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"Preserving "Expiring Use Restriction" Housing Developments,"

by Emily Achtenberg September 1992 issue of Poverty & Race

New federal legislation will determine the future of more than 470,000 privately-owned government-assisted housing units over the next ten years, including 27,000 in Massachusetts. Under the Low Income Housing Preservation and Resident Homeownership Act of 1990 ("LIHPRHA"), owners will be permitted to sell or refinance these "expiring use restriction" properties, and, in some cases, to prepay the subsidized mortgage and terminate the property's existing low- and moderate-income use.

At the same time, tenants, community- based organizations, and state and local government agencies will have a significant opportunity to purchase the housing end keep it permanently affordable. For reservation advocates, LIHPRHA represents a major challenge. To assist local groups in developing community-based preservation strategies, PRRAC provided funding to the Citizens Housing and Plan-ning Association (CHAPA)--a metropoli-tan Boston housing research and advocacy organization -- for production of a technical handbook on this new law and program.

Origins of the New Federal Program

The housing that is covered by LIHPRHA was built during the 1960s and '70s under programs designed to stimulate private sector involvement in the production of low- and moderate-income housing. In exchange for federally-insured loans at subsidized interest rates, substantial tax incentives, and virtually no cash investment, developers were required to limit occupancy to low- and moderate-income families at regulated rents.

However, under their contracts with the federal government, most owners were permitted to prepay their 40-year subsidized mortgages after 20 years, thus terminating the original use and rent restrictions and allowing conversion of the housing to market-rate use.

Now 20 years later, a typical well-designed, well-located project built for $20,000 per unit might have a market value of $40,000 per unit and an outstanding mortgage debt of $15,000 per unit. This leaves a residual equity value of $25,000. The same project has likely become a tax liability for its owner, creating a strong incentive for prepayment or refinancing.

In the heated national debate which has raged over the prepayment issue, owners have claimed that prepayment restrictions constitute a breach of contract and an unconstitutional taking of private property by the federal government. Preservation advocates have argued that the original social purpose of the housing must take precedence over paying windfall profits to owners, reflecting changed market circumstances that were never anticipated in the first place.

Following the passage of a temporary emergency law in 1987, LIHPRHA was enacted as a permanent solution to the prepayment problem which sought to balance these conflicting interests against federal fiscal constraints. The result was a political compromise.

On the one hand, the new federal program offers the potential for long-term (even permanent) preservation. Private owners who elect to receive the financing or sales incentives provided under LIHPRHA must agree to extend affordability restrictions for at least another 50 years. With respect to any housing that is offered for sale, tenants, non-profit sponsors, and public agencies have preemptive purchase rights for one year. These "Priority Purchasers" will have access to special funding and subsidies, creating a genuine advantage for conversion to non-speculative ownership.

But LIHPRHA is not a mandatory preservation program. Owner's incentives are based on the property's fair market value, and the federal government will not commit to pay for high-value projects. Conversely, if the property's value is too low to justify incentives, the owner may be allowed to prepay. Additionally, pre-payment is permissible if the property is offered for sale and no capable buyer steps forward within the required time frame. This places a significant responsibility on tenant, non-profit, and state and local government organizations to salvage their own housing.

Current Program Status & Community Response

With the promulgation of HUD regulations last May, the preservation program is now officially underway. Owners of more than 2500 projects, containing approximately 250,000 units, are eligible to start the process by filing a Notice of Intent to refinance, prepay, or sell, and several hundred have already done so.

Housing activists and preservation advocates gearing up for LIHPRHA in Massachusetts and elsewhere are now struggling with several practical problems:

First, is there a workable purchase program? On the one hand, LIHPRHA provides for expedited sales to tenant- and community-based groups along with virtually guaranteed funds covering 95% of Priority Purchaser costs (plus future rent subsidies). However, these resources are available only at the end of a complex and highly regulated purchase process which will take approximately 2-3 years to complete. Local groups will need both technical and financial assistance to carry out and pay for predevelopment activities (such as architectural/engineering studies, feasibility analysis, and tenant organizing).

Second, will there be properties offered for sale? Since HUD requires the property to be valued in excess of the remaining HUD mortgage, with the recent decline in real estate values, fewer properties will be eligible for LIHPRHA incentives. Some owners will choose to wait for an anticipated upturn in the market. Others, especially large owners with a continuing management fee interest in their properties, will elect to refinance rather than sell.

At the same time, there are a growing number of owners who simply want out of the subsidized housing business. This includes several large national syndicators whose tax-motivated investments in subsidized housing during the early 1980's have now completely lost their rationale. In many cases, the presence of a persistent community-based buyer can be a significant factor motivating an owner to sell.

Third, will Priority Purchasers have the capacity to buy? Many communities with expiring use projects have no non-profit development capacity. Even in large cities, existing non-profits have tended to focus on neighborhood revitalization efforts that are considerably less complex than a typical preservation project. In some cases, potential community-based buyers face competition from "captive" non-profits formed by private developers, lenders, or even the existing owner, which must be challenged politically.

Several tenant/non-profit purchases completed under the predecessor legislation to LIHPRHA demonstrate the potential for success, where local groups work together around common preservation goals (examples include Northgate Apartments in Burlington, VT, Clarendon Hill Towers in Somerville, MA, and 850 West Eastwood in Chicago).

The Preservation Handbook

"Preserving Expiring Use Restriction Projects" is a technical resource for tenant advocates, non-profit groups, and public officials seeking to participate in the preservation process. It is designed to help advocates and prospective purchasers understand the new federal program, get information about local projects, and plan and carry out community-based preservation strategies.

Published by CHAPA and the Community Economic Development Assistance Corporation of Massachusetts (CEDAC), the 350-page handbook draws on the wealth of experience in Massachusetts where local groups have been actively involved in preservation activities. Highlights include: a detailed summary of the new federal statute and regulations; how to research an expiring use project and understand the owner's motivations; how to analyze the feasibility of a purchase; steps in the preservation purchase process; and a chapter on "old law" projects. The handbook also includes case studies of successful preservation initiatives in New England and an analysis of the Massachusetts expiring use inventory.

While the specific focus of the handbook is on Massachusetts, the regulatory framework and strategies it describes will also be useful, for the most part, to groups in other states.

Emily Achtenberg is a Boston-based housing consultant specializing in the preservation of expiring use restriction projects and the author of the preservation handbook described here. For further information, contact her at 47 Halifax St., Jamaica Plain, MA 02130, 617/524-3982.

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