Preservation Update: RAD Numbers and Other HUD News
The Rental Assistance Demonstration (RAD) is inching close to hitting its cap under the program’s first component involving public housing and Sec. 8 Moderate-Rehab properties.
Approximately 57,000 of these units have received initial reservations for the program as of Dec. 31, just 3,000 units short of the program’s limit.
The Department of Housing and Urban Development (HUD) has authority for 60,000 units to take part in the first component. The agency has received applications for more than 176,000 units to convert to long-term Sec. 8 rental assistance contracts under the program.
HUD officials have been seeking to lift the cap, but that has yet to happen. The recently approved fiscal 2014 budget failed to increase authority for this part of RAD.
The second program component allows Rent Supplement, Rental Assistance Payment, and Mod-Rehab properties to convert tenant-based vouchers to project-based assistance. These platforms have been known as the “orphan” rental assistance programs because they have not benefitted from the usual renewal provisions of expiring project-based Sec. 8 contracts and have been unable to take advantage of a normal recapitalization cycle.
As of the end of 2013, HUD provided approvals to 75 projects with more than 8,300 units under the second component.
The program has been extended through Dec. 31, 2014, and HUD expects to release guidance on how to submit new second component requests under the extended authority.
Michael Bodaken, president of the National Housing Trust/Enterprise Preservation Corp., is encouraged by RAD. But, at the same time, he and others recognize that new RAD deals are one more group searching for limited financing.
“We’re seeing more and more RAD deals coming into the system and seeking either 9 percent or 4 percent housing tax credits,” Bodaken says. “There’s at least some additional pressure on housing finance agencies to figure out which preservation deals to fund. To the extent RAD transactions can use 4 percent credits, there is less pressure on HFAs to use already scarce 9 percent competitive funds for the preservation of public housing.”
Of the first component projects using low-income housing tax credits (LIHTCs), about 72 percent will use 4 percent credits and 28 percent will use 9 percent credits, according to the latest HUD update.
Understanding the environment
In this budget-constrained age, there’s more rigorous examination of rent levels, says Stephen Whyte, managing director of Vitus.
With HUD acting cautiously, developers can’t be assumptive about rent levels. They must work proactively to introduce a project to HUD and not incur significant real estate risk before HUD has had its say in the deal.
When developers improve a property, they often seek an increase in rent. The difference between $1,000 per month rent and a $1,150 rent can be significant in shaping a deal, says Whyte. If HUD decides to study the request, it can also take time that a developer wasn’t expecting.
“It’s important for developers to be mindful of the regulatory environment,” Whyte says.
To finance several recent deals, Vitus turned to a bond structure that combines short-term cash-backed tax-exempt bonds with taxable loan sales.
Using a combination of short-term “cash-backed” tax-exempt bonds and taxable long-term loan sales can help projects using Federal Housing Administration (FHA) financing or certain Fannie Mae and Freddie Mac moderate-rehab loans reduce their all-in borrowing costs, and in the case of FHA-backed Sec. 221(d)(4) projects, potentially eliminate devastating construction period negative arbitrage, says Wade Norris, a partner at Eichner Norris & Neumann (ENN), a Washington, D.C.-based law firm specializing in bond financings.
The firm explored the structure during the financial crisis in 2008, and it has been used on approximately 75 to 100 deals since then, according to Norris, who estimates that a strong majority have been preservation projects. The use of the structure, which includes 4 percent LIHTCs, has been increasing with roughly 40 deals using the formula last year alone.
Tom Feusse, CEO and co-owner of Wallick, says another problem that has hindered preservation deals has been the shrinking availability of soft funds, particularly HOME funds. But Wallick has found HUD’s Mark-to-Market program to be an effective tool to aid preservation, either on its own or down the road coupled with tax credits.
If a project has previously gone through the Mark-to-Market program, with some rehab work done at that time, developers can subsequently apply for tax credits to do more substantial work on the project. “You can work with HUD and assume a good chunk of the Mark-to-Market debt on the project, which effectively acts as soft debt,” Feusse says. *
Top 10 Trends in Senior Housing for 2014
Retirement planning is not simple math any longer. Variables such as interest rates, chronic health issues, life changing events such as falls, and other unforeseen events make calculating stops on the Health train difficult. The Money train faces its own obstacles such as unexpected slowdowns, the unlikely scenario of speed as a function of money ever increasing or running out of power altogether
The complicated journey of Money and Health and their intersection is the foundation of the top ten trends for senior housing and senior living in 2014. While 2014 is by no means the beginning of senior living business, it will be the first year where the main assets of retirees, home equity and investment portfolios, will not be the anchor of decision making that they were during the past five years. The new anchor will be the realistic, responsible lifestyle choices retirees make to ensure their how and where they spend this time in their lives and the ability to live within their means on their current and future resources.
With the Dow Jones Industrial Average reaching new highs in 2013 and home prices up 13% year-over-year according to the Case-Shiller Index as of October, the outlook for retirement and seniors is not the wasteland of the past five years. Despite these positive moves, challenges remain as low and middle income seniors struggle to align their fiscal and health choices with their current resources, both personal savings and entitlements. Longevity and life span will continue to increase with the coming years but a shortage of funding, personnel and declination of spirit may balance these new realities of aging for consumers and businesses.
The global population is getting older and larger which means the business leaders in senior living will need to stake their claim in specific demographic, socioeconomic and geographic segments of this population in order to be successful. For those experienced in senior living, it is nearly impossible to be all things to all people and be successful.
The Top 10 Trends for senior living in 2014 identify some of the challenges of solving the puzzle of the Money and Health trains collide.
See remainder of the story at Senior Housing News **
Investing in Secondary and Tertiary Markets
There are robust opportunities to be had by investing in multifamily assets located in secondary and tertiary markets. Yet, in order to realize the attractive risk-adjusted yields many anticipate achieving in these markets, it’s imperative to vet these opportunities differently from primary markets.
If underwritten correctly, these alternative markets have the potential to offer investors significant benefits. Here are some tips for those looking to follow yield off the less-worn path:
Remember the supply side of “supply and demand”: Multifamily demand drivers like job announcements and immigration receive more press than the local apartment supply pipeline. However, the lack of new apartment supply in secondary and tertiary markets is a crucial, often-overlooked, factor. These markets are consistently less attractive to new apartment developers than primary markets, even though fundamental demand drivers such as capital cities, regional medical centers, and long-standing higher-education institutions help create stable renter demand.
Additionally, the absence of new apartment supply coupled with the aging of the existing multifamily inventory generates a pent-up demand scenario, which is a good start toward making a great investment.
Some inhibitors to new supply in secondary and tertiary markets may not be apparent at first glance. Local governments may be averse to the development of new apartments, such as in the best submarkets of St. Louis; Memphis, Tenn.; or Jackson, Miss. Additionally, geographic features such as the steep terrain around Nashville, Tenn., can make it costly to build new multifamily product.
Conversely, in first-tier markets, pronounced demand growth fosters excessive new supply. In several Texas markets, for example, the job and household growth that fuel renter demand have been remarkably strong. Flat land is also abundant and affordable. The local governments aren’t extremists in their opposition to new apartment developments. This smells like ripe conditions for significant multifamily development activity.
Stay close: Proximity to an investment is key in these types of markets. Through the last recession, many of the secondary- and tertiary-market investments that experienced trouble suffered because out-of-town owners lacked a realistic understanding of the local markets in which they invested, rarely visiting them. Consequently, when times became tough, those owners didn’t know where to begin addressing challenges. Even their lenders picked up on their lack of understanding and were less amenable to using “extend and pretend” work-out scenarios.
One reason for this is that, often, driving—or even flying—to a distant market may not be an option, due to the time involved and commercial flight limitations. Unless one accesses these markets by investing alongside a local or regionally focused operator, the original investor is starting out with a disadvantage.
Don’t underestimate home-field advantage: Although many of an investor’s local or regional competitors may not appear to be very sophisticated, be careful not to underestimate the well-connected owners that live and breathe those markets every day.
Local owners elect the local politicians, pay their taxes to the local governments, and are country club members with the managers of the primary local employers. Where these same players may have shortcomings in apparent sophistication, they may overcome them through general business savvy and local insight that can’t be found on the Internet. This finger on the pulse may offset a competitor’s revenue management system.
Pay attention to less-conventional market information sources: Worthwhile market information packaged up nicely is more difficult to find regarding these opportunities. It is also the same “outside-in” information that other interested parties are reading. Visiting with the staff of a convenience store located at “Main and Main” within a submarket can be more useful than reading a few lines in a quarterly market summary.
Shop a property’s comparable set in person rather than calling them from five states away, since the operators of those comparable properties probably aren’t the same usual competitors you’ll find in the primary markets. Bartenders at local hot spots, too, can be a valuable source, as they’re usually pretty in tune with local lifestyle components important to the multifamily industry.
These sources in secondary and tertiary markets can be decently reliable, since everything is more tight-knit, which makes it easier to keep up with other people’s business.
Include two-bedroom units in your plans: An equal weight of one- and two-bedroom units is a safe bet. Although predominantly one-bedroom mixes may be preferable in primary markets, the renter demographics of alternative markets lend themselves to two-bedroom units, as well.
Because the gross monthly rents in secondary markets are lower than those in primary markets, higher-income one-bedroom households may opt to lease a two-bedroom unit for the utility of an additional room. Regardless, a minimum ratio of one parking space per bedroom is vital, even if it’s not required by the local municipality.
With three-bedroom units or larger, price point will be the primary competitive advantage over the shadow market of single-family home rentals, which always existed before the recent recession and will continue to exist in the future.
Consider the suburbs: The majority of the local jobs that drive renter demand and household growth are often located in the suburbs. Typically, there is less mass transit infrastructure in place in such locales, requiring that more residents, even lower-income ones, have vehicles. Walkability factors are appreciated, but be cautious about paying too stout a premium for that feature in these markets.
While plenty of renters by choice still live in secondary and tertiary markets, keep in mind that many Class A apartment rent levels are close to the cost of owning a comparable single-family home. Consider that point especially as Echo Boomers age and while they're at the stage where they’re still delaying starting families.*
HUD Housing Scorecard
The U.S. Department of Housing and Urban Development (HUD) and the U.S. Department of the Treasury today released the January edition of the Obama Administration's Housing Scorecard – a comprehensive report on the nation’s housing market. The latest data show progress among key indicators. In 2013, home sales had their strongest performance in several years, foreclosure starts were at their lowest annual level since 2005 and homeowners’ equity is up $3.4 trillion since the beginning of 2012. While this scorecard notes positive trends in the housing market, officials caution that the economy is still healing from the Great Recession. The full Housing Scorecard is available online at www.hud.gov/scorecard.
“The January Housing Scorecard shows that the Obama Administration’s efforts continue to have a positive effect on the housing market,” said HUD Deputy Assistant Secretary for Economic Affairs Kurt Usowski. “In 2013, the number of U.S. properties which started the foreclosure process was down 33 percent from 2012, while sales of previously owned homes rose by 9.1 percent. With foreclosures down, home sales up, and equity continuing to grow, the housing market continues to make slow, but steadily improving progress.”
“This month’s Housing Scorecard shows the continued need for and progress of the Making Home Affordable program,” said Treasury Acting Assistant Secretary Tim Bowler. “January’s Making Home Affordable (MHA) report shows a steady increase in the cumulative number of homeowners receiving permanent mortgage modifications, while more than 258,000 homeowners have found alternatives to foreclosure, participating in a short sale or deed-in-lieu through the Home Affordable Foreclosure Alternatives Program (HAFA).”
The December Housing Scorecard features key data on the health of the housing market and the impact of the Administration’s foreclosure prevention programs, including:
Existing Home Sales Continue to Make Gains. In 2013, there were 5.09 million sales of existing homes--9.1 percent higher than in 2012 and the strongest performance since 2006 when sales reached an unsustainable level during the housing boom. A total of 428,000 new homes were sold in 2013, which is 16.4 percent above sales in 2012 and the highest level in 5 years.
Foreclosures Are Down. According to Realty Trac, a total of 747,728 U.S. properties started the foreclosure process in 2013, down 33 percent from 2012 to the lowest annual total since 2005. A total of 462,970 U.S. properties were repossessed by lenders (REO) in 2013, down 31 percent from 2012 to the lowest level since 2007.
Equity Continues to Grow. According to the Federal Reserve, the equity homeowners have in their homes (total property value less mortgage debt outstanding) is up $3.4 trillion, or 55 percent from the beginning of 2012 through the third quarter of 2013.
The Administration's foreclosure mitigation programs continue to provide relief for millions of homeowners as the recovery from the housing crisis continues. Over 1.9 million homeowner assistance actions have taken place through the Making Home Affordable Program, including more than 1.3 million permanent modifications through the Home Affordable Modification Program (HAMP), while the Federal Housing Administration (FHA) has offered more than 2.1 million loss mitigation and early delinquency interventions through December. The Administration’s programs continue to encourage improved standards and processes in the industry, with HOPE Now lenders offering families and individuals nearly 4.0 million proprietary modifications through November (data are reported with a 2-month lag). In all, more than 8.0 million mortgage modification and other forms of mortgage assistance arrangements were completed between April 2009 and the end of December 2013.
Performance of HAMP modifications continues to improve over time. For modifications seasoned 24 months, 23.6 percent of modifications started in 2011 have disqualified, compared to 28.6 percent of modifications started in 2009. Program data supports that the longer a homeowner remains in HAMP, the more likely he or she is to keep up with their mortgage payments and avoid foreclosure.
Payment reduction is a strong driver of permanent modification sustainability. For example, of modifications seasoned 24 months, only 15.9 percent with a monthly payment reduction greater than 50 percent have been disqualified due to missing three payments. By contrast, those modifications with a payment reduction of 20 percent or less had a disqualification rate of 41.2 percent.
Also featured this month in the Administration’s Housing Scorecard is a regional spotlight on market strength in the San Francisco-Oakland-Fremont, CA Metropolitan Statistical Area (San Francisco MSA). Like many areas across the country, the economic and housing market conditions in the San Francisco area are improving, but the foreclosure crisis has taken its toll, with the Oakland metropolitan division experiencing more distress than the rest of the MSA. The Administration’s broad approach to stabilize the housing market has been a real help to homeowners throughout the San Francisco MSA. You can read the report here.
“As the housing market continues to improve nationwide, the San Francisco metropolitan area is also showing signs of significant improvement,” said Usowski. “As the regional spotlight shows, from the launch of the Obama Administration’s assistance programs in April 2009 through December 2013, nearly 73,500 homeowners in the San Francisco metropolitan area have received assistance. This is a positive step in our recovery efforts, but more work must be done to help homeowners in this area struggling from an excess of housing construction and unsustainable mortgage lending in the years leading up to the housing crisis and recession.”
The Housing Scorecard Regional Spotlight features data on the health of the San Francisco MSA housing market and impact of efforts to help homeowners at the local level including:
The foreclosure crisis has had an asymmetrical impact on the San Francisco MSA. The Oakland Metro Division (MD) has fared less well than the other divisions. During the housing bubble, home price appreciation in Oakland peaked earlier and rose higher than the MSA as a whole, but the subsequent decline in home prices was greater for Oakland (45 percent) than for San Francisco (22 percent) and that of the nation (30 percent). From 2000 through 2006, the share of distressed mortgages in the San Francisco MSA--those 90 or more days delinquent or in the foreclosure process—were considerably lower than comparable shares in the rest of the nation. The impact of the 2007-2009 recession, however, was more severe for the San Francisco MSA than for the nation, adding to rising mortgage delinquencies.
Economic and housing market conditions in the San Francisco MSA are improving.The share of mortgages that remain underwater has dropped to 2.5 percent in the San Francisco MD as of the third quarter of 2013, down from 9.0 percent a year earlier; in the Oakland MD, negative equity has declined to 13.9 percent from 29.7 percent over the same period. Jobs in the MSA have been increasing at an average annual rate of 38,900, or 2.1 percent, from the second quarter of 2010 through the third quarter of 2013. The Administration’s broad approach to stabilizing the San Francisco housing market has contributed to the improvements as nearly 73,500 homeowners received mortgage assistance between April 2009 and December. Furthermore, the San Francisco MSA has benefitted from $36 million in funding from the Neighborhood Stabilization Program, and the State of California has received $1.975 billion from the Hardest Hit Fund program.
The National Mortgage Servicing Settlement is continuing to provide relief for those in the San Francisco metropolitan area and throughout the state of California. Under the landmark National Mortgage Servicing Settlement, more than 186,000 California homeowners have benefitted from over $20 billion in refinancing, short sales and completed or trial loan modifications, including principal reduction on first and second lien mortgages provided as of June 30, 2013. Nationwide, the settlement has provided more than $51 billion in consumer relief benefits to more than 643,000 families. That is in addition to the $2.5 billion in payments to participating states and $1.5 billion in direct payments to borrowers who were foreclosed upon between 2008 and 2011.***
- Gill Group plans to attend Bank of Advance’s Annual Retreat and Meeting March 20th – 22nd in Norfolk, AR.
- Cash Gill plans to attend the Missouri Real Estate Appraisers Commission’s Quarterly Meeting as an Active Commission March 18th – 20th in Jefferson City, MO.
- Gill Group plans to attend MACO’s Annual Retreat and Meeting March 13th – 16th in Biloxi, MS.
- Gill Group plans to attend the National Housing and Rehabilitation Association’s (NH&RA’s) Annual Meeting February 19th – 22nd in Palm Beach, FL
- Gill Group attended the Council for Affordable Rural Housing’s (CARH’s) Mid-Year Meeting January 26th – 28th in Las Vegas, NV.
- Gill Group attended 22 conferences and meetings throughout the United States in 2013
GROWTH (2013 - Highlights):
- Gill Group expanded our cutting-edge market analysis software and added our own in-house developed needs assessment software for CNAs, PNAs, PCNAs, PCAs, RPCAs, and every other acronym for this type of service.
- Gill Group added 4 offices with appraisers, market analysts, engineers and architects.
- Within the offices are three architects, one MAI appraiser, two general certified appraisers, five market analysts and 10 additional support staff.
- Gill Group expanded the footprint of its subsidiary, National Title & Escrow, to cover the entire United States with a local presence.
- Gill Group attended 20 conferences and meetings throughout the United States in 2012
GROWTH (2012 - Highlights):
- Gill Group developed cutting-edge market analysis software that will allow us to do preliminary analysis that is subject-specific in any market in the United States within minutes.
- Gill Group added 11 offices with appraisers, market analysts, engineers and architects.
- The offices now employ an additional 34 people.
- Gill Group expanded coverage of its subsidiary, National Title & Escrow, to cover the entire United States.
- Gill Group expanded coverage of its subsidiary, Gill Insurance Group, to cover the entire United States.
Gill Group has published the following:
- New York Real Estate Journal - How can low-income housing facilities translate into high profits?
- New York Real Estate Journal - Up, up and away: Home mortgage interest rates and gasoline prices continue ascending.
- Tax Credit Advisor - Boston MSA Market Snapshot
- Tax Credit Advisor - Seattle MSA Market Snapshot
- Northeast Industrial Development Resource Guide - What Appraisers Know About Investing.
- Affordable Housing Finance – Urban and Rural Market Studies.
Cash Gill, MAI has had the opportunity to speak on the following topics:
- (Indianapolis, IN) National Council of Affordable Housing Market Analysts - Maximize Your Market: Understanding the Methodology Behind Market Studies.
- (Reno, NV) Nevada Council of Affordable and Rural Housing - Don't Get Caught in the Red. New Guidelines for Audits and Inspections.
- (Washington, DC) The Institute for Professional and Executive Development - Nonrecourse HUD Deals - So You Closed Your Nonrecourse HUD Deal. Now What? And Is It Really Nonrecourse?
- (Arlington, VA) Council for Affordable and Rural Housing - Property Valuation: The Correct Way to Value Properties.
- (New Orleans, LA) National Council of Affordable Housing Market Analysts - Affordable Housing Site Analysis
- (Las Vegas, NV) Nevada Council of Affordable and Rural Housing - Auditing and Accounting Guidelines for Section 42 Low Income Housing Tax Credits.
- (Washington, DC) Council for Affordable and Rural Housing - Rural Development Appraisals and Market Studies
- (Miami, FL) Council for Affordable and Rural Housing - The Equity Market - Impact on Rural Housing
- (Washington, DC) Council for Affordable and Rural Housing - How to Foster Affordable Green and Rural Housing Needs Assessments
- (Indianapolis, IN) Affordable Housing Association of Indiana - Market Analysis – Best Ways Use Market Studies to Ensure Application Points
- (Portland, ME) Enterprise Buyer/Seller Conference for RRH 515 Properties – Valuing the Product. What Is My Development Worth?
- (Washington, DC) National Housing and Rehabilitation Association – Financing and Underwriting Special Needs Housing.
- (Atlanta, GA) National Council of State Housing Agencies – Comprehensive Market Analysis.
- (Chicago, IL) AHF Live – Strategies for Rural Deals.
- (Dallas, TX) Crittenden Multifamily – Financing Special Use Properties.
- (Washington, DC) Council for Affordable Rural Housing – Rural Housing Preservation
- (Denver, CO) National Council of State Housing Agencies – Rural Housing Strategies
- (Denver, CO) National Council of State Housing Agencies – Y15: Preservation and Disposition Seminar
- (San Antonio, TX) Rural Rental Housing Association – LIHTC Legislative Update
- (Key Largo, FL) Council for Affordable Rural Housing – How National Appraisal Practices Impact USDA Assisted Properties
- (San Francisco, CA) National Council of State Housing Agencies – Changes and Challenges in Rural Housing Development
- (Chicago, IL) AHF Live – Preservation of Older LIHTC Deals
*as seen on housingfinance.com
**as seen on seniorhousingnews.com
***as seen on hud.gov.com