State and Local Preservation Solutions

11 min read

Three states, three different approaches 

One size does NOT fit all.

That was the message from an expert panel on State and Local Preservation Solutions at the NH&RA Summer Institute in July. The sentiment, accompanied by a rear view of a cat and an elephant sitting next to each other on a bench and looking out at the ocean was particularly appropriate, not only for the beautiful Newport, RI setting, but also as it came in the presentation of Anne Berman, assistant director of development at Rhode Island Housing, the smallest state’s housing finance agency, who compared notes and experiences with colleagues from Massachusetts  and Colorado, states with decidedly different preservation needs and challenges.

And as moderator Laura Abernathy, state and local policy director for the National Housing Trust, noted, “Before you can come up with an innovative tool to solve your problem, you have to understand what, specifically, your problem is and talk to all of the players. Solutions are coming from state and local decisionmakers and it’s working in communities across the country.”

So, going from small to large, here are distinct approaches three states are taking in partnership with their localities to preserve affordable housing stocks.

Rhode Island
RIHousing is the state’s housing finance agency, Low Income Housing Tax Credit allocator, bond issuer and FHA and portfolio lender, giving it a mandate to develop and maintain and track affordable housing, as well as deal with preservation policy issues. “We’re the Performance-Based Contract Administrator (PBCA) for the state and about 65 percent of project-based Section 8 Housing Assistance Payment (HAP) is in our portfolio,” Berman says.

The statewide PBCA portfolio encompasses 155 developments comprising 15,500 units and the RIHousing multifamily portfolio has about 16,500 units, with 10,400 preserved to date. “That’s about 6,000 units yet to be preserved,” she points out, “while still trying to build new. Resources are always a challenge. We’ve also developed several hundred units of housing that aren’t LIHTC, not Section 8, HOME funds, Housing Trust Fund, Neighborhood Stabilization Program (NSP), and those developments are old, they need work, they don’t have any reserves, they don’t have any cashflow. So, that is also a challenge for us, and I would venture to guess a challenge for a lot of the HFAs.

“As a small state, we have a pretty good idea of what’s there, but if we have to drill down, that’s a little more challenging for us.” As a result, RIHousing’s asset management team has developed a Risk Rating Model that evaluates each project’s debt coverage ratio, financial health, physical condition and the effectiveness of its management. “It measures the performance of our entire multifamily portfolio, using information from annual audited financial statements, account balances, physical inspection reports and file audits.”

Annual inspections are done for nearly all properties, which is practical because of the easy driving distances within the state. “What this [all] does for us is gives us an annual snapshot of each development’s operating performance, debt ratios, projected financial health, reserves, if they are capitalized adequately, where the deficits are and whether there’s surplus cash. We use that data to do as much proactive asset management as we can. This gives us a picture of what the preservation landscape looks like, prioritizing what needs to be preserved now, what can wait five years and what can wait a little bit longer than that. With information from our asset management group we can look at problem loans, site issues and really talk comprehensively about what some of our options are.”

Based on that RIHousing created a watch list and assigned one staff member to focus exclusively on workouts.

“Challenge,” as we can clearly see, is a term that comes up repeatedly in any discussion of affordable housing preservation and Berman is clear about listing the ones in her state. LIHTC projects of fewer than 30 units are a tough sell. As the state agency has tried to bring down rent costs for residents at 40 to 50 percent of AMI, it is difficult to get them up to an attractive level for potential owners and investors. Many nonprofit owners have limited balance sheets. Syndicators are often not interested in four percent deals and are looking for larger projects, as well as wanting also to be the lenders, which can add costs. And, as Berman says, “The state has never committed a lot of resources to housing needs.”

On the other hand, she does cite opportunities: creative financing (“We have some very complicated capital stacks.”); resyndication with four percent credits; combining preservation with new construction; preservation loans; Community Development Capital Magnet Funds; and Housing Trust Funds. “Past Year 15, we’re not just assuming it will be a resyndication. We’re providing new first mortgages and rolling in some additional preservation funds, which usually goes in as a soft loan. We then put a 40-year regulatory deal on the property [which assures the preservation of affordable status].”

While progress is being made, Berman says, “We know which projects have extended their HAP contracts, and we have a general idea of which ones have refinanced over the years. But we don’t really have a good handle on who all of the owners are and what the next opportunities are. And I think that’s something on our to-do list over the next six to 12 months.”

Chapter 40T, enacted by the Massachusetts legislature in late 2009, is an innovative act preserving publicly-assisted affordable housing, states Bill Brauner, director of housing preservation and policy for CEDAC, the quasi-public Community Economic Development Assistance Corporation, headquartered in Boston. “We are one of four state agencies that deal with affordable housing. We focus on working with nonprofits on affordable housing and child care development. We also have a policy function.”

There are three main aspects of the 40T law: the requirement for notices of upcoming end of affordability restriction status; the rights of offer and first refusal; and an array of tenant protections.

A Notice of Future Termination must be sent out two years prior to the event and a Notice to Complete Termination must be issued one year prior to tenants, tenant organizations, the municipality, the state, CEDAC and local legal services organizations. There are penalties for noncompliance. Additionally, a Notice of Intent to Sell (i.e., a proposed sale without an affordability restriction) must also be issued to the same parties.

This notice triggers a right of offer and a right of first refusal to the state, which, in turn, through the Department of Housing and Community Development, assigns its rights to a prequalified statewide or local preservation buyer, known as a designee. Then, for 90 days after the Notice of Intent to Sell, the designee can conduct due diligence and make an offer to purchase. During this time, the owner cannot accept any offer except from the designee, though is not required to accept such an offer. “Often, the designee will submit a nonbinding offer,” Brauner explains, “and there will be negotiation back and forth.”

After the right of offer period, the owner can sign a purchase and sale agreement (P&S) with a third-party buyer, but the designee can “step into the shoes” of that buyer for the same purchase price. Along with this, there is a limitation on the P&S terms, including: The deposit can be no more than two percent of the sales price or $250,000, whichever is lower. The deposit must be refundable for at least 90 days. And the closing may take place in no less than 240 days.

Low-income tenants who do not receive enhanced vouchers are protected for three years after termination and rent cannot be increased by more than the Consumer Price Index plus three percent per year.

Now, the “fine print.” Sales that preserve affordability for at least 30 years are exempt from the rights of offer and first refusal. Other exempt transfers include foreclosure sales, affiliate transfers and sales of projects where there is more than 15 years of remaining affordability. Eminent domain actions are also exempt.

The 40T rules cover 16 housing funding programs, including HUD Sections 236, 202, 515; LIHTC; all major project-based rental subsidy programs, such as Sections 8 and 521 and state rental vouchers. “Housing programs not covered include Home Investment Partnerships (HOME), Community Development Block Grants (CDBG) and our alphabet soup of state programs,” Brauner says.

And there are clear limitations to the program. Acquisitions are at market rate, which means, according to Brauner, “It takes a lot of public funding, so we can’t do that very often.” A right of first refusal is not a right to purchase. “An owner who doesn’t sell can wait out the affordability term and is then free to do what [he or she] wants.”

While some see the main benefit of the law as a philosophical one in that preservation is viewed as the default option, in the first nine years of 40T, 14 projects representing 1,640 units have been preserved with rights of offer and first refusal, and more than 9,000 total units in nearly 100 projects were exempt sales that preserved affordability.

As Brauner puts it, “I can’t overstate the importance of 40T for state agencies. It’s not ‘Should we preserve?’ but ‘How do we preserve?’”

“Denver also passed a right of first refusal ordnance,” Beth Truby, preservation program manager of the Colorado Housing and Finance Authority (CHFA) states. “But it was never exercised. Third-party market price was a concern, and no one wanted to scare away those buyers if the other deal fell through.”

Instead, “About three years ago, stakeholders—about 30 organizations throughout the state—got together into a network to get a handle on the magnitude of the [affordable housing] problem.” The group became known as the Colorado Housing Preservation Network, and its aim was to implement a coordinated strategy. It developed and maintains a master database designed to track inventory and identify at-risk properties in the state. The members also hired a preservation program manager who would act as a liaison for statewide preservation efforts. That was where Truby came in.

She calls the preservation database the “cornerstone” of their efforts, and that, “It acts as an early warning system.” It currently tracks 1,412 multifamily properties in the subsidized state inventory, with a total of 90,225 affordable units. Updated regularly, it contains such categories as expiration by year, sources of restriction, risk factors and property owner information. Headings at the top allow users to reach down into a number of detailed datasets, depending on the type of information sought.

“You can really manipulate this data in quite a few ways,” Truby says. “Everyone in the network has access to all the data. We feel it really established a foundation and structure for preservation.” The database includes what they call a Preservation Prioritization Matrix that lets users know when affordability for a given facility is expiring and whether the risk of losing the property from the affordability rolls is high, medium or low. Special attention is directed at properties in opportunity areas with potential access to jobs, public transportation, good schools and shopping that mission-driven owners and developers might want to consider.

The network is also engaged in a number of outreach programs, involving both property owners and local jurisdictions. These include surveys and workshops and various means of providing relevant information and sharing best practices. One workshop, for example, is directed at property owners eligible for RAD conversions. Another is a rural preservation academy and there is a specialized one involving mobile home parks, of which there are many such low-income communities in rural areas of Colorado and near resorts. These workshops help residents, resident owners and mission-driven developers. “We recently closed a loan on a resident purchase of a mobile home park,” Truby says.

The results speak for themselves. Between 2016 and 2018, 13,678 affordable units have been preserved, representing 20 percent of the total inventory and increasing year over year. Among the highest profile properties is the Colburn Hotel building. “It’s in a highly desirable area of Denver, and its successfully undergoing RAD conversion,” Truby says.

Current emerging effects of the Colorado preservation effort include the first dedicated source of affordable housing funds, recently passed by the state legislature. The network is working with local housing authorities that don’t want to manage geographically scattered-site portfolios to establish community land trusts and may soon expand into single-family homes. They are also working closely with properties of fewer than 50 units that don’t compete well for tax credits.

Many Sizes
So, though one size does NOT fit all, many sizes fit some, and the diversity of ideas, efforts and programs in just three states show the possibilities when a variety of people and groups work together with common purpose.

Story Contacts:
Laura Abernathy, [email protected]
Anne Berman, [email protected]
Bill Brauner, [email protected]
Beth Truby, [email protected]