Remarks to The Council for Affordable and Rural Housing,
January 2002, by:
John B. Meyers
Consultant
Louisville, KY
502.451.2727
SECTION 515 PORTFOLIO ANALYSIS:
OPPORTUNITY FOR OWNERS
Now that you have owned a number of Section 515 FmHA projects for a
number of years, it is only right to form a strategy as to what to do with them. Some projects may have value for obtaining equity loans, some may be preferable as conventional projects, and others may have no discernible value except as part of a management portfolio.
This is to suggest that you categorize your projects first on the basis of GOOD locations and BAD locations. Good means that there would be a market for the units if they were simply conventional units without any RD subsidies, or that they are 8/515 projects in good markets. Bad means that, without subsidies, you couldn’t rent the units to save your life, i.e., they’re in a depressed or truly rural market, or in a small, dying town. (See below.)
Good Projects
List your Good projects by the dates their RD loans closed.
Projects 20 years old (from date of loan closing, not occupancy) can be considered right now for equity loans or even for paying off the RD loan and renting them as conventional projects. The dates will determine the order for submitting requests for equity loans or for prepayment.
For equity loans, RD appraises projects as though they are
conventional projects (without subsidies or restrictions). Say a project is appraised at $2,000,000; RD could offer a 90% loan on it, or $1,800,000. If you owe, say, $800,000 on it, then you could receive an equity loan of $1,000,000 and possibly an increase in return-to-owner to $16,000 (8% on the $200,000 redetermined equity).
You could structure an agreement with the Limited Partners (within your fiduciary limits) to buy them out with a portion of the equity loan proceeds as part of a transfer to a new Partnership. You could rehab this transferred project and secure Tax Credits on it. As a condition of the equity loan and transfer, RD would require a 20 year restrictive-use clause.
Or you could take the equity loan, buy out the Limited Partners, and stay in without a transfer.
For projects from 1986 through 1989 with Tax Credits, you need to look at any Tax Credit restrictions which might have been imposed. The restrictions might limit the RD equity loan scenario when they reach the age of 20 in 2006-09.
For RD projects from 1989 and later, RD imposes a 50 year lock-in that forbids prepayment and severely limits equity loans. These projects may have additional Tax Credit restrictions on transfers and resyndications. Such projects are probably dead in the water and should be considered for sale of the GP interest to a management company.
To prepay a project, you first have to accept that Agency
requirements give tenants Life Estates on their units at rents of 30% of their income. That is, if Mrs. Jones is getting Rental Assistance and paying $50 monthly as her contribution to rent, after prepayment, when the project is free to be operated as a conventional project, she’ll continue to pay $50 or 30% for life — her life, not yours. Mr. Smith, paying $315 before prepayment, will pay $315 or 30% for life, even if the conventional rent should be $590. If you can get over this hurdle, then prepayment becomes a possibility.
Bad Projects
Actually, there are at least three types of Bad projects: those in Bad locations with no hope of an equity loan, but which have a lot of Rental Assistance from RD and are operating well enough. Depending on their age, these could be considered for transfer to new Limited Partnerships, rehabilitation and Tax Credits. Whether or not you would stay in as GP would be up to you.
Then there are the Bad projects in Bad locations with no hope of an equity loan. They don’t have enough RA, but with additional RA they would operate well because there is a market for the units. RD simply doesn’t have servicing RA for such projects unless RA is transferred from other projects. There are some cases where a Prepayment Request could result in additional RA being offered, since Prepayment RA comes from a separate pot. With enough RA, these projects could move up to the above category. Without it, they will limp along.
Last, there are the really Bad projects where the market has died. The
question with these is not if you’ll take a hit, but when.