John Meyers, 515 Housing Consultant

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This is my proposal on where I think we can be on prepayment. I have revised this from my previous draft based on further discussions I have had.

This is to propose that the industry draft, endorse and support a three-pronged legislative package regarding prepayment and preservation of pre-1989 projects (post-1989 projects have a prohibition on prepayment).

Right now,

— if you want to prepay a pre-1979 project without any restrictive use clauses, the Agency administratively (rather than legislatively) attaches a restrictive use clause that makes it impossible to prepay the loan if it has any RA or Section 8. This clause requires that each tenant be protected at their present cash rent until the tenant leaves; this affects the cash flow for refinancing.

— if you want to prepay a post-1979 project with a restrictive use clause (which has not expired), then you can easily prepay at the end of the term of the clause because the tenant has no rent protection once the term is up. If you prepay after the restrictive use term expires, however, you will be governed by the requirements for projects without any clause (above).

— post-1979 projects with an unexpired restrictive use clause can no longer be offered any incentives to stay in because legislation last year prohibited any incentive offers. This was an unintended (I believe) consequence of stopping equity loans for them.

— the Agency has offered equity loans and other incentives for projects not to prepay, but the Agency is not funding adequate amounts of incentives, so you are forced to stay in the program because you cannot get out. There could be a 10 year wait (or more) for incentives, and the Agency proposes to fund the then 10 year old offer, not a new one. Remember the Agency is the government and is here to help us.

Thus, I think a three pronged legislative proposal is in order so that CARH and the Rural Housing Council can be leaders in this area and demonstrate to members (and potential members) that the organizations will continue to fill a vital role in the industry. The legislation should have 3 elements:

1. Rural Development can impose no further restrictions upon prepayment than originally agreed to by the borrower:

— prepayment of a pre-1979 project would have no restrictions imposed by the Agency upon prepayment; this means the current administrative restrictions in the regulations would be removed and no tenants would have any protection.

— for post-1979 projects, the restriction would be as originally agreed to for using the project for low and moderate income tenants after prepayment; this means that tenants would have to meet the income limits for low and moderate tenants after prepayment, but there would be no basic rents or note rate rents, only the unit rent set wherever the owner sets it, however lease terms would be honored for non-RA tenants until expiration. There would be no reference to 30% of income. For RA tenants, their rent would be their tenant contribution until lease expiration, then the rent would become the unit rent.

2. Implement a “sticky RA voucher program” through separate legislation, appropriation, and authorization:

When a project with RA is prepaid, RHS would then assign a sticky RA voucher to the tenant remaining in the unit, whether or not the tenant received RA before. The sticky RA would pay the difference between the tenant contribution (determined by the Agency, not the manager) and the rent (up to 120% of the Section 8 Existing Housing Fair Market, or, if the rent is higher, the Administrator may authorize a higher amount). The actual rent of the unit will be set by the owner. When and if the tenant moves, the sticky RA may be taken only to another 515 project. Failure by the Agency and tenant to pay all rent when due could be a basis for eviction.

3. Force the Agency to fund the incentive offers which have been made, but not funded, and provide for incentives to post-1979 projects.

The following draft legislation accomplishes # 1 and # 3, above. Someone else needs to draft # 2. The intent is to cause the Agency to fund incentive offers made, to offer incentives (but not equity loans) to post-1979 projects, and to accept prepayment when incentives are not accepted. This does not address (and is not intended to affect) any litigation under way relating to any damages resulting from previous legislation.

 

A BILL
To amend the Housing Act of 1949.

Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1, SHORT TITLE.

This Act may be cited as the “Rural Rental Housing Preservation Act of 1998”.

SECTION 2. APPROVAL OF ASSISTANCE - Section 502 (c) (4) (C) of the Housing Act of 1949 is amended by striking “(C)” and all that follows through “provided —” and inserting the following:

(C) APPROVAL OF ASSISTANCE - The Secretary may approve assistance under subparagraph (B) as follows:

(1) For assisted housing for any loan for the housing made or insured under section 514 or 515 pursuant to a contract entered into prior to or on December 21, 1979.

(2) For assisted housing for any loan for the housing made or insured under section 514 or 515 pursuant to a contract entered into after December 21, 1979 but before the date of the enactment of the Department of Housing and Urban Development Reform Act of 1989, except:

(a) Where the restrictive use period has not expired, the Secretary may not approve assistance under subparagraph (B) (iv);

(b) Where the restrictive use period has expired, the Secretary may approve assistance under subparagraph (B).

and the Secretary determines that the combination of assistance provided --

SECTION 3. FUNDING OF ASSISTANCE - Section 502 (c) (4) (C) of the Housing Act of 1949 is amended by inserting the following:

( ) FUNDING OF ASSISTANCE - The Secretary shall fund the assistance offered under subparagraph (B) within 6 months of acceptance. The Secretary may not place a higher priority on funding new projects over such offers of assistance and subsequent loans for other, existing projects.

SECTION 4. ACCEPTANCE OF PREPAYMENT - Section 502 (c) (4) (C) of the Housing Act of 1949 is amended by inserting the following:

( ) ACCEPTANCE OF PREPAYMENT - Where the Secretary accepts prepayment of a loan without a restrictive use clause, or where the clause has expired, the Secretary may not impose any restrictions as a condition of accepting prepayment. And, where the Secretary accepts prepayment of a loan with a restrictive use clause, the Secretary may not impose any additional restrictions as a condition of accepting prepayment.

SECTION 5. FINAL REGULATIONS

The Secretary shall issue implementing regulations to carry out the amendments made by sections 2, 3 and 4 of this Act not later than 30 days after the date of enactment of this Act.

(See also my expanded version of this proposed legislation.)

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