HUD Issues Notice on Refinancing Section 202 Housing for the Elderly

HUD’s Office of Multifamily Housing Programs recently issued Notice H 2018-02, providing guidance to owners of pre-1974 Section 202 Direct Loan sites serving the elderly that have the option of refinancing to make capital improvements and/or to reduce the interest rate. The notice is a supplement to Housing Notice H 20013-17, otherwise known as the HUD 202 Direct Loan Prepayment Notice.

This notice represents a positive step in preventing the displacement of low-income elderly residents following the refinancing of a pre-1974 Section 202 direct loan. To prevent displacement of elderly residents, owners may seek Tenant Protection Vouchers (TPVs) or Senior Preservation Rental Assistance Contracts (SPRACs).

Tenant Protection Vouchers. The 2013 notice indicates that for pre-1974 properties that prepay their mortgage, TPVs will be issued to income-qualified residents that don’t already have a subsidy. The recent notice explicitly allows for automatic project-basing of those vouchers, which will result in a new Project Based Voucher (PBV) contract. PBV contracts can help preserve properties by increasing in Net Operating Income (NOI), as the voucher rents are often higher than the rents being currently being received. The new notice also explains that for these PBV contracts, HUD will waive the percentage caps at the PHA level, and at the property level. As a result, there should be no barriers preventing the local participating housing authority from administering the new PBV contract.

Senior Project Rental Assistance Contracts (SPRAC). The 2013 notice allowed “SPRAC” contracts to add rental assistance for unassisted units. The new notice states that HUD will use up to $5 million for SPRACs for any units that cannot be covered under a PBV housing assistance payment (HAP) contract. Initial SPRAC rents will be based on the lesser of comparable market rents or 150 percent of the fair market rent. SPRACs have a 20-year term and will be awarded on a first-come, first-served basis. To submit a request, email SPRAC@hud.gov.

To qualify, the project’s 202 loan must not mature before the prepayment and award of the new SPRAC contract and the owner must: 

• Have a MOR score that is satisfactory or higher and have no open Departmental Enforcement Center referrals;
• Demonstrate that the units to be covered by SPRAC are not already covered by Section 8, and could not be covered by a new PBV contract;
• Commit to serving very low-income elderly residents at turn-over;
• Be approved and close on the new SPRAC contract before the loan’s maturity; and
• Comply with federal civil rights and fair housing laws and requirements.