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HUD issues rules for Section 8 restructuring The U.S. Department of Housing and Urban Development (HUD) has taken a major step to reduce costs in the Section 8 rent subsidy program, issuing regulations to restructure projects with Federal Housing Administration-insured mortgages and above-market rents.

New regulations' effect on mark-to-market program *Projects will be reduced to market levels under the mark-to-market program, thereby lowering HUD subsidy payments.

*Because the lower rents couldn't be carried by existing debt service, the mortgage will be split into a new first mortgage that can be supported by the reduced rents and a below-market-rate HUD-held second mortgage.

Under the mark-to-market program, project rents will be reduced to market levels, thereby lowering HUD's subsidy payments. Because the lower rents couldn't carry the existing debt service, the mortgage will be split into a new first mortgage that can be supported by the reduced rents and a below-market-rate HUD-held second mortgage.

Participating administrative entities (PAEs) will handle the program for HUD, developing restructuring plans for individual projects. PAEs can be public agencies, nonprofit organizations or for-profit entities, though public agencies will have priority in the selection process.

As part of the restructuring plan, the PAE will underwrite the project financing, determining the amount of the second mortgage that can reasonably be expected to be repaid, based on such factors as projected cashflow and residual value. At least 75% of the net cashflow after payment of operating expenses and debt service on the first mortgage must be used for payments on the second mortgage, while up to 25% can go to the owner.

If HUD pays a partial FHA insurance claim in connection with the debt restructuring and the second mortgage doesn't cover the gap between the original mortgage and the new first mortgage, the department can require the owner to provide a third mortgage to secure the excess.

Owners participating in the mark-to-market program will be subject to project affordability and low-income use restrictions for at least 30 years, though a PAE can impose a longer period. If at least 20% of the units are receiving project-based Section 8 assistance, Section 8 affordability requirements will apply. If fewer than 20% of the units get project-based Section 8, the project must satisfy the rent and income restrictions of the low-income housing tax credit program.

Project rents generally must be reduced to market rents for comparable properties, though higher rents may be approved when market rents won't cover operating expenses.

As part of the restructuring, an expiring Section 8 rent subsidy contract can be renewed as either project-based or tenant-based assistance. Project-based assistance is mandatory for cooperative housing projects, projects in which at least 50% of the units are occupied by elderly or disabled families, and projects in tight rental markets, which the regulations define as markets with vacancy rates of 6% or less.

Where all units in mark-to-market projects aren't covered by project-based Section 8 contracts, owners can't refuse to lease unsubsidized units to Section 8 certificate or voucher holders.

Tax-exempt financing OK for assisted living facilities Developers of assisted living facilities for the elderly will be able to take advantage of tax-exempt bond financing under a revenue ruling (Rev. Rul. 98-47) issued by the IRS.

The question addressed in the ruling is whether assisted living facilities, which provide supportive services as well as housing, will qualify as residential rental property under Section 142(d) and Section 145 of the Internal Revenue Code.

Section 142 covers exempt facilities which can be financed with tax-exempt private activity bonds. Section 145 deals with tax-exempt bond financing by Section 501(c)(3) tax-exempt organizations.

To be eligible for private activity or 501(c)(3) bond financing as residential rental property, an assisted living facility must meet the low-income occupancy requirements of the low-income housing tax credit. Accordingly, at least 20% of the units must be held for occupancy by households with incomes at or below 50% of area median income, or at least 40% must be held for occupancy by households at or below 60% of area median.

Citing the tax credit regulations, the revenue ruling explains that a facility won't qualify as residential rental property if it provides continual or frequent nursing, medical or psychiatric services.

Many assisted living facilities provide a continuum of services in different parts of the project, allowing residents to move to different units while remaining in the same facility as their needs for supportive services increase. In such a project, buildings providing housing, basic supportive services and assistance with daily activities such as dressing and eating will qualify for tax-exempt bond financing. However, buildings which also provide continual or frequent nursing, medical or psychiatric services won't be eligible for bond financing.

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