Report on Multifamily Housing Preservation

NOVEMBER 2001

• Letter from Executive Director Kim Herman 

• Executive Summary 

• Download Preservation Report (PDF)

Exhibit A: Section 8 Contracts

Sorted by Expiration Date (PDF) ( Excel)
Sorted by County (PDF) (Excel)

Exhibit B: Tax Credit Properties

The following two Excel spreadsheets contain "hidden" columns which contain additional information. To unhide columns, highlight the columns on either side of the hidden columns, right click, and choose "unhide."
Sorted by Expiration Date (PDF) (Excel)
Sorted by County (PDF) (Excel)

Exhibit C: Rural Development Properties

Sorted by Expiration Date (PDF)
Sorted by County (PDF)

Exhibit D: Number of Expirations by County

All Programs (PDF) (Excel)

INRODUCTION 

Since the 1970’s and 1980’s, various federal programs have been used to finance affordable rental housing in the state of Washington.  These include the Section 8 rental assistance program administered by the U.S. Department of Housing and Urban Development (HUD), the Low Income Housing Tax Credit program administered by the Washington State Housing Finance Commission, and the Rural Development program administered by the Rural Housing section of the U.S. Department of Agriculture (USDA).  In addition, locally controlled funds provided by cities, counties and the state were either combined with financing from the primary federal programs or, in some cases, used independently to finance affordable housing. 

The HUD Section 8 program provides project-based rental subsidies to owners on behalf of eligible residents.  Washington’s portfolio of project-based Section 8 exceeds 480 properties with over 19,000 units affordable to very low-income households.  Residents in these properties typically earn below 30% of the area median income.

The Low Income Housing Tax Credit program has financed the development and rehabilitation of over 416 properties with over 23,000 units in Washington State.  Affordability levels in these properties range from 30% to 60% of the area median income.

The USDA Rural Development office located in Washington has provided financing for over 331 properties with over 9,300 units.  These properties are often located in the most remote rural areas of the state.  All of these properties also offer rental assistance, similar to Section 8, for some or all of a property’s units.  Because of the rental assistance offered, many of the units in these properties house families well below 50% of median income.

The Expiring Use Problem

At the time they were developed, almost all of the rental assistance programs required affordability for a given length of time in exchange for favorable financing provided through the program.  However, in the mid-1990’s, those affordability restrictions began to expire, and Washington State, along with the rest of the country, was faced with the loss of thousands of affordable units.

In response to this problem and in keeping with its mission, the Washington State Housing Finance Commission became actively involved in the preservation of existing affordable rental housing in the state.  The Commission’s initial focus was on rental housing that had been funded by HUD in the 1970’s, but quickly expanded to include other financing programs.  The HUD developments carried 20-year Section 8 rental subsidy contracts, which upon expiration, allowed owners to opt out of the Section 8 program and convert their properties to market rate rents.  Likewise, the affordability of the early properties funded by Rural Development have begun to expire, although the program has structured some unique protections described later in this report.  Finally, the original 1986 federal law that created Tax Credits required affordability for 15 years only; thus, the first properties to receive Tax Credits will begin to lose their affordability restrictions in 2002.

Preservation Successes 

In response to the potential loss of hundreds of thousands of Section 8 units nationwide, Congress enacted various programs to extend the subsidy and thus maintain the properties’ affordability.  These include renewal of project-based Section 8 contracts on one to twenty-year terms, marking subsidized rents down to market or up to market based on comparable market studies, and restructuring rents and long-term debt to support these properties.

Since HUD alone could not restructure the debt of all the properties and process related Section 8 subsidy contract reviews, it sought the participation of state and local agencies, in particular, state housing finance agencies.  In response to HUD’s request for proposals, the Commission submitted an application to serve as a “Participating Administrative Entity” (PAE) for the state of Washington.  HUD accepted the Commission’s proposal, and since 1999 the Commission has preserved hundreds of Section 8 units throughout the state. 

The Commission, acting as a PAE, has worked to preserve 886 units in 19 Section 8 properties.  Several additional properties were processed and determined ineligible for the PAE program or reassigned back to HUD for further review.  The Kitsap County Consolidated Housing Authority, which also serves as a PAE in Washington, has preserved 516 units and has another 262 in process, in 17 properties.  Assuming all units in process will ultimately be preserved, the PAE’s in Washington will have preserved a total of 1,604 units in 36 Section-8 properties in the state.

In addition to its PAE work, the Commission and other public funders have preserved properties with expiring affordability periods using tax-exempt bonds, Tax Credits and other public funds.  Commission bonds have been used to help preserve five properties containing 345 units.  Tax Credits issued by the Commission have assisted in preserving 42 properties comprising 2,437 units.  The Commission has also invested $4.75 million of its Private Investment Funds in an Impact Capital Preservation Fund that is combined with $18 million from private banks.  To date, the Impact Capital program has assisted in providing predevelopment and bridge financing loans assisting in the preservation of one Section 8 property and seven other properties throughout the state, with 194 affordable housing units, serving households below 50% of the area median income.  The total units preserved to date by all of these programs, including the PAE program, are approximately 4,580 units.

Housing Preservation Study

To ascertain the extent of the potential loss of affordable units, as well as to gather information to use in developing funding priorities, the Commission decided to undertake a study of preservation needs and activities throughout the state.  It contracted with the Low Income Housing Network to complete a three-part study of multifamily housing preservation activities.  A primary reason for contracting with the Network was to build on the Section 8 database it had already created and to use the Network’s expertise in market conversion risk analysis.

Part one of the study focused on an update to the list of HUD properties with expiring Section 8 rental assistance and HUD financing. For a list of these properties, see Exhibit A.

Part two of the study examined the Commission’s portfolio of properties allocated Tax Credits between 1987 and 1995, using a database format developed by the Commission.  The Commission wanted to determine the expiration of affordability restrictions for each property based on 1) the property’s Tax Credit regulatory commitment and 2) regulatory commitments made to other public funders.  This was done in order to determine the latest possible restrictive use expiration date.  In addition, the Commission gathered a wealth of demographic information about the properties including resident incomes, special needs households, Tax Credit rents versus market rate rents, and detailed information about the owners. For a list of these properties, see Exhibit B.

Part three of the study looked at properties funded by the state’s USDA Rural Development program. For a list of these properties, see Exhibit C.

This report outlines the portfolio of properties in need of preservation that have financing and rental assistance from HUD, the Tax Credit Program and/or Rural Development.  Properties financed independent of these sources and that used only city, county or state funds are not included.  The purpose of this report is to summarize the findings to date of the study.  The data for parts one and two is presented as of April 2001 while the rural housing information is as of October 2001.  Although the Commission believes the data presented in this report to be correct and complete, it makes no representation as to the absolute accuracy of data derived from reports developed by other funders.

PRESERVATION STUDY RESULTS

The Section 8 Portfolio

The discussion that follows is divided into two sections.  One section describes those properties that remain affordable, either because they have decided to renew their expired Section 8 contracts or because they are still in their original contract term.  The second section reviews those properties that have left or plan to leave the Section 8 program (the so called “opt outs”) and whose units have converted (or will convert) to market rate rents.

Properties Remaining in the Section 8 Program
There are 481 Section 8 housing properties in the state with current Housing Assistance Payments  (HAP) contracts.  These properties contain 19,088 units and are located in 33 of Washington’s 39 counties.

Renewals

Two hundred eighty-three (283) of the 481 properties, comprising 12,845 units, had HAP contracts that expired, but their owners and HUD decided to renew the contracts and continue the affordability.  Renewals can be done either year-by-year or for up to 20 years.  To date, owners in Washington have chosen either the one-year renewal or renewals of four or five years, thus preserving their ability to opt out in the near future should it prove financially beneficial to do so. 

Original Term

One hundred ninety-eight (198) of the 481 properties, comprising 6,243 units, have HAP contracts that are still in their original term and have not yet expired.  However, the rate of expirations is quickly increasing.  For example, 159 of the 198 original contracts (80%) will expire within the next 10 years.  Table 3 below shows when the remaining original contracts will expire. 
 

Properties That Have Opted Out

To date, fifty properties, comprised of 1,625 units, have opted out of the Section 8 program and converted their rents to market rate.  There is no study data to indicate to what level the rents were raised in these units.  Eligible Section 8 residents living in these units at the time of conversion received rental subsidy vouchers to enable them to pay the higher rent.  Table 4 shows the county location of the opt out properties. 
 

Another 15 properties containing 670 units, shown in Table 5, have given their residents and the state the required one-year notice of their intention to opt out.  Some of these will actually opt out while others may or may not do so but have given the notice simply to preserve their options. 

Properties with Other Funding

There are 103 Section 8 properties that have funding from at least one public source in addition to the HUD financing and Section 8 rent subsidies.  Such sources include the state’s Housing Trust Fund, Tax Credits issued by the Commission, tax-exempt bond financing, and local funds.  If the affordability restrictions associated with these funding sources run longer than the HUD financing, affordability will remain in place to the end of the other source’s term, even if the Section 8 subsidy is terminated.  The following Table 6 provides information on these additional funding sources.

*does not add; properties may have public funding from more than one source 

The Tax Credit Portfolio

Congress created the Low Income Housing Tax Credit Program as part of its 1986 tax legislation in order to increase the involvement of the private sector in affordable housing development while decreasing the reliance on traditional federal housing programs.  States were designated as the administering agencies and began allocating Tax Credits in 1987.

Affordability provisions vary depending on when a property was awarded Tax Credits and was placed in service (i.e. began renting up):

Properties placed in service between 1987 and 1989 were required to establish a 15-year affordability period but have no “right of first refusal” or other obligations beyond that period.  The affordability obligations for these properties will terminate in 2002 - 2004.

Properties placed in service since 1990 carry a 30-year commitment to affordability, but have an option to terminate after 15 years.  Owners must offer their properties to parties who would maintain the affordability.  The price is determined by a formula set forth in the IRS code.  This offer happens after year 14, and requires the Commission to find a qualified buyer during the 15th year.  If a qualified purchaser is not found that year, the owner can convert to market rate, but must maintain affordable rents until the end of the 18th year, thus giving in-place residents three years to find another home.

Also in 1990, the Commission began allowing owners to extend the affordability period beyond the 15-year minimum as an Allocation Criterion to secure points in the Tax Credit competition.  Properties were awarded two points, up to a maximum of 20, for each year the regulatory period was extended beyond year 15.  Therefore, some properties developed during this period will have affordability for at least 28 years (i.e., the minimum 15-year period, plus the 3-year resident protection, plus 10 years).

Beginning in 1993, the Commission’s allocation system awarded two points up to a maximum of 44 points for extending the potential affordability period by 22 years.  As a result, most (but not all) of the recent properties have committed to affordability for at least 40 years (i.e., the minimum 15-year period, plus the 3-year resident protection, plus 22 years).

The Commission’s database contains information for 279 properties comprising 14,284 units (13,684 affordable units and 600 market rate units) that received Tax Credits between 1987 and 1995.  Properties range in size from one to 257 units.  The average number of units per property is 51 while the median size property is 32 units.  Tax Credit properties are located in 32 of the state’s 39 counties as shown on Table 7.