Ray Kingsbury knew one of his organization's affordable senior properties needed help–badly. At The Meadows, a 150-unit senior property in Springdale, Ohio, mortar was crumbling away between the bricks near the building's roofline. There was also no air-conditioning in some of the hallways, and the backup generator needed a new fuel tank.

"There were a number of structural issues with The Meadows," says Kingsbury, vice president of community services for LifeSphere, a nonprofit that provides healthcare and housing services for older adults and their families in southwestern Ohio. But The Meadows, a HUD 202 property that provides Section 8 housing for the elderly, had nowhere near the reserves now or in the future to pay for such projects.

In the past, it would have been very difficult to fix up such a property: HUD 202 properties are subject to strict refinancing requirements that can limit the ability of owners to get the money they need to do significant repairs or upgrades. But as both the population and these properties age, HUD knew it needed to make changes to its program if it wanted to keep this housing stock livable and affordable for future residents.

WINDS OF CHANGE: A new HUD refinancing rule helped The Meadows in Springdale, Ohio, update its aging buildings.
WINDS OF CHANGE: A new HUD refinancing rule helped The Meadows in Springdale, Ohio, update its aging buildings.

Lucky Timing

LifeSphere enlisted a lender, Lancaster Pollard Mortgage Co. in Columbus, Ohio, to help it refinance The Meadows. The lender wasn't obligated to go through HUD, but in this case it made sense. "In 2002, HUD allowed 202s to refinance through HUD, which meant the properties could get longer loan terms and lower interest rates," says Scott Moore, president of Lancaster Pollard. "But the underwriting criteria did not become practical until [HUD's new rule] 04-21, which created more realistic underwriting criteria so 202s could qualify for enough to refinance."

Before this change went through, the lender twice submitted paperwork to HUD so that it could refinance the property. HUD's local office didn't officially reject the property, but it also didn't approve the project's refinancing.

The main issue? A requirement that the owner of a 202 property use the lower of either Section 8 contract rents or market rents when applying for refinancing. "We were asking the field office to ignore the fact that contract rents were $80 above market and underwrite the contract rents, which would provide a higher loan amount," Moore explains.

Meanwhile, as Lancaster Pollard was submitting applications to the Columbus area HUD office, the Mortgage Bankers Association was lobbying HUD's main office in Washington to allow aging 202 properties to use contract rents for refinancing. "The debt service is 9 percent to [9.75] percent on a lot of these properties," explains Mike Petrie, chairman of the Mortgage Bankers Association and president of P.R. Mortgage and Investment Corp. in Indianapolis. These properties are "at the breakeven point, and they didn't have the funds to do the capital improvements they would need to do" at the 20- or 30-year mark.

Done_Deal2.jpg(300) Late in 2004, owners of such properties caught a break. HUD released a new rule (known officially as Notice 04-21) that would allow banks to underwrite Section 8 contract rents–even if they were higher then the market rent. It also raised the loan-to-value ratio from 85 percent to 90 percent and lowered the minimum debt service from 1.17 to 1.11. This meant that the property no longer had to generate as much income, relative to its debt service payments, as before. "It allows for more flexibility in the refinancing," says Charles H. (Hank) Williams, the deputy assistant secretary of the Office of Affordable Housing Preservation at HUD. "These projects have 200,000 units in affordable housing for the elderly. As these projects age, it was necessary to address their needs through a refinancing structure."

Real Impact

Prior to this change from HUD, Kingsbury admits that the future of The Meadows looked pretty grim. "If HUD doesn't allow the refinance, the property would definitely have deteriorated," he says. "We would have been in deep trouble in the next five to 10 years."

But the HUD decision allowed LifeSphere to access a $5 million, federally insured loan for the property. Half of the loan was put to use immediately. In addition to the masonry repairs, LifeSphere will upgrade the fire system (including fire alarms and sprinkler system), fix the air conditioning in the hallway, and replace the fuel tank that runs the backup generator. "There was also money for softer upgrades like the floor coverings and wall coverings," Moore says. "There's some bathroom upgrades for grab bars. It's a collection of smaller upgrades to the core items."

The other half went into reserves, putting money aside for future improvements, Kingsbury says.

Combined, these upgrades will extend The Meadows' lifespan by another 30 years. This provides welcome news for the 154 people who call the 150-unit property home. Kingsbury says Cincinnati, like many areas of the country, lacks enough affordable housing for seniors. While that shortage remains, the HUD decision will keep the need from growing any worse.

Obviously word is spreading about the new HUD approach. The owners of more than 200 properties, including LifeSphere, have applied for refinancing under the new rule. This doesn't surprise Petrie. "Everybody wins [with this new rule]," he says. "HUD wins, the Section 202 project wins, and the market wins. It's a good deal for everyone."