National Housing Law Project Housing Law Bulletin

HUD Issues Guidance for Recent Changes
to Preservation Program

Preservation Letter No. 1

Preservation Letter No. 1 addresses issues related to implementing the sales priority, such as waivers of prior regulations and the procedures for owners' switching to a sales transaction.³ This memorandum:

• Waives the tenant endorsement/preferred priority purchaser process set forth in 24 C.F.R. § 248.157(c) (1995), thus permitting sale to any priority purchaser (other than a prohibited "related party") selected by the owner and meeting basic HUD qualifications;
• Requires the owner to file with HUD a formal Second Notice of Intent (NOI) by April 15 to switch from processing as an extension⁴ to a sale;
• Reduces the tenant and local government comment period for all sales to 14 days upon filing of a Plan of Action (POA) with HUD;
• Requires no expression of interest beyond a written statement from the interested buyer;
• Defers credit review and approval of the buyer from the offer stage to the POA submission/review stage;
• Requires HUD to review the project's satisfaction of the new minimum equity requirement when it reissues the HUD Form 9607 adjusting the transfer preservation equity for changes since issuance of the original HUD Form 9607.

While HUD echoes the statutory language that processing will be suspended on October 1, 1996, advocates are working to convince Congress to provide continued funding for the more than 100,000 units that will remaining in the pipeline after FY 1996 funding is fully expended.

The final version of this memo differs in several important respects from a draft that was circulated in early April. That draft did not waive the tenant endorsement requirement and eliminated the bona fide offer step. It also required purchasers to elect the capital grant format of financing in order to obtain the waivers, and expressly allowed switching owners to revert to an extension plan if they failed to find an "acceptable" purchaser. The final April 12 version does not contain these provisions. Thus, completion of the bona fide offer step is still required, and purchasers may apparently benefit from the waivers without electing capital grant funding. It is unclear whether owners who cannot find an "acceptable" qualified purchaser retain the right to switch back to an extension (and possibly resume their place in the extension queue with an already approved POA).

The mechanics of switching also appear confusing. Although Preservation Letter No. 1 repeatedly mentions the need for switching owners to file a Second NOI by April 15 (even though the memo was not issued until Friday, April 12), it also suggests the possibility of HUD reissuing the 9607 valuation form, thus triggering an opportunity for owners that have not yet submitted POAs to then file a Second NOI to sell within 30 days, even if they were on an extension track and missed the April 15 deadline. These projects would then become pipeline sales that could potentially realize the advantage of the sales priority until August 15, 1996. HUD will no doubt clarify this very soon.

In an effort to expedite the approval of sales prior to expiration of the funding priority on August 15, 1996, the memo waives several other regulations besides the tenant endorsement requirement. Apparently, the waivers in the memo apply to all sales (both switches and those in the pipeline that have not yet completed the step required by the waived regulation).

The elimination of tenant endorsement (apparently from all sales transactions, not just switches) is especially troubling. Except for sales that already have signed purchase and sale contracts, this waiver would deprive tenants of any formal role to screen bogus or unresponsive nonprofits or force them to bargain around issues of concern to tenants. It would also foreclose the opportunities for many to assume greater control via a tenant purchase or collaborative venture with a nonprofit. The waiver would leave tenants with only a 14-day comment period once the Plan of Action has been negotiated and submitted to HUD. At a meeting in Boston on April 19, Assistant Secretary Retsinas reportedly agreed to revoke this waiver, and Congress has also indicated concern about it. Reportedly HUD field offices have been told that they may continue to require tenant endorsement.

Late Flash: On May 2, HUD staff reported that Assistant Secretary Retsinas would soon issue "Preservation Letter No. 3," revoking the April 12 waiver of the tenant endorsement requirement. The policy would require purchasing nonprofits to secure a tenant endorsement prior to HUD approval of the Plan of Action from May 3 onward, but would allow all nonprofits, not just community-based ones, to seek that endorsement. The next Bulletin will review any recent HUD issuances on this and other preservation issues.

Preservation Letter No. 2

Preservation Letter No. 2, from Deputy Assistant Secretary Chris Greer, primarily addresses issues related to HUD's funding priorities to allocate insufficient funds and processing requirements for newly authorized prepayments. It states, in brief:

• The first funding priority will be to provide tenant vouchers upon prepayment, and the second will be for sales to priority purchasers with approved POAs (the sales queue). HUD's general intention is to protect tenants and fund sales to approved priority purchasers;⁵
• HUD estimates unfunded needs for the program (after full FY 1996 funding eventually flows) at $3.7 billion;
• Title II projects may use the capital grant program;
• Purchasers need not perform the "Shallow Rental Subsidy" calculation since that applied only for FY 1995 (leaving unclear whether projects funded during the first half of FY 1996 under the subsequent short-term continuing resolutions remain subject to FY 1995 rules);
• Sales projects funded via Section 241(f) loans with Section 8 assistance will be subject to a Section 8 cap set at 100 percent of fair market rent, with any additional needed funds provided through "Carry Grants" (formerly Equity and Gap Grants).

Prepayments. On the paramount issue of prepayments, HUD states, via an attached "Questions and Answers" section:

• Only projects that are 20 years from final endorsement may prepay;
• Projects with already approved POAs apparently may prepay;
• The survival of Title VI's tenant protections upon prepayment, beyond the special preservation vouchers for currently unassisted (non-Section 8) low- and very low-income tenants (e.g., rent protections for special needs tenants and those in low-vacancy areas, and relocation expenses), remain for future interpretation;
• The value of the voucher for tenants who choose to move appears to be subject to a floor value set at the previous rent, not 30 percent of the tenant's income, although this remains unclear;
• Owners may not opt-out of any Section 8 Loan Management Set-Aside contract as part of the prepayment; when the contract expires, if there is no renewal, the tenants assisted by Section 8 will receive vouchers if there are funds;
• Owners already receiving preservation incentives may prepay, but the project remains subject to the Use Agreement for the full applicable term.

Finally, Preservation Letter No. 2 details the processing steps and information requirements for prepayment, such as the information required from the owner, other required owner actions, notice to tenants and local government, HUD approval, and other HUD actions. HUD also states that the instructions concerning vouchers and the timely flow of funds are still being developed.

1. See Memorandum from HUD Assistant Secretary Nicolas P. Retsinas for All Housing Directors et al. re Waiver of Certain Requirements for a Sales Transaction Under the Preservation Program (Apr. 12, 1996) ("Preservation Letter No. 1"); Memorandum from HUD Acting Deputy Assistant Secretary Chris Greer for Directors of Housing et al. re Implementation of H.R. 2099 (Apr. 12, 1996) ("Preservation Letter No. 2").
2. See President Signs Extender Legislation, 26 HOUS. L. BULL. 54 (Apr. 1996) and HUD Preservation Program Survives Appropriations Conference, 25 HOUS. L. BULL. 200 (Dec. 1995).
3. "Switching" refers to owners who wanted to stay in the preservation program but who now want to sell to a HUD-designated priority purchaser, thus still preserving the housing as affordable to low-income tenants. "Prepaying owners," in contrast, want to convert their units to market rate.
4. An "extension" refers to an owner's choice to preserve the housing under the preservation program in exchange for additional financial incentives.
5. HUD does not give any clue about how it will treat other preservation-eligible projects, either now or come August 15, not even those mentioned as discretionary priorities in the statute. Thus, projects with extension plans either approved or in the pipeline are at greater risk for funding.