The future of HUD’s Sec. 202 initiative is in doubt, as the 61-year old program suffers budget cuts and a proposed moratorium on new construction.

Sec. 202, which provides subsidies and grants for the construction of housing for very low-income seniors, was one of the losers of HUD’s proposed 2011 budget, getting cut by $551.3 million to just $273.7 million. That figure is earmarked only for subsidies, meaning 2011 may be the first year that no new Sec. 202 housing is built.

What’s more, HUD’s proposed budget suggests not funding any new construction of Sec. 202 properties through 2015. Many longtime 202 developers now wonder if this is the beginning of the end of the program. HUD’s 2010 budget had funding for about 3,400 units to be built nationally, but in the program’s heyday, tens of thousands of units were built annually.

“This is my 18th year doing this, and every single year, it’s a few units less. But they need to adequately fund the program,” says Robin Keller, who leads the 202 development efforts for Alexandria, Va.-based nonprofit Volunteers of America, one of the country’s most prolific 202 builders. “The Baby Boomer generation is moving forward fast, increasing the number of people that will need affordable housing, yet the government’s response is to decrease the number of units available.”

Volunteers of America broke ground on five 202 developments last year and hopes to start another seven in 2010. But 2011 is another matter, as HUD takes new construction off the table. “We’re very concerned that once they stop, it will be years before, if ever, they fund it again,” Keller says.

National Church Residences, another active 202 developer, once started seven to nine 202 projects a year, good for between 500 and 700 units. Now, the company starts between one and four projects annually, totaling at most about 100 units. HUD’s funding formula allocates a certain number of units that can be built annually in each metro area: 20 units for Columbus, Ohio, for instance.

“We need to be preserving these assets, because you can’t build fast enough,” says Michelle Norris, senior vice president of development at Columbus, Ohio-based National Church Residences. “If you can only build 20 units in Columbus, Ohio in a year, but an older 150-unit 202 becomes obsolete, then you’re nowhere.”

In a recent interview with Affordable Housing Finance, HUD Secretary Shaun Donovan indicated that the low-income housing tax credit (LIHTC) program was an adequate stand-in for the Sec. 202 program. “Today, we produce 10 times more seniors housing … with the low-income housing tax credit than we do with the 202,” Donovan said. And the fact that tax credits are often used to rehab the properties means that the program “no longer produces something unique, because the tax credit is there.”

But 202 advocates disagree. There is one crucial difference between the two programs: namely that you don’t need any income to live at a 202 property, whereas LIHTC units are targeted to AMI levels that many seniors can’t afford. “The huge difference is, there’s no Sec. 8 contract that comes with the tax credit,” Norris says. “Somebody who only has Social Security cannot afford most tax credit units.”

And current supply can’t keep up with demand. “The last stat I saw was that for every one 202 unit, there are 10 people waiting to get in,” says Nick Gesue, a senior vice president and director at Columbus, Ohio-based lender Lancaster Pollard. “No other program allows you to serve such a low-income population: You can earn $1 a year and still move into a 202 property.”

Plugging the Gaps

Even at its current funding levels, the 202 program presents developers with a lot of budget shortfalls. To maximize its diminishing funds, HUD tries to spread out the 202 allocation among as many projects as possible, which lowers the per-unit amount available to any one project. “The complaint I hear from developers is that it’s impossible to build a quality product with the amount of money HUD is willing to commit,” Gesue says.

Both NCR and VOA concur. Of the seven projects that VOA hopes to start this year, six of them will need additional funds to complete the build. For NCR, about three in every four 202 developments have funding shortfalls that necessitate gap financing. “Often, before you even put the application in, you know you don’t have enough money,” Keller says.

The two most popular programs for plugging the gaps in a 202 development are CDBG money and the HOME program. In fact, HUD will not provide additional “amendment” funds unless a developer proves they’ve tried to get those funds elsewhere first. But the process of securing enough funds is difficult. Developers don’t know how much more they’ll need until after plans and specs are finished, which can take six months to a year. 

And then, “if you go through HUD amendment money, it takes a long time to get those approved,” Norris says. “So it delays the start of the construction and quite often during that time the construction costs can go up.”