Executive Vice President and Chief Operating Officer
National Equity Fund
Good morning, Mr. Chairman. My name is Charles Wehrwein. I am Executive Vice President and Chief Operating Officer of the National Equity Fund, an affiliate of Local Initiatives Support Corporation (LISC). I would like to offer comments today on the preservation of Section 8 housing under Mark to Market, the production of permanent supportive housing for the homeless, and a minor change to the HOME Investment Partnership program necessary to facilitate the production of housing for grandparents who are raising their grandchildren.
LISC helps neighbors build whole communities. In 20 years, LISC and its affiliates have raised from the private sector and provided over $3 billion to 2000 nonprofit low-income Community Development Corporations (CDCs) across the country. This support has directly helped to produce almost 100,000 affordable homes and over 11 million square feet of commercial and industrial space. We also invest major resources in jobs and income programs, childcare facilities, youth programs, crime and security initiatives and many other programs that directly benefit low-income neighborhoods and their residents. CDCs have used LISC's funding to leverage an additional $4.6 billion from other sources.
The National Equity Fund is an affiliate of LISC. Since 1987, NEF has used the Low Income Housing Tax Credit to raise and invest $2.6 billion in the nonprofit development of over 46,000 affordable rental homes. The vast majority of NEF's activity stabilizes distressed low-income urban and rural communities, and a significant share has involved such difficult and important issues as housing the homeless or single parent families with children, redeveloping public housing, and preserving federally assisted rental housing, and providing assisted living alternatives for the frail elderly.
LISC regards the preservation of affordable rental housing as essential to the stability and revitalization of low-income communities, as well as to the low-income households who desperately need this housing now and in the future. Over 437,000 units of Section 8 housing face contract expiration in the 40 localities where LISC operates programs. We believe that CDCs and other nonprofit sponsors are ideally suited to acquire properties where Section 8 subsidy contracts are expiring.
LISC is involved in preserving Section 8 housing in several ways.
As a frame for our comments, we would like to outline issues that a nonprofit owner might consider before undertaking a Mark to Market transaction. Primarily, the goal is social, to provide affordable housing and revitalize distressed communities. We should assume, based both on the need to preserve the housing and the fact that the housing shelters very low-income seniors and families, that the question of whether such a purchase is consistent with a non-profit's social mission is really a given.
In general, we are not surprised that owners of Mark to Market properties want to sell. The industry has been anticipating this for some time. Indeed, many potential buyers, particularly on the nonprofit side, have been thinking and talking about campaigns to acquire properties that are pushed toward a sale by the threat of restructuring. For the most part, those discussions have stopped short of any real action. There are a number of specific obstacles to the acquisition of a Mark to Market property. The core of the issue, though, is that the program treats a buyer virtually the same way it treats an existing owner. We have discussed here, and it is a common conclusion in industry seminars, that restructuring is no fun; you only do it if you have to. Existing owners may have to. But why should someone new volunteer to take their place? Unless purchasers can get some preferential treatment by the program or bring in some ancillary resources to address the financial issues, they shouldn't. It would be unwise to take on the responsibilities for ownership unless the property can be economically viable going forward.
In the Mark to Market Demonstration program, buyers were allowed to provide prices to sellers that paid the sellers' exit taxes. Most likely, the sales would not have otherwise occurred. HUD became comfortable with these sales because it was demonstrated that, despite the payment of the purchase price, the transactions still presented a result that was better for HUD than the likely alternative if the transaction was not approved. The reason that this was true was that the buyer brought ancillary resources into the deal. Given the scarcity of Low Income Housing Tax Credits, tax-exempt bond volume, HOME funds and other plausible resources, the prerequisites of needing to pay sponsor costs and fees and a purchase price will hobble most potential transfers.
Some progress has been made on the program side. There have been a series of discussions among OMHAR, HUD and a diverse group of nonprofit housing organizations. It seems that OMHAR recognizes the benefits that nonprofit participation can bring to the inventory and is starting to appreciate and address the obstacles to participation. OMHAR has set forth a number of tentative provisions that it may adopt. The central concept is that, while buyers will not be relieved of the cash contribution requirements under the program, these contributions, along with a development fee to the buyer, can constitute a loan (the "Acquisition Loan") that is repaid by the property to the buyer (or possibly a third party lender).
The problem with this concept is that there will often not be enough cash flow left over, after servicing the first mortgage and a second mortgage written at the program's typical terms. 1 We understand that OMHAR recognizes this and has suggested increasing debt service coverage on the first mortgage to enhance the cash flow available to service both the second and the Acquisition Loan. OMHAR has also suggested that an attempt will be made to pay off these loans over a ten-year period. However, even with an increase in the debt service coverage, many transactions will be unable to meet a repayment schedule. Moreover, the goal of accomplishing repayment over ten years is inadequate. Very few nonprofit organizations can afford to expend resources today and recoup them over ten years or more. It also is unlikely that third party loans will be widely available to bridge this gap over so long a term.
Repayment needs to happen more quickly. In order to consistently and adequately support repayment of these loans, OMHAR will need to exercise the discretion that the statute gives it to modify the repayment terms of, or eliminate, the second mortgage at the inception of the transaction. OMHAR has, in fact, suggested that it may use this authority on a case by case basis. However, the community of prospective nonprofit buyers needs to have a clear set of non-discretionary policies that they can rely on in order to warrant their pursuit of specific acquisitions.
LISC, the National Association of Housing Partnerships, the National Housing Trust, National Housing Conference and others are specifically concerned with rules that affect the business of responsible property ownership. They focus on the costs and fees that need to be financed or otherwise earned by the nonprofit housing sponsors. The rules must encourage nonprofit ownership by permitting transaction costs to be financed, fees to be earned, and cash flow to be generated for successful property ownership. At the same time, the benefits of nonprofit stewardship to the residents, communities and to HUD should be tangible and covenanted. It is not sufficient simply that the buyer is a nonprofit organization. There should be standards imposed for nonprofit performance involving high quality asset management, extended use agreements, and perhaps enhanced resident services and other features that benefit the residents over the long-term.
Under the proposal, federal grants may match state or local funds on up to a 2:1 basis, essentially tripling the dollars available for preservation of multifamily, affordable housing. Federal funds can also match up to a 50% of private equity investments based on Low Income Housing Tax Credits and proceeds from tax-exempt bonds.
Funds may be used for federally insured housing, housing assisted under Section 8 project-based assistance, properties purchased by residents under LIHPRHA or rural housing. Funds may be used for acquisitions, operating costs, or capital expenditures.
States and localities would prioritize assistance to properties to be purchased by resident endorsed nonprofits, providing longer-term affordability, furthering fair housing goals, and encouraging housing close to jobs and transportation. LISC urges Congress to add as a priority those projects that contribute to the stability and revitalization of low-income communities.
Assistance for Non-Profit Purchasers. Section 402 of S. 2733 authorizes grants to help capitalize nonprofit organizations involved in the acquisition and preservation of federally assisted housing. LISC supports this provision.
As discussed above, LISC, the CDCs it assists, and other non-profit organizations can contribute to the preservation of federally assisted affordable rental housing. However, nonprofits typically have limited capital available for this purpose. An organization like LISC, for example, could use each dollar of additional capital to obtain three to five dollars of private loans. LISC could use the proceeds to finance local nonprofit acquisition of federally assisted housing. In combination with the other policies discussed above, this resource could greatly facilitate housing and community preservation.
Supportive housing is a proven solution to the problem of homelessness. By combining permanent low-income housing with social, medical and employment services, supportive housing is the most compassionate, sensible, and cost-effective approach to addressing the needs of the America's most chronically homeless populations -- those people who cope with mental illness, chemical dependency or HIV/AIDS. Federal policy, however, does not provide the tools essential to expanding supportive housing for the homeless.
The Value of Supportive Housing. According to the Urban Institute, in 1996 over 800,000 people were homeless in any given week. While many individuals and families experience temporary homelessness due to the growing shortage of affordable housing and gaps in the social safety net, approximately 150,000 households are chronically homeless having been without stable housing for 2 years or longer. On any given night, chronically homeless individuals occupy over 50% of beds in emergency shelters even though they only constitute 20% of the total number of users annually. Permanently re-integrating this population into the community in turn frees up the emergency shelter system to provide for people in need of short-term stays.
Supportive housing is a humane, dignified, and permanent solution to chronic homelessness. As rent-paying tenants, residents have access to a range of social and employment services that they need to address the underlying cause of their homelessness, rebuild their lives and live independently. At the same time, local neighborhoods benefit from stable and affordable housing. Supportive housing is developed, frequently from abandoned and/or dilapidated properties, to fit the neighborhood, and has high quality management.
Supportive housing saves taxpayers money. While the cost varies according to the population housed, the services provided and location, supportive housing costs between $10,000-$15,000 per year per resident. By contrast in New York, for example, an emergency shelter bed costs $25,000 per year; a group home for the mentally ill costs $21,000 a year; institutionalization in a psychiatric hospital costs $127,000 per year; and a prison cell costs in excess of $50,000 annually. It is clear that supportive housing saves money within the range of public health, mental health, drug treatment and criminal justice systems.
The Role of Project-Based Subsidies. LISC's National Equity Fund (NEF) has used the Low Income Housing Tax Credit to raise and invest nearly $400 million in over 8,457 units of supportive housing in 127 projects nationwide. Not only do these investments extend the reach of limited McKinney Act funding, but they also bring private sector underwriting discipline and ongoing oversight.
Although LISC does not advocate for project-based rent subsidies to produce housing for general populations, supportive housing is an exception. In fact, project-based subsidies are the one essential subsidy that only HUD can provide. Housing Credit investors can cover over half the cost of development, and cities and states can allocate HOME, CDBG or their own funds for the balance. States or other federal agencies can pay for most social services. But HUD is the only plausible source of project-based rent subsidies.
The importance of project-based subsidies is easy to explain. Project-based settings are essential to efficient service provision and, just as important to success, peer support networks. But homeless people are too poor to afford rents sufficient to cover a property's operating costs, even if the property carries no debt service. Project-based subsidies cover the difference between actual operating costs and affordable rents.
For example in Chicago, the annual cost to operate a Single Room Occupancy unit (assuming no debt service) is approximately $250 to $350 per month per unit, which includes the cost of property management, utilities, insurance, property taxes, desk clerks and maintenance. Without rental assistance, disabled persons receiving SSI ($434/mo) or SSDI ($570/mo) would go from paying 30% of their income to an unaffordable 50% to 70% of their income. Individuals with no financial support or minimal state assistance would remain homeless, increasing expenses for temporary shelters, health care and criminal justice, negatively influencing local business environments, and living in desperate misery.
Long-term rental subsidies are essential to leverage private sector investment through the syndication of Housing Credits. Housing Credit guidelines - and prudent investment policy -- require that projects be sustainable for 15 years. Only rental subsidies can assure a project's financial stability over the long term.
Without these rent subsidies, project financing falls apart.
HUD's McKinney permanent housing programs have been essential to the financing structure for supportive housing for homeless and disabled populations. Specifically, the Section 8 Moderate Rehabilitation SRO Program, the Shelter Plus Care Program and the Supportive Housing Program provide rental subsidies that make projects affordable to homeless people with no or extremely limited incomes.
These McKinney programs have proven especially successful in leveraging private sector, state and local resources to help end homelessness. According to HUD: every dollar of Shelter Plus Care federal rent subsidies attracts two dollars in nonfederal service funding; every dollar of Supportive Housing Program funding attracts three dollars in non-federal funding; and Section 8 Moderate SRO funds accounted for only 40% of development costs, with the remainder raised by the community. For example, in Minneapolis, the sponsor of a 124-unit supportive housing project was able to raise $3.2 million in equity Housing Credits as a result of a $400,000 Supportive Housing Program funding award.
Policy Recommendations. The growing burden of renewing subsidies for existing projects threatens their continuing success and greatly slows additional production of supportive housing. Applications for five-year Shelter Plus Care renewals totaled $110 million in the round of funding announced by HUD in December 1999. Of those, HUD denied $23 million resulting in the expiration of operating funds for 712 units and housing for 885 individuals in 21 communities across the country.
A solution is to fund rental subsidy renewals for Shelter Plus Care and the Supportive Housing programs out of HUD's Section 8 Housing Certificate fund, the source of other rent subsidy renewals. 2 This policy would free up McKinney permanent housing funds to provide new permanent supportive housing. The House Banking Committee's Housing Subcommittee has already approved this policy as part of a bipartisan bill, H.R. 1073. The Clinton Administration, 27 national organizations that address homelessness, and every witness who testified at this Subcommittee's May 23 McKinney Act reauthorization hearing all support this policy change.
Additionally, Congress should amend the McKinney Act to devote at least 30% of the funds the annual HUD McKinney appropriation to permanent housing. Between FY 1993-1995, permanent housing accounted for 40% of total McKinney funding through a national competition. Starting in FY 1996, new policies discouraging multi-year funding drove down this share to 14% by FY 1998. In FY 1999, permanent housing funds increased to 36% because appropriations legislation established a 30% set-aside for permanent housing, which was enacted again for FY 2000. Making this policy part of the McKinney Act will ensure production of the permanent supportive housing necessary to end homelessness.
We are also seeking a change to the HOME Investment Partnership Program as it relates to tenant-based Section 8 rental assistance. The change that we are seeking would permit Section 8 assistance at the full Fair Market Rent (FMR) level for affordable rental properties that serve "grandfamilies".
The Potential. According to the Boston Globe (April 6, 2000), grandparents are solely raising approximately 1.5 million children nationwide -- a 50% increase from ten years ago -- because the parents are unable to care for them. Many of these "grandfamilies" have low incomes and need special housing. Grandfamilies tend to need large apartments with multiple bedrooms. Architectural features such as ramps and grab bars are also critical. Grandfamilies also need on-site facilities and services such as play areas, pre-school and after-school programs for children. Neither traditional elderly housing nor traditional family housing can address these needs.
To address this unmet and growing need in Boston, a nonprofit housing developer, Boston Aging Concern - Young and Old United, developed the first affordable rental property in the country that is specifically designed for grandfamilies. Opened in 1998, the GrandFamilies House provides 26 apartments with two, three, and four bedrooms as well as community space, a health screening room, a YWCA-run activity center and a Resident Services Coordinator. The average income of residents in this property is a very low $14,300, and most of the households are headed by single women with an average age of 62.
The GrandFamilies House has won several awards, including Fannie Mae's 2000 Maxwell Award for rental housing, the Affordable Housing Tax Credit Coalition's 1999 award for senior housing, and a HUD Best Practices Award. It has also been featured on ABC's Nightline and NBC's Today Show, and in the Wall Street Journal, Newsweek and several other national publications.
The GrandFamilies House was developed with a variety of federal, state and local resources including the Low Income Housing Tax Credit, HOME funds and other block grant resources. Most of the residents also receive tenant-based Section 8 rental assistance, through a state demonstration program specifically designed for grandfamilies. While the vouchers are fully portable and recipients are entitled to live anywhere they choose, most choose to live in the GrandFamilies House because of the amenities that it provides and the strong sense of community with other grandfamilies.
The Policy Problem. Unfortunately, the HOME statute limits the amount of tenant-based Section 8 rental assistance that can be provided to HOME-financed properties such as the GrandFamilies House to the lesser of 30% of 65% of Area Median Income (AMI) or the Fair Market Rent (FMR). (There is no such distinction for HOME-financed properties that receive project-based Section 8 assistance.) In Boston, as in many urban areas, the FMR is significantly higher than 30% of 65% of AMI. As a result, the GrandFamilies House receives approximately $50,000 less in annual rent revenues than it would if the higher FMR-rent level were permitted (or if the Section 8 assistance was project-based).
The GrandFamilies House currently runs an annual operating deficit of about $10,000. In addition, there is approximately $92,000 in additional annual maintenance, security and resident services that the property manager has deferred. The additional rent revenue that a higher Section 8 subsidy would provide would cover the GrandFamily House's operating deficit and some of the deferred maintenance, security and service items, thereby helping to ensure its continued economic viability. It would also allow other communities around the country to replicate the grandfamily model.
Recommendation. Congress should change the HOME program to permit rents up to the FMR for grandfamily housing. The House has already approved this change as part of H.R. 1776.
This concludes my testimony. I would be happy to respond to your questions.
1 - The first mortgage will generally be FHA insured and underwritten to a 1.2 debt service coverage ratio. The second mortgage will be a cash flow note commanding 75% of the cash flow that is available after payment of operating expenses and first mortgage debt service.
2 - Section 8 Moderate Rehabilitation SRO renewals are already handled through the Section 8 program.
Mr. Wehrwein will discuss three issues: the preservation of Section 8 housing under Mark to Market, the production of permanent supportive housing for the homeless, and a minor change to the HOME program necessary to facilitate the production of housing for grandparents who are raising their grandchildren.
The Local Initiatives Support Corporation (LISC) and its affiliate, the National Equity Fund (NEF), regard the preservation of affordable rental housing as essential to the stability and revitalization of low-income communities as well as to the low-income households who desperately need this housing now and in the future. LISC and others that work closely with Community Development Corporations and other local nonprofit housing sponsors are deeply concerned that transfers of Mark to Market properties to nonprofit entities are not likely to materialize unless certain policies are adopted.
There are a number of obstacles to the acquisition of Mark to Market properties by nonprofits. We are specifically concerned with rules of the program that affect the business of responsible property ownership. The rules must encourage nonprofit ownership by permitting transaction costs to be financed, fees to be earned, and cash flow to be generated for successful property ownership. We are also concerned that the Mark to Market program treats a buyer virtually the same way it treats an existing owner. Unless purchasers can get some preferential treatment by the program or bring in some ancillary resources to address financial issues and make properties economically viable going forward, it would be unwise to take on the responsibilities of ownership.
Related to the issue of preservation, LISC and NEF support Section 401 of S. 2733, introduced by Senators Santorum, Kerry and Sarbanes on June 14, 2000, which authorizes federal matching grants for committed state or local funds to preserve federally assisted affordable housing for at least 15 years. We also support Section 402 of this bill, which authorizes grants to help capitalize nonprofit organizations involved in the acquisition and preservation of federally assisted housing.
Permanent Supportive Housing for the Homeless
NEF has raised and invested nearly $400 million in over 8,457 units of supportive housing primarily for chronically homeless persons. HUD provides critical project-based rent subsidies through the McKinney Homeless Assistance programs to make such supportive housing possible. However, there is a growing burden of renewing subsidies for existing projects, at the expense of producing additional supportive housing. A solution to this problem that we support is to fund rental subsidy renewals out of HUD's Section 8 Housing Certificate Fund, the source of other rent subsidy renewals. This change would free up McKinney permanent housing funds to create new permanent supportive housing. The House Banking Committee's Housing Subcommittee has already approved this policy change as part of a bipartisan bill, H.R. 1073.
Additionally, Congress should amend the McKinney Act to devote at least 30% of annual McKinney appropriations funding to permanent housing. In FY 1999, a 30% set-aside of McKinney funds was established for permanent housing through the appropriations process. Making this set-aside permanent in the McKinney Act will help to ensure the production of the supportive housing necessary to end chronic homelessness.
HOME and Grandfamilies
We are also seeking a change to the HOME Investment Partnership Program as it relates to tenant-based Section 8 rental assistance. The change that we are seeking would permit Section 8 assistance at the full Fair Market Rent (FMR) level for affordable rental properties that serve "grandfamilies". According to recent press reports, grandparents are solely raising approximately 1.5 million children nationwide -- a 50% increase from ten years ago. Many of these "grandfamilies" have low incomes and need special housing which neither traditional elderly housing nor traditional family housing can address.
A nonprofit housing developer, Boston Aging Concern - Young and Old United, developed the first affordable rental property in the country that is specifically designed for grandfamilies. The GrandFamily House, which has won numerous affordable housing awards, was developed with a variety of federal, state and local resources including the Low Income Housing Tax Credit, HOME funds and other block grant resources. Most of the residents also receive tenant-based Section 8 rental assistance.
Unfortunately, the HOME statute limits the amount of tenant-based Section 8 rental assistance to the lesser of 30% of 65% of Area Median Income (AMI) or the Fair Market Rent (FMR). As a result, the GrandFamilies House receives approximately $50,000 less in annual rent revenues than it would if the higher FMR-rent level were permitted. It could use this additional revenue to cover a $10,000 annual operating deficit and deferred maintenance, security and services costs totaling $92,000 annually. Congress should change the HOME program to permit rents up to the FMR for grandfamily housing. The House has already approved this change as part of H.R. 1776.
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