property is only 32 units, which isn’t a typical model for attracting capital. What ideas are being discussed to energize the flow of preservation capital?
NB: We want everyone to know that RD is open for business and open to all ideas. RD 515 is the only program dedicated solely to rural rental housing, and our mission is to preserve this very special market of rural affordable housing.
I also spoke with Colleen M. Fisher, who has been the executive director of the Council for Affordable and Rural Housing (CARH) since 1996. CARH represents the interests of stakeholders in the building, development, management, and ownership of housing in rural America.
BJ: Colleen, what can members of our industry do that will help wave the flag for preservation?
Colleen M. Fisher: Congress needs to understand the complexities of and fund housing for rural areas. Preservation is expensive and takes money from both the private and public sectors. The best thing our industry can do is to get members of Congress to visit the RD properties, so they can see firsthand the quality housing and the very special bond between the residents, site managers, and maintenance technicians.
Home, safe and sound
Once we understand the underlying programs that make these projects possible and the challenges facing our industry, it is then most important to recognize what is at stake. Our properties provide more than just shelter for thousands of families across the country. They provide activities for children, socialization for seniors, and a sense of community for everyone. For example, when COVID-19 caused school closures, many children in our rural properties were faced with a lack of access to reliable internet access for online classes. Our properties reacted with mobile Wi-Fi, making online school possible for countless children who may have otherwise missed out on an entire year of education.
Among their many other essential functions, property managers throughout our rural portfolio are dedicated to the resident experience. Whether it’s potluck dinners, holiday parties, or a simple hello, they treat these properties as more than just apartment communities; they embrace themas homes.
Now when you hear the term “affordable housing,” do you still think of your nearest major city’s massive public housing projects developed back in the ‘60s and ‘70s? Or do you picture rural neighbors gathering for a Thanksgiving meal, judging a Halloween costume contest, or sitting for a game of backgammon? That is what is at risk as we face the many aforementioned challenges. It is undoubtedly an uphill battle, but one worth fighting.
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