Floor Discussion
Eric Oetjen,
Session Moderator
ICF Kaiser Consulting
Fairfax, VA
Why are we here? The Agency is in the middle of undertaking a top-to-bottom Reinvention of the 515 program. The focus of this meeting is to get input on ways that could be done differently to address some of the problems that participants have encountered. On prepayment, are there ways to minimize the number of borrowers that are actually applying for prepayment? This gets at the idea of owner retention.
The key question is: are people using prepayment as a solution for something that doesn’t require prepayment? Are there other ways to get at the reasons that people are seeking prepayment? The prepayment process is a fair amount of work for both the Agency and for people in the program. If that doesn’t need to be the solution — if there are other, better solutions — we’ll have simplified the process. For those that prepayment is something they want to do, what are some ways to improve the process — what is working, what is not working, and what could be done better?
DISCUSSION
What are the characteristics of projects where borrowers are likely to apply to prepay? What are the market conditions? Situations that owners are in? For these kinds of properties, what are the motivating factors? Is it truly money? Have the local market conditions changed and is it now a very different place from when the project was originally developed? Or are other things going on? Finally, are there other things that might be done that might change the motivation for an owner to submit a prepayment request?
Characteristics of owners/projects:
— rents in the area have gone up
— older project with phantom income
— owner has had enough
— owner is getting out of the business
— owner has died
— excess Reserve funds in 8/515
— owner is doing estate planning
— partnership has matured
— liability issues with rental units
— smaller projects (8-and-under units)
— “mom and pop” owners tired of paperwork.
Reasons why:
— paperwork too burdensome
— rules have changed
— original intent of partnership
— excess 8/15 Reserves
— accumulated depreciation
— rents tied to 30%
— Limited RTO versus better options
Options to head off requests:
— reduce small project paperwork
— let small projects prepay.
John Meyers: Maybe I’ve missed the point of the discussion to this point. The reasons why owners would want to prepay are fascinating. I think there are a lot of good reasons of why owners would want to. But can they realistically prepay?
If we go back to the initial point — that the markets have improved and the rents are up — the question is: If they were to prepay, can they make it financially in the market as a conventional project? That is a bottom line decision. The second part is: Will the Agency permit them to prepay in such a way that they can afford to prepay? Someone came to me and asked about prepaying — he was older and wanted to plan his estate, he was tired of the paperwork, he was tired of the Agency, he was tired of the changes in rules. I pointed out to him that if he wanted to prepay, he could. The program was clearly set up for that. It would cost him $40,000 a year to prepay. That was what he would have to do because of the way the prepayment program (if it is a program) has been structured.
There are many borrowers, that even though they are in prime markets, cannot afford to prepay because of the restrictions the Agency has put on. I’m saying this is all fascinating, but my perspective is not philosophical, but the dollars and sense of prepayment.
Pat Sheridan: It is important that the Agency get to the motivation of why the request to prepay is in there and if it is seriously something that is a conversion to a conventional market rate project or whether it is a wish by the owner to tap the equity in the project or increase the Return. It is important, as we go through this process, to try to separate out what we can do to fix regulations (try to streamline them or something) and what things we may need to look at that are legislative in nature that maybe, as a group, we can go forward with some type of legislative consensus.
Return to List —
— where the market has deteriorated (as in small towns) small projects have prepaid
— the property was built as an investment, the Agency could offer a fair Return
— IRS treatment of Reserves and improvements is inconsistent with Agency approach
Chuck Wehrwein: I think that the Agency recognizes that there are some elements related to changes in tax laws and different treatment of certain types of income and expenses that weren’t present when many of these projects were built and contracts entered into. I think there are some things we can do regulatorily (if that’s the right word) to try to take some of those issues not only into consideration but to try to make some adjustments for those thing. I am a CPA and I understand those processes pretty well. I invite you to send us some specific examples of some the phantom income issues and some of the tax-implications owners are being faced with. Offhand, I think there are some things we can do to recognize some of these issues.
On Return on equity (I’m not going to tell you which way we’re leaning, because we’re not leaning any way, we’re here to listen), clearly, what happens as more Return goes out of the project is an impact on rents and it is either going to hit the tenants or our Rental Assistance. That is what we’re faced with.
There are some marketplaces that can absorb some more modest rental increases than have gone on in the past; in some cases, we’ve been rather shortsighted in our look at rental increases and what it means to the condition of the project and the Reserves, and so forth. It comes down to a situation where very hard choices are going to have to be made, or they may be made for us relative to funding on Rental Assistance and so forth. It gets down to these situations that are not going to be easy to call. I think the 515 program has served its tenants very well; it would take a sea change in policy to move up the income ladder — that would effectively leave a good many tenants behind. We’re going to have to look very hard at what we’re going to do with these dwindling resources.
Return to List —
— permit return of 2% even after 5 years
— permit Returns to Owner to be accrued
— change tax code on phantom income and exit tax
Chuck Wehrwein: The Agency is not averse to trying to work with Treasury on coming up with some proposals to deal with issues like that. Realistically, a flat out pass on those gains is not even remotely possible, although I think there are some different ways to skin that cat that I understand they may be interested in looking at now. That would be with Treasury; whether or not that would pass muster (that is a legislative change) with Congress is entirely another issue. We would certainly be happy to consider other issues, and maybe if we think about this more thoughtfully, think of ways to get you part of the way there and still achieve what we want as an Agency: to continue to provide this housing.
We would be happy to work with the Stakeholders and Treasury to try to come up with some kind of proposal. I think you have to be somewhat realistic and understand that with the budgetary and tax issues, Congress may not allow a large loop hole (in their terminology) for “investors” to drive through.
Jim Poehlman: Equity loans would work in a good share or at least a portion of the projects; maybe there would be a way for the Agency being willing to take a second position with their current mortgage. At least in Wisconsin, there would be opportunities for some below market financing through our State Agency. That would allow an equity loan from some other sources.
John Meyers: I will agree fully (up to a point, of course, being me) that equity loans will work to keep borrowers in the program, but there are several circumstances to consider.
One is that you have a List of projects which have been offered equity loans, and the owners have accepted. Some of those appraisals are up to five years old. I think it is a legal question of equity of whether or not to offer the borrower an opportunity to have the project reappraised to determine a new equity; in those markets in which the projects could truly prepay, their equity would be current — based upon their present value in the market.
What I’ve heard is that there are a number of projects on the List where the project could truly not prepay, but because of a mis-appraisal of the project, the project was shown to have equity, and the owner was offered an equity loan. This reappraisal would be one way to get those bad offers off the table. There is the question of coming up with current appraisals for the projects on the List as well as the Agency cleaning up the List; I have equity loan offers which have been made and accepted, and the projects have not been put on the List even though the offers are three years old because the States are unsure of how to process.
Coming back to the previous speaker’s point, I think that borrowers should be given the opportunity to secure the equity loan with outside financing. Even though it is appealing for the Agency to say to the borrower: “You need to get a written-down interest rate from a State Agency or otherwise,” not all States have those programs. So, I think for program administration, the owner should be offered an opportunity to obtain an equity loan on the best rates and terms available (somehow this best rates and terms available can be subject to a review and discussion). Banks should bump something off if they have first position rather than second position behind the government.
Another possibility, other than simply an equity loan from an outside lending source, would be securitizing the Return to Owner. That is, the equity loan would be based upon equity; let’s say you determine 100% of equity to be, say, $500,000; 8% Return (to keep it simple) is $40,000. You give the borrower a $40,000 annual Return to Owner, and that will be a permanent line item in the project budget — it will never be zeroed out and it will never be cut.
Allow the owner to securitize (or pledge) that with a lender in lieu of an equity loan. If the owner can negotiate an 8.5% rate rather than 9.5%, or even a 7.5% rate, it is up to the owner as to how much “equity” he can raise on this income stream. That becomes the owner’s problem. The Agency is only committed to that $40,000 a year. One of the concerns I’ve heard expressed is that taking an increased Return leaves you fully subject to the budget process. Some Agency offices, say: “If we’re a little short on the budget, we’ll just take it out of the Return;” so the owners are unwilling to accept an exposed Return.
Art Collings: When an owner offers a project for sale to a non-profit (where the Agency finances the purchase, including the equity payment), the line is so long for equity loans to make that work (because such purchase loans and equity loans are funded in date order) that this is inoperable. There needs to be some adjustment in how that works in order to implement the law.
Return to List —
— Agency letter to tenants is too early
John Meyers: Another thing that is not working is where you have a project that you truly want to prepay, that is viable in the conventional market. On the pre-’79 projects, the Agency says: “In order to accept prepayment, we will slap on this restrictive use clause that provides you will ‘love, honor and obey’ the tenants for as long as they live there.” Where you have a Section 8/515 project with the Section 8 expiring or where you have an RA project, you can very easily have your $25 a month tenant — one that is very-low income, truly needing the housing, eligible, and all that good stuff. However, the reality is that you can’t go to your bank and say you want to prepay the loan, and your rental income is going to be $25 a month and your O & M is going to be $250 a month. The bank will laugh you out of the office.
The restrictive use clause that has to be imposed in order to accept prepayment precludes prepayment. That is particularly with the sophisticated borrower that is looking down the road; they say they cannot afford to have all these $25 a month tenants.
What’s not working is that the Agency cannot even accept prepayment on a number of projects because of the restrictions it has put on. This is a ‘love, honor and obey till death do us part’ for pre-’79’s.
For post-’79’s, the restrictive use clause (as I interpret it) is that you will ‘love, honor and obey’ until the end of the 20 year period. At that point, the tenant has no protections and the owner has no obligations. So that works ideally with Section 8/515, where you hold the Section 8 in place; if it expires, you say “adios” to the rents you had been collecting and collect the new rents; if the tenant can’t pay those new rents, you say “Adios, tenant.”
You have more restrictions on the pre-’79 without restrictions than on the post-’79 with restrictions. And, then you can get into the worst of all possible worlds where you have a post-’79 that we advance a few years, and it comes in as a prepayment request — there is no restrictive use clause in place because it is over 20 years old at that point. Then, the Agency would have this “love, honor and obey till death do us part” on it.
So, I think that in terms of prepayment — that is actually not working because of restrictions the Agency has imposed. I think an owner would accept the original restrictive use clause that was slapped on the post-’79’s which comes in two parts:
1. You agree to use it for 515 purposes for 20 years — 515 purposes under the legislation is for low and moderate; there is no mention of very-low, and it does not include the Rental Assistance (which I guess is Section 521) and it does not include the Interest Credit (which is 523, or maybe I have them reversed). So I think an owner could accept using it for low and moderate until the 20 year period ends.
2. The second part of the restrictive use clause that was accepted on the post-’79’s is that when the Federal financial assistance ends, it ends. It is no more. You could interpret that, in my view, to mean that when the RA ends as a function of prepayment, that tenant then has the opportunity to pay what is the true rent for that unit, or to move.
Now, this is absent a policy to coordinate with HUD to provide a Section 8 voucher for these tenants in the projects that are being prepaid. Or, absent a determination by the Agency that, in these special circumstances, they can provide RA for that tenant even though the Section 515 financing is no longer in place. So, the tenant protections could be made. Now in that scenario, many an owner would gladly prepay and say “adios.”
The Agency could say in that scenario that the tenants in the RA units which are being paid, that it will provide RA for the tenants as long as they live in that project, even after the 515 financing is paid off.
Bob Rapoza: What would be the basis for paying off the 515?
John Meyers: The basis for paying off the 515 is that the owner can get an economic return in the marketplace.
Bob Rapoza: What about the housing opportunities for the tenants that are there? Do you assume the Section 8 ends or that the rental subsidies from FmHA end?
John Meyers: I’m assuming that when you prepay the 515, the RA ends, or if you prepaid the 515 on an 8/515, that the Section 8 will at some point expire.
Bob Rapoza: On the first case, on the 521 (the RA), what is the basis you presume the Agency would accept the offer to prepay?
John Meyers: The Agency could accept the offer on the basis that you will live with the restrictive use clause that was applicable to the post-’79’s. This is a proposed compromise position — that you would agree to serve low and moderate. Moderate, to be irreverent, covers a lot of sins — $35,000 income can be Moderate.
Bob Rapoza: Why would advocates be for something like this? What is the benefit for the purpose for which the housing was financed?
John Meyers: I would say an advocate is someone who believes that this low income housing has been built, has been operated, and should be continued to be provided (because there’s no more coming down the pike), and that these minimal opportunities should be provided for as long as possible.
Bob Rapoza: To the extent that the government provided the subsidy and provides the options for the equity loan or some other way to sweeten the pot, and there continues to be the need for the housing, what is the public policy basis for what you ask?
John Meyers: Owners have been offered an equity loan. I’ve got them stacked up in the office. They’re collecting dust. There are no equity loan funds being made available because the Agency has administratively determined not to fund those offers that are on the table, but instead to construct new housing. So the owner is in an interim period that he’s not getting any benefit from the project and has no prospect of an equity loan.
There is no prospect, as I see it in my ramblings, of getting even a reputable Return to Owner incentive. He’s locked himself into a process that may never end. The owner can rightfully conclude that he is, out of his own pocket, subsidizing these tenants. If the Agency isn’t going to fork over the dollars, then there comes a heightened wish to be away from the Agency.
Bob Rapoza: To what extent is the owner subsidizing the tenants?
John Meyers: The owner is forgoing the cash income from the project if he were free to operate it in the conventional market.
Bob Rapoza: If you’re right about this, what happens to the tenants?
John Meyers: In a very narrow sense, the ideal is that they would be able to pay the rent that would be charged in the market.
Bob Rapoza: If you built a 515 for very-low income families, and you conclude that FmHA won’t afford the subsidy for extended use, what about the tenants that can’t afford to pay the market rent?
John Meyers: Those that can’t afford the market rent could be adversely affected unless either a HUD voucher (in a special form or otherwise) or a Rental Assistance program is set up. There are tenants that have an actual cash contribution toward their rent of $25 (there are also tenants that owners pay to live in the unit), but taking the $25 a month tenant, when the loan is prepaid (if there are no restrictions) they would be out of that unit because they could not afford it.
I recognize that we have two things here — we have a business motivation and a social motivation. The Section 515 program has melded these and worked with them (perhaps in an uneasy tension over the years) and now it is coming to the end of the relationship. The question is how to preserve both. I’m saying as the first opportunity, I think the owner would accept an equity loan if truly offered cash on the table; he would reenlist for 20 years. Or, if the owner were offered a reputable Return to Owner (depending upon how it is determined), I think the owner would accept that and reenlist. But, absent those, I’m saying the owner has to make an economic decision to go in his economic interest.
Bob Rapoza: Then it is possible that if prepayment went through, very-low-income families would be displaced. I think we ought to define the issue here. Of the 500,000 or so units across the country, I don’t know what per cent are pre-’79, but if it’s 40% (which is probably not far off), that’s 200,000 units. Those families make, on average $9,000 a year. The capacity for them to pay market rents is somewhat limited. I don’t know, of the 200,000 units, what per cent are in projects that can truly prepay, that truly have some value outside of what they’re being used for. Nonetheless, you are saying that with this policy, at the end of the road, certain families will be gone — out on the street and looking for housing opportunities elsewhere without any subsidies.
John Meyers: Not only would they be looking for housing opportunities outside this project, but the project can indeed prepay. I’m involved in one where the rents would be $500 a month in the marketplace; when these families look for other units in that market, they’ll find the rents are about $500, maybe as low as $400, but the families still can’t afford to pay $400. In these markets, there is no place for them.
Bob Yoder: HUD is doing what they call “sticky back” certificates, for tenants in high rise elderly projects that are paying off their loans because the 20 year period is over. Those certificates last, for those tenants that are in those units now, until the tenants die or move from the project. Then that certificate disappears and that unit goes to the market rent. You don’t lose a tenant if you pay it off if the tenant has a “sticky back”" certificate; but, the certificate won’t last for another 50 years. The government won’t have the ongoing subsidy and the interest.
Of my units between 1978 and 1989, I don’t have any Rental Assistance. All of mine were built without Rental Assistance because there wasn’t any available; we’re talking about a segment of projects for prepayment that don’t have the deep rental subsidies, so the people living there now are paying the rent. If you went to market rates with prepayment, we’re at the market, even though we’re considered to be low-income.
If you can’t afford to go to market with the rents, no one is going to take them out. I’m just curious to find out if RHS has looked at how many units they really think that if they said “Prepay the loan and we’ll let you out of the program,” how many units out of the portfolio would you actually lose? Are we going through a whole bunch of gyrations for 3,000 units out of 500,000? If that’s the case, prepayment may not even be an issue; if they can afford to go, give them a “sticky back” certificate and let them go.
Chuck Wehrwein: We don’t know exactly at this point what the impacts are for these various segments. We are going to have a study done; it will be done in fairly short order before the end of this Fiscal Year (by September 30). This should give us a lot of information on the tenants and these various categories of projects.
Bob Rapoza: When there was funding for equity loans, some thought the Agency went to equity loan offers as a first resort rather than as a last resort. So there is concern that a lot of deals that were offered equity loans probably shouldn’t have been offered them.
Part of the concern is that the Agency didn’t do the thorough work it should have done to determine if the market for the project existed outside of providing housing to low income families and whether, in fact, the equity loan was the only incentive that could keep the project in the program. The Law said the “least costly” incentive to the government should be used by the Agency; there is a lot of evidence that wasn’t the case. Basically, any owner who wanted an equity loan would get it.
Pat Barbolla: Would the concern be lessened or removed if we could structure some kind of program that would involve prepayment of the loan in connection with a transfer to an entity using Low Income Housing Tax Credits, where the property would then enter into a restrictive use agreement (for a minimum of 20 years, but more likely 30 years), but we might be able to provide Rental Assistance so the existing tenants would have Rental Assistance as long as they live in the unit; future tenants would be under the Tax Credit limitation, say 60% of median income. Is that something that could be lived with?
Bob Rapoza: It is understood that there is a problem here. There are some legitimate issues.
John Meyers: I would not support Pat Barbolla’s concept because there is no place where the owner agreed to sell the project as a condition to getting out of the program. This may be a consequence that the borrower does not want and did not anticipate. There might be some situations where that might be applicable, but at the same time, there is precedent in the program where the owner can offer it for sale to a non-profit — either prior to prepayment, which would result in a non-prepayment (there the Agency has not been providing loans for such transfers); or, an owner can prepay subject to a clause which states that at the end of the 20 year period, he agrees to sell or offer it to a non-profit.
Pat Barbolla: It would not be the sole option. I’m just saying it would be an idea — one of many options the Agency could look at. It is something that if someone wanted to do it, they could do it. Not for everyone, but it might work for a few. It is an alternative to try to reconcile the individual owner’s interest versus the housing advocate’s interest in protecting the individuals who are already in the units. Obviously, it is not as good as an equity loan, but I don’t think there is money for equity loans. And, this would not be limited to the current option of going to a non-profit; the only way many people would want to do this, in my view, is selling it to another limited profit owner that would be willing to pay enough to take the risk to give the owner some money. It is just something to look at.
John Meyers: If you’re selling your project, you don’t care who buys it if your price is met. So, you are not going to say: “My price to a limited profit is $X, and $Y to a non-profit.”
Pat Barbolla: The owner doesn’t care to whom he sells it, as long as he gets his money. At least if we have an alternative for some people to possibly sell it to somebody, it is better than being in the position you’re in now where many owners can’t do anything with it.
John Meyers: The Agency already has the position now where it can be sold to a non-profit. I’m saying such a transfer isn’t working because the Agency isn’t providing funding for a transfer to a non-profit as an alternative to prepaying.
Pat Barbolla: In my idea, the Agency wouldn’t be involved in funding the sale to the new entity; the only thing the Agency would agree to is to continue the Rental Assistance to the existing tenants that might be there. This would not have to involve a non-profit.
Bob Yoder: We’re here talking about prepayment and moving these projects. People sitting here are people that have projects that are well kept, taken care of. Some owners couldn’t spend $3,000 per unit in their projects to get Tax Credits to transfer them because they’re well kept, have good Reserve accounts, and are well-maintained. There is no new funding for New Construction because all the money has been used for rehab. So, there’s no money for buy-outs because it is being used to rehab projects belonging to owners who built the projects in the wrong towns (or, shouldn’t have built them there), and then turned around, and they are going out of the program in most cases.
We are sitting here talking about how we’re going to get beat up again because we can’t get out of the projects that we’ve taken pride in. I’m just as interested in the social part, but there is a cost to the government (to the taxpayers) to house low income tenants; we all get out there in left field where we should be able to do it for nothing. Well, it can’t be done for nothing. The lower the income of the tenant you want to house, the more money it takes. There’s no way around this.
It is disheartening to listen to the discussions about the incentives to owners that have done good jobs and have done well, kept them well, and can move them to market rate. In our State today, if you can’t do substantial rehab (meaning new roofs, new structures, walls, foundations), you don’t even compete for Tax Credits. That is becoming less and less of an option.
John Meyers: If a project is in a soft market, and I’ve seen some, where the project is running five vacant units out of twenty, and there is 100% RA, and the Public Housing is running 20 vacant units out of 100, it is an absolutely soft market and you could arguably prepay the loan and the RA tenants could move into Public Housing. There are such soft markets. But, the reality in those is that you cannot economically prepay because there is no market for these units — it is not a bankable loan. You can’t tell a bank your Net Operating Income is going to be a negative $5,000 a year, and ask for a loan to prepay. That is a market problem where prepayment and incentives aren’t in the same ball park. That has to be distinguished as an irrational reason to prepay.
Bob Rapoza: I’d like to suggest a couple of things. First, the bad loan that the Agency has now ought to be returned to the owners to be reappraised. Second, that the Agency set aside $5-$10 million out of 515 funds for equity loans, and the Agency limit the equity loan amount and take a very hard look at the market (so there is a market) and that the Agency commit in the next two or three [Meyers, being impolite and interrupting: months] years to try to get through the projects that can truly prepay, with the understanding that the owner may not get full equity, but will get some money to stay in the program.
If it is the case that the market for the equity loans isn’t that big (we have to find out), I think the Agency ought to commit to using some of its 515 funds for limited equity loans as a way of getting this going again and see what that gets them — based on a reconfiguration of what they can do and what the true demand is for equity loans.
John Meyers: There truly are markets. I could take you to a project in Williamsburg, Virginia. I could take you to a project that is now in Richmond, Virginia. I could take you to some really nice ski resorts. There truly are some projects that can prepay. If the Agency were to set aside money and commit to it and go through with it, it would be fine. But, there is another processing issue which I feel is important to raise.
The Agency has all sorts of eligibility determinations; so if a borrower has 20 projects, and he’s out of compliance on one project, he is being told that he can’t come in with prepayment requests on the top of the line projects because he’s got a compliance problem. So, he’s being denied the opportunity to come in and prepay. But, somehow, a request had snuck through and he was offered equity loans on cream puff projects; now, the Agency is saying, we don’t want to close on those equity loans because you’ve got a project out of compliance.
We have the Agency processing stumbling on itself. Even if the borrower would accept an equity loan and up to 100% RA, and the owner wants out of the program and will agree to sell to whomever (who will get a rehab loan, Tax Credits, and reenlist). So, we have borrowers, who because of these eligibility determinations can’t even try to slide away from the program on these projects.
Chuck Wehrwein: That is our stick. With non-recourse loans (with bad actors) it is pretty effective. I would throw it back to you. If it is in the best interests of the government, we can accept certain situations. If it is a big portfolio and we are talking non-monetary non-compliance, and it is in the best interests of the government to allow the transfer to take place, we can do it. There may be specific examples you’ve seen where there hasn’t been the amount of flexibility you think should have been present; speaking as someone who’s been both a lender and a developer, I can see the value in this. I can see the Agency look at the circumstances that would be in the best interests of the government. I don’t know why we would drop that processing requirement.
Pat Sheridan: One of the things to look at, in the Agency perspective, in light of the funding situation, is that in a lot of ways, the equity loan funded by the Agency is a double subsidy. Not only are we having to put out the money to fund the loan, but we are having to raise the rents to cover the debt service on that equity loan. We’ve done a number of projects where we’ve raised the Return the owner is permitted, which of course impacts cash flow and the rents, but we haven’t made a loan. So, in essence, we’ve saved money on that side. Does that make more sense, or even essentially tied to something like that, the ability of the Agency to do subordinations or junior liens with other lenders, or doing more from a cash flow standpoint than a loan?
John Meyers: About a year ago, there was a National Office training session for staff and there was an example of a Return to Owner incentive offer. The Owner could be offered a $463,000 equity loan [see below for detailed analysis] or he could be offered an increased Return to Owner. As I recall, the Return offered was $12,000 annually for 20 years, or $240,000. The example said $463,000 was close enough to $240,000 that the owner might accept. The Agency had a way of calculating this based upon the 1% loan cost for $463,000 at 50 years.
But when I teased this example apart, it was not $12,000 over 20 years — that was the total Return — it was only a $9,000 increase in Return over 20 years. The offer, then, was $180,000 over 20 years; a dollar is not worth the same in 20 years as today. If you bring it back to a Net Present Value, this $180,000 could be $100,000, depending upon how you discount it. An equity loan is tax free; so we want to take this Return on the same basis — after taxes. So, $100,000 after taxes is $67,000 at 33%.
The Agency training was to say, “If we can’t give them a $463,000 equity loan, we will offer them $67,000 at present value, after tax.” My concern is that in the training manuals of the Agency in the field, the orientation is not to look upon this as a financial transaction, but more of a sham. In brief, no one will accept these terms unless they are very unsophisticated. When we talk about a Return to Owner, we need to talk about one that makes financial sense in the real world.
Pat Barbolla: I am concerned about the double subsidy. It bothers me about the additional Rental Assistance needed to be utilized to repay the equity loan. Either way you look at it, the Agency will be stuck with a complex that is 20 years old; I think a hard look needs to be made to compare the existing unit with the cost of an equity loan with the Rental Assistance versus the owner prepaying that loan and making a new loan for a new complex that is now up to energy standards, better construction techniques, and better constructed than they were 20 years ago. For budgetary purposes, we can’t count the repaid loan against the new loan, but if we can get those $10,000 to $12,000 apart, it really may be worthwhile to let that owner prepay and target that town for a new complex. That allows the old owner to prepay and get out, and the Agency has a new complex. This is an alternative that could be looked at in certain communities.
Unknown speaker (probably an Agency employee): There was an example that someone used earlier like an increased Return to Owner at $40,000. The comment was made that the Agency was not looking at what was the least costly to the government. If you take the $40,000 Return for 40 units, you’re going to have a rent increase of $83 a month. That is going to dig into your subsidy, dig into your Rental Assistance, and over the 20 year period, it is going to cost the government $800,000. So, when we look at an equity loan, in a lot of cases, it is the least costly.
RD Training Example of Increased Return
FYI