National Rural Housing Coalition issues Recommendations for Rural Development

Recommendations for Rural Development

The National Rural Housing Coalition (NRHC) is a national membership organization consisting of housing developers, non-profit housing organizations, state and local officials, and housing advocates.  Since 1969, NRHC has promoted and defended the principle that rural people have the right—regardless of income—to a decent, affordable place to live, clean water, and basic community services.

NRHC has prepared the following list of recommendations for improvements to programs administered by the Rural Housing Service (RHS). We look forward to continuing our partnership with the U.S. Department of Agriculture (USDA) and working with you to improve the effectiveness of RHS programs.

Single Family Housing Programs

Mutual Self-Help Housing Program

For over 50 years, the Mutual Self-Help Housing program has been one of the most successful housing programs the federal government has ever seen, and is responsible for more than 50,000 low- and very-low income rural families building their own homes with assistance from dedicated  nonprofit community-based organizations, several regional technical assistance providers, and USDA working together in partnership. Despite the program’s success, a combination of uncertain and uneven funding levels, the worst economic downturn since the great Depression, and antiquated delivery systems have reduced the impacts of the program in recent years.

USDA could take several steps to improve the Mutual Self-Help Housing program and increase its impact. First, Section 523 Grantees should be encouraged and expected to become robust partners with Rural Development, including becoming Section 502 Loan Packagers, and where possible, performing custodial accounting of construction funds.  Additionally, USDA should recognize regional variations in construction and delivery methods in the implementation of the Mutual Self-Help Housing program. Specific recommendations for different aspects of the Mutual Self-Help Housing program are provided below.

Section 523 Grants

Currently, USDA staff and grantee organizations duplicate their work with borrowers, including redundant entry of data. USDA should apply the Section 523 grant program rules evenly across the board and adopt best practices to increase the program’s effectiveness. There are several Section 523 grantees that have participated in the program for several decades, including Self-Help Enterprises in California and Florida Non-Profit Housing. USDA should look to these groups to develop a best practices list and to identify areas where USDA could collaborate with Section 523 grantees to reduce the workload on Rural Development staff and increase efficiencies in the program.

Due to limited funding availability, grantees are restricted in their ability to grow their program – either within their existing service area or by adding to it. As a result, the overall impact of the program is stifled. Limited funding has become an even greater issue in recent years as construction costs have increased. Simply put, these factors and the caps on grants mean current grantees are able to produce less each successive grant period. USDA should make grant awards up to 6 years for experienced grantees in good standing, extendable for two years through renewal options. This flexibility would allow for continuous funding of experienced grantees, and help families to start the program under one grant period, and finish in another, following the “carryover” method.

To address the funding issues and allow the program to grow and assist more families, USDA should propose and support a baseline Section 523 budget of $40 million annually, with a 5 percent increase each year.  With this increased funding, USDA should also allow Section 523 grantees to enter into new service areas and increase their level of production. USDA should encourage new grantees in underserved and unserved states, such as North Dakota. Two grantees should be allowed in the same market area only where there is a memorandum of understanding in place.

USDA must also recognize that different parts of the country have different local costs and regional funding sources. Because of these differences, the “one size fits all” approach to allowable Technical Assistance should be revised. Finally, grantees should not be penalized when their performance is curtailed by factors outside their control. While reasonable cuts in grant expenses should accompany such delays, funding should not be cut off completely. Where de-obligation of grant funds is necessary, it should be made in a timely fashion so that the unused funds can be made available to other grantees.

Technical & Management Assistance (T&MA) Contracts

The T&MA contractors assist participating organization in implementing the Mutual Self-Help Housing program. The four T&MA contractors are: Florida Non-Profit Housing, Inc., Little Dixie Community Action Agency, NCALL, and the Rural Community Assistance Corporation (RCAC). There are several improvements to the T&MA contract that we recommend. First, T&MA contract deliverables should be updated, where necessary, to address current program needs and foster program expansion. Language should be added to the T&MA contracts to allow for more flexibility and the utilization of technology for Qualified Residential Mortgages (QRM) and quarterly site visit attendance. Further, all T&MA contractors should be certified Section 502 Direct packagers and expected to work with new grantees, new packagers, and experienced grantees in situations where Rural Development processing of loan applications is not meeting expectations. T&MA contracts should be modified to allow for promotion, growth and grantee development the goal of expanding the program. Finally, the contracts should be modified to allow T&MA contractors to hold regional and national conferences on a regular basis.

Recommendations to Improve the Construction Period

USDA should allow third parties to conduct construction inspections, including final inspections, at the request of the grantee, unless there are no certified providers in the area. Additionally, Rural Development should hold grantees accountable for loan disbursements for construction costs, but should not be involved with the actual disbursement process. Rural Development should revise task lists to provide clarity on labor requirements, and allow a lesser standard (as low as 50 percent) if a grantee makes a compelling case for lower participation in projects with compensating factors such as high sweat equity. Custodial accounts should be allowed for all grantees that have the capacity (to be reviewed by the T&MA contractor) and requests it. Finally, flexibility should be allowed on placement of Builders Risk policies to conform to insurance policy limitations.

Section 502 Direct Loan Program and Packaging Program

USDA’s Section 502 Direct Loan program is a critical source of single-family housing financing for low- and very-low income families and essential to the success of the Mutual Self-Help Housing program. To improve the program, USDA should establish uniform performance standards for Rural Development’s review, approval, and loan closing timeframes. Additionally, to address understaffing issues at Rural Development, USDA could allow Mutual Self-Help grantees with demonstrated capacity to have remote electronic access to input data into USDA’s loan origination system, which would speed up the application process. USDA could also adopt standards for an accelerated loan approval process for applicants that meet basic threshold requirements and allow for increased flexibility on loans that involve multiple financing sources. Finally, all grantees should take the Section 502 loan packaging training, and should be expected to work with their T&MA contractors for at least a start-up period.

Several of these improvements are already in the works at USDA. NRHC looks forward to the results of this process.

Multifamily Housing Programs

Provisions on Maturing Section 515 Mortgages

As you likely know, the U.S. Department of Agriculture (USDA) RHS multifamily housing portfolio, which is primarily comprised on Section 515 and 514 properties, is facing two confounding issues. First, there is a massive shortfall in the funds needed to maintain the habitability of existing properties. The average age of the USDA rural rental housing portfolio is 34 years. As the 2016 USDA Comprehensive Report indicated, there is a 20 year, $5.5 billion cost for maintaining and preserving existing rural rental housing developments and the approximately 470,000 units of existing rural rental housing (Section 515 and 514). Second, there is a rising tide of maturing mortgages, which will result in increasing affordability issues for low- and very-low-income rural renters. As Sections 515 and 514 loans mature, those developments and their tenants are no longer eligible for rental assistance.

USDA has already lost a substantial number of units – 2,646 units from 205 properties in 2015 alone – and this trend is expected to continue over the next several decades. According to the Housing Assistance Council’s analysis of USDA data, rate of maturation of Section 515 mortgages between 2016 and 2027 is expected to average around 74 properties per year. However, the number of properties exiting the USDA portfolio sky rockets in 2028 to 407, and averages 556 properties per year for the next five years (2028 through 2032). Between 2032 and 2050, an estimated 12,530 properties will mature or be prepaid, with the greatest loss, 927 properties, with some 30,831 units, exiting in 2040.

Congress has taken action to address these issues. In the Fiscal Year (FY) 2017 Omnibus (H.R. 244), several provisions were included that are designed to address the issues facing the RHS multifamily housing portfolio. In addition to providing slight funding increases to the Section 515 program, the Omnibus also directs the Secretary to provide incentives for the acquisition of RHS multifamily housing properties nonprofit organizations and public housing authorities that commit to keep the properties in the RHS multifamily housing program for a period of time as determined by the Secretary.

The Omnibus further details several incentives, noting that the list is not exclusive. Incentives include: allowing nonprofits and public housing authorities to earn a Return on Investment (ROI) on their own resources to include proceeds from low-income housing tax credit syndication, own contributions, grants, and developer loans at favorable rates and terms, invested in a deal; and allow reimbursement of organizational costs associated with owner’s oversight of asset referred to as ‘‘Asset Management Fee’’ (AMF) of up to $7,500 per property. These were also included in both the House (H.R. 3268) and Senate (S. 1603) Agriculture Appropriations Bills for FY 2018.

Additionally, the FY 2017 Omnibus and S. 1603 both include $1,000,000 for a pilot program to provide grants to qualified nonprofit organizations and public housing authorities to provide technical assistance, including financial and legal services, to RHS multifamily housing borrowers to facilitate the acquisition of RHS multifamily properties in areas where the Secretary determines that there is a risk of loss of affordable housing.

The provisions in the Omnibus bill for FY 2017 and House and Senate Agriculture Appropriations bills for FY 2018 reflect an important step to meeting the affordability and quality demands for improving rental housing in rural communities. We encourage you to work with the Secretary to begin fulfilling these provisions.

Fix 4 Percent Rate

When the Low Income Housing Tax Credit (LIHTC) was created, Congress set the credit rates (which determine how much LIHTC equity can go into a particular project) at 9 percent for new construction and substantial rehabilitation and 4 percent for the acquisition of affordable housing and for multifamily Housing Bond-financed housing (hence, how the “9 percent” and “4 percent” credit labels were derived).  However, since then, Housing Credit rates have fluctuated according to a formula related to federal borrowing rates, which have sunk to historic lows and yielding much lower credit rates.  (Currently, the 4 percent rate is only 3.22 percent).  As a result, there is 15 to 20 percent less Housing Credit equity available for any given affordable housing development today than the original rates provided.

Recognizing the impact of declining rates of the program, Congress permanently enacted a minimum 9 percent credit rate in 2015, but there is still no corresponding minimum 4 percent rate.  While the increased equity this permanent rate brought into a project (often resulting in the reduction or even elimination of new permanent debt), the majority of preservation transactions in rural markets are completed by utilizing the 4 percent Housing Credit (tax exempt bond financing).

Section 301 of the Affordable Housing Credit Improvement Act of 2017 (S.548), establishes a minimum 4 percent rate for Credits used to finance acquisitions and Housing Bond-financed developments (similar to the fixed 9 percent rate).  This would not only provide more predictability in transactions, it would also  provide additional capital which in turn will help close funding gaps  – or better yet, reduce the amount of new senior debt required.  Developers could then be encouraged to target more apartments to very- and extremely-low income households at rents they could afford, as well as make more types of properties in need of preservation financially feasible.

Income Averaging

USDA should allow for income averaging in properties that are financed with Rural Development loans and the Low Income-Housing Tax Credit (LIHTC). Section 201 of the Cantwell-Hatch Act allows for income averaging in Housing Credit properties.  If this bill is enacted, Rural Development will need to modify some restrictions in order for owners/developers to take full advantage of the Act.  Housing Credit properties currently serve renters with incomes up to 60 percent of area median income (AMI), and rents are comparably restricted. While states are encouraged to give preference to developments that serve the lowest-income populations, it can be difficult to make such developments financially feasible, especially in rural areas with very-low median incomes, in economically depressed communities pursuing mixed-income revitalization, and in high-cost markets where it is difficult to target apartments to the lowest-income tenants without significant additional subsidy.

If enacted, this new provision would create a new test known as “income averaging,” that would allow 60 percent of AMI ceiling to apply to the average of all apartments in a property rather than to every individual Housing Credit apartment.  The maximum income to qualify for any unit would be limited to 80 percent of AMI, which is still considered low-income.  The higher rents that households with incomes above 60 percent AMI (up to the max of 80 percent  AMI) could afford have the potential to offset the lower rents that households below 40 percent or even 30 percent AMI could afford, allowing developments to maintain financial feasibility while providing a deeper level of affordability.

Furthermore, the diversification of rents within a given project would broaden the marketability of a project and provide more flexibility and responsiveness to local needs. As such, projects with tiered rents would be more attractive to Housing Credit investors, potentially bringing in more capital to rural developments.

However, Rural Development currently prohibits tiered rents (i.e., targeted rents based on varied income levels). This adversely impacts the affordability for some extremely-low income households and makes projects infeasible.

Contracts for Rental Assistance

Even before the current LIHTC market contraction began, investors have grown increasingly concerned that the federal government might fail to renew the subsidies promised in HUD’s project-based Section 8 contracts and USDA’s Section 521 Rental Assistance.  As a result, many LIHTC investors show preference to those projects that currently have 20 year subsidy contracts (i.e., 20 year HAP contracts).  Although the funding of such long-term contracts is still subject to annual appropriations, the capital market has a perceived confidence the government will honor existing contracts. Depending on the government for contract renewal or establishing new contracts is however a greater risk. As such, some investors demand that preservation projects with partial or short term contracts establish large, additional cash reserves to hedge this perceived subsidy risk. Because the price that LIHTC investors pay has fallen, establishing an extra Rental Assistance reserve has become even more difficult and makes it impossible to finance preservation projects that are otherwise perfectly sound.

If Rural Development went back to providing long-term 20 year Rental Assistance contracts, subject to annual appropriations, the capital market will view this favorably and be willing to pay a slightly higher equity pricing for the reduced risk.

Align Rural Development’s Underwriting Thresholds with the Private Lending Sector to encourage more private investment in USDA rental properties

Rural Development currently maintains several restrictive underwriting parameters that were originally implemented to reduce Agency risk when USDA was the only debt provider for the development of affordable rural housing projects.  However, these restrictions are inconsistent with the private industry, and in turn, artificially hinder the amount of private investment (debt and equity) brought into the preservation of those existing 515 projects.  While efforts to better align some of Rural Development’s fiscal thresholds in a potential Pilot with Freddie Mac are underway, expanding such provisions to all preservation transactions would certainly allow more projects to be preserved.

For example, USDA could allow new senior debt to mature ahead of subordinate 515 debt. Currently, RHS requires any senior debt to be co-terminus with their sub-debt (30 years), which adversely affects the interest rate for the borrower and in turn increases the amount of rent increases needed to support the new debt.  While this has been a requirement by USDA, it is not a regulatory or statutory requirement per the HB-3560.   USDA should allow a minimum of 16 or 18-year term (when LIHTC partner would exit) to secure lowest MBS rate, increasing the leveraging of new debt.

Rural Development could also allow underwritten pro forma rents in place at initial closing.  Most non-USDA loan products will not allow an immediate-delivery loan product if new rents are not in place at closing (costing properties anywhere from 0.50 percent-1.00 percent increased interest rate due to a forward component) which adversely affects rental assistance and feasibility.  This artificially reduces the amount of private debt a project can support, as well as reduces the options of various debt products.

USDA should defer to the lender or housing finance agency in determining annual deposit to replacement reserves (ADRR).  Most are using a 10-year (plus 2 years for I/O period) post rehab capital needs schedule compared to Rural Development’s 20-year schedule.  This will decrease the amount of funds required from annual CF, and in turn decrease rent needed to support new ADRR.  RHS could consider requiring an updated CNA ever 10 years to ensure sufficient funding reserved for future capital needs.

USDA should eliminate the artificial inflation of historical vacancy by 2 percent.  Most private lenders and investors will use a blend of historical performance and current budget to determine the underwritten vacancy factor.  A potential change to the performance is already captured in the pro forma trending of 2 percent.  By inflating the initial vacancy by another 2 percent (regardless of past performance), the potential new debt necessary to support a preservation transaction is artificially reduced and often renders a project infeasible that otherwise would be supportable.  Or, the rents are artificially inflated over what is needed in order to obtain the necessary income to support the needed debt stack.

Rural Development has historically managed its properties under a zero-based budget, in which the managing agent determines annually what the project will incur in expenses to operate the property.  And through that process, they then back into the amount of rent it will need to cover those expenses.  This method is effective in minimizing the amount of rent charged to the RA program and to the individual tenants who may not receive a monthly rent subsidy. However, this method of rent sizing is inconsistent with the way in which the private sector operates, and the way in which projects are evaluated when they are being underwritten by new debt and equity providers. As a result, there is a continued lack of interest in the debt and equity community to pursue Rural Development transactions.  Furthermore, this inconsistency with the market often results in equity pricing cuts from those capital partners that are willing to invest.

Asset Management Fee

As mentioned, the FY 2017 Omnibus (and House and Senate Agriculture Appropriations Bills for FY 2018) included a provision that allows for reimbursement of AMF of up to $7,500 per property. Chapter 4 of the Handbook, which covers Financial Management, has not been updated to reflect this change, and still limits AMF to up to $7,500 per owner (even where the owner manages multiple properties).[1]

Members of our Board have stated that state Rural Development offices have disapproved of budgets because the borrower included an AMF in each property. In at least one situation, a borrower, Coachella Valley Housing Coalition in California, was asked to pay back previously approved per-property AMFs for FY 2016-2017 for a wholly-owned farmworker housing project.

The Omnibus makes it clear that entities are eligible to be reimbursed an AMF per property. Rural Development should provide guidance to the National and State offices, and update the Handbook to reflect this change.

Multifamily Preservation and Revitalization Program (MPR)

One of the primary tools currently available to USDA to address the issues facing its multifamily housing portfolio is the Multifamily Housing Preservation and Revitalization Demonstration program (MPR). Established by Congress in 2006 in response to findings from a 2004 USDA comprehensive report on the portfolio, the MPR program authorizes USDA to employ a variety of financing options in order to preserve the Section 515 and Farmworker housing properties in its portfolio. By leveraging other federal and state resources, including grants, private debt guaranteed under the Section 538 program, the Low-Income Housing Tax Credit (LIHTC), and other sources, the MPR is able to recapitalize properties by restructuring Section 515 and 514 loans in order to maintain the properties’ affordable use. While the MPR remains a demonstration program subject to annual appropriations, it has successfully preserved the affordability of many properties in the USDA portfolio; between 2006 and 2014, an estimated 26,459 units in 1,218 properties were financed through MPR.

USDA should remove the pilot designation from the MPR and authorize RHS to defer existing Rural Development debt. Organizations like Southwest Minnesota Housing Partnership (SMHP) are currently stalled in their rehabilitation process because Rural Development over allocated MPR for 2017 and so SMHP has to wait until 2018 to acquire and rehabilitate a portfolio of 11 515 properties, even though the organization has soft funding from the state and were told by Rural Development National that MPR would be available.

Clarify Rules for Use of LIHTC with Rural Development Funds

The Low Income Housing Tax Credit is an essential source of funding for affordable multifamily housing, and USDA should update its policies and procedures to facilitate the use of LIHTC with both Section 515 and Section 514 financing.

Rural Development should provide guidance on if/when/how LIHTC can be used with new construction and/or preserving farm labor housing and multifamily housing. If the use of both financing sources is problematic, Rural Development should provide guidance so borrowers can plan to avoid or address problematic situations.  Specifically, USDA should create a best practices playbook for use of Section 514 and Section 515 with LIHTC.

Currently the use of LIHTC and Section 514 is difficult. For example, Motivation, Education and Training, Inc. (MET) is doing a $28 million tax credit deal with $6 million in Section 514.  Without LIHTC, MET could only build 1/5th of the units.  If Rural Development would let MET, and other borrowers, do a proportion of farm worker units equal to the percentage of funding from Section 514, which is supported in both current regulatory and handbook language, borrowers like MET could build developments that respond to the needs of rural communities, rather than segregating low-income farmworkers in farmworker-only developments.

Other examples include Community Housing Partners, which had a horrific experience in last year with trying to use LIHTC and Section 515 in Virginia. Because USDA was so slow in processing, Community Housing Partners had to return the credits. As a result of the Rural Development staff, timing issues, and lack of relevant market experience and knowledge, the organization is getting more reluctant to go after Section 515.

Financing Services to Tenants

Many USDA multifamily properties also offer services to the tenants. Notably, however, all of the services provided are funded through the borrower’s own cost or through HUD. Currently, rent funds can only be used to pay for “bricks, sticks, and operating costs.”  Because of this, the amount of services that borrowers can provide to tenants in their properties is limited to having another funding source for those services. Even so, many borrowers already link nutrition and other programs to their sites. The historical problem with Rural Development on this issue has been their insistence that any costs associated with these services cannot be paid through the project or RA.

Rural Development should reconsider the funding of resident service programs out of the operating budget for Section 515 and Section 514/516 developments.  Rural Development made the expense unallowable, based on the interpretation that RA funds were for housing only subsidies and not for services. This change would benefit the residents of USDA multifamily housing properties. For example, Laconia Area Community Land Trust (LACLT) in New Hampshire has found that “providing resident services is difficult when USDA does not allow us to build that into our property budgets. The properties would get a higher level of service if we could do that, which would benefit residents. It has one resident services person for 341 apartments and no one wants to fund this necessary work.”

[1] (p. 4-21) available at:

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