Senior Living Business: Intricacies of Affordable Senior Housing--
A Discussion About HUD’s 202 Program and How It Works
Most of the senior housing development that has occurred in the past decade has been geared toward the upper-income elderly — perhaps as high as the upper 25th percentile in terms of income level.
And while the great transfer of wealth to the baby boomer generation has begun, and we’ll see continued growth in the “well-off elderly” over the next two decades, a growing number of poor elderly are at risk of being left behind.
A variety of financing strategies and tax incentives available to the affordable senior housing market — such as HUD’s 202 program and Low-Income Housing Tax Credits — allow the construction of developments with rents that are low enough for the lower income elderly to afford.
The demand for affordable senior housing projects, however, already exceeds the supply. A recent AARP study found that for every unit of 202 housing, ten people are waiting in line. Developers could be building two or three times the projects that are currently underway and still not catch up to the need. Unfortunately, the demand to rehabilitate and develop affordable senior housing projects also far exceeds the supply of available capital.
HUD’s 202 program
Today, HUD’s 202 program is a capital advance program rather than a loan program, according to Nancy Libson, director of housing policy at the American Association of Homes and Services for the Aging (AAHSA). “In effect, it’s a grant program,” she says. “HUD advances capital funds to eligible sponsors to construct projects and then provides ongoing operating assistance for those projects. It is the only federally financed, affordable senior housing construction program available today that provides an operating assistance subsidy with no debt service.”
The 202 program is only open to not-for-profit sponsors that serve seniors identified as being below 50 percent of an area’s median income level. The property must be maintained for 40 years as affordable housing for seniors; otherwise, the capital advance must be returned.
The capital advance that the federal government provides covers only about 80 percent of the cost of the building. So, for nearly every project that’s built, the not-for-profit sponsor must find gap financing through grants, public programs, local programs, foundations, or other sources. In addition, the initial operating assistance that HUD provides is sometimes insufficient, which leads the not-for-profit sponsor to play catch up, over time, in order to have enough money for operations.
Libson believes, however, that the overriding negative for many people is the need for constant contact with HUD. “The regulations can be a burden,” she says, “which can be a major drawback to the 202 program.”
Flat funding in recent years
The high-water mark for the 202 program was probably in the 1970s through 1990s, when it was still a loan program and funded 200,000 units. In recent years, however, funding for the program has been flat. The Administration has said that enough projects are in the pipeline and, therefore, has requested much less funding for the program.
Projects remain in the pipeline, though, because they take so long to develop in conjunction with the federal government. That gives both the Administration and Congress an excuse for not providing additional money — particularly in tight budget times, when domestic discretionary financing, which is how the 202 program is funded, is so limited.
Added to that, the 202 program, which is budgeted at less than a billion dollars per year, represents only a fraction of the total HUD budget. So even within HUD, the program must compete with other demands for funding.
In reality, though, even today’s flat level of funding covers more things. “In addition to the capital advance and operating assistance, the program now pays for three totally different accounts,” explains Libson. “It pays for service coordinators, for converting older projects to assisted living, and for some pre-development loan money for the not-for-profit sponsor. It also pays for renewals of the operating assistance, so new construction is really the area that has less money available.”
Libson believes that interest in boosting funding for the 202 program will increase once the climate for domestic spending improves. “All the government has to do,” she says, “is look at the population explosion to realize that someone must provide the financing for affordable senior housing.”
Filling the gap
National Church Residences (NCR), with more than 20,000 units in approximately 300 affordable senior housing facilities, is the largest provider in the country in this market. About half of those facilities were financed through the 202 program, according to Michelle Norris, senior vice president of acquisitions and development. Norris oversees a team that specializes in the development of NCR’s new housing projects.
“NCR has been building 202 projects for about 25 years,” she explains, “but, as an organization, we have had to make accommodation for the fact that the 202 funding stream has slowed significantly. Ten years ago, probably 80 percent of our projects were funded through the 202 program. Now, it’s exactly the opposite. Only one or two of our projects each year receive 202 funding, while 10 to 15 projects a year (about 1,500 units) are funded through other sources.”
NCR has also gone through several generations of the 202 program. “The grant program was originally intended to cover total development costs,” says Norris, “but it no longer does that. Now, we must find other sources to fill the gap left by the 202 funding shortfall. That takes time and makes the process more complicated.”
State of the stock
Between 1974 and 1990, the market value of 202 projects was about $13 billion. At last count, the HUD database lists 6,000 projects, so the total value of all 202 projects today probably falls between $15 billion and $20 billion. “Arguably, every dollar of that probably should be refinanced over the next five years,” says Nicholas Gesue, senior vice president and director of multifamily finance for Lancaster Pollard Mortgage Company.
A lot of the older 202 projects are efficiency apartments that are not particularly attractive or marketable to seniors who see new and better options in their communities — options that include the latest advances in design for seniors as they age in place in an appropriate setting. That is one of the critical reasons to refinance.
“The bulk of the 202 funding occurring in the mid-1970s to mid-1980s had restrictions in terms of being able to access additional capital,” Gesue adds. “The only funds available on an ongoing basis for upkeep and capital improvements have been contributions from the owner’s own reserves, so these 15- to 25-year-old projects are likely to have original furnishings and equipment and inefficient systems that need to be modernized. I would argue, therefore, that almost every 202 project out there has a need for either a small recapitalization or a large-scale rehabilitation.”
Recently, NCR has paid a lot of attention to acquiring properties that are in this situation, according to Norris. “Small church groups that built single-purpose entities 20 or 25 years ago may have taken good care of the property,” she says, “but, in the end, the property may be 30 years old. You don’t have a 30-year-old building in the regular marketplace and not plan a major rehabilitation. The problem in most of these older properties, though, is that the reserves have not been funded to the level where the owner can do a major rehabilitation without a refinance strategy.”
Energy efficiency also plays a huge role. A lot of the older buildings have very high utility costs, which are a drain on the owner’s budget and also to HUD in terms of operating assistance payments.
The 202 program is heavily restricted by HUD, which closely monitors both the rental subsidy that the projects receive and any debt that the project must repay. HUD also monitors and oversees all of the project’s reserves.
“To a large extent,” says Gesue, “HUD controls the ability or inability to do these refinancings— either en masse or one by one — so the 202 projects have not been able to accumulate a lot of cash. And it is difficult to find partners with deep enough pockets to help pay for design work, for retaining professionals to help put the project together, and for other pre-development costs incurred in the HUD refinancing process.”
Other refinancing tools are available, however, to help owners complete rehabilitative work on existing 202 projects. The Low-Income Housing Tax Credit program, for example, can provide adequate capital to do a fair number of these projects,” says Debbie Burkart, vice president and national director for supportive housing and assisted living for the National Equity Fund (NEF) — one of the nation’s largest not-for-profit equity funds. Burkart works on affordable senior housing projects for NEF, utilizing other funding tools.
“It has been a labored process,” Burkart adds, “but we are seeing light at the end of the tunnel in terms of learning how to combine the 202 program with the Low-Income Housing Tax Credit program. Some waivers had to be approved, and AAHSA is currently working on some 202 reform bills that will facilitate this type of refinancing for everyone going forward.
“One benefit when refinancing with tax credits,” she adds, “is that HUD will allow the owner to use a cash-flow distribution to pay down an acquisition loan. And after the sponsor loan is repaid, the owner can still earn a cash-flow distribution of up to 10 percent of the profit. In a straight 202 refinancing, without using the tax credits, only residual cash flow may be used.”
Preserving 202 projects
Just as the 202 program has evolved from a direct loan to a grant program, so, too, have many of the rental subsidy programs that HUD provides. The transformation has largely been from a subsidy provided directly to a property, where anyone residing in the facility benefits from subsidized rent, to a tenant-based subsidy, where an eligible individual or family receives a voucher that is redeemable at a property.
“Project-based contracts are more valuable than tenant-based subsidies,” explains Gesue, “because direct subsidies to the property remain with the property. They provide consistent revenue and a lot more assurance from both financing and operational perspectives.”
As HUD has evolved away from the project-based contracts, terminated contracts are not renewed. “They are gone forever,” says Gesue, “so projects that still have these contracts accomplish two things: (1) They’re able to serve the lowest income populations, because HUD agrees to pay the rent for whoever moves in regardless of their income level; and (2) from the financing and operational perspectives, the property has much stronger credit characteristics and, therefore, is much more financeable.” From 1977 to 1991, the list of 40-year, market-rate, direct federal loans shows roughly 4,300 projects across the country, representing more than 200,000 units with project-based 202 contracts.
“These extremely valuable subsidies are a powerful reason to preserve all types of 202 housing,” Gesue concludes.
Comments exerpted from the July 25, 2007, audio conference,
“Mission: Possible, Creating and Preserving Affordable
Housing,” part of the Irving Levin Associates Senior Care Audio
Conference Series. For more information: (203) 846-6800.