Multifamily Properties: Opting In, Opting Out And Remaining . - HUD USER

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Multifamily Properties:Opting In, Opting Out and Remaining AffordableU.S.Department of Housing and Urban DevelopmentU.S. Department ofHousingOffice of Policy Development and Researchand Urban Development

Visit PD&R’s Web Sitewww.huduser.orgto find this report and others sponsored byHUD’s Office of Policy Development and Research (PD&R).Other services of HUD USER, PD&R’s Research Information Service, include listservs;special interest, bimonthly publications (best practices, significant studies from other sources);access to public use databases; hotline 1-800-245-2691 for help accessing the information you need.

Multifamily Properties:Opting In, Opting Out and Remaining AffordablePrepared for:U.S. Department of Housing and Urban DevelopmentOffice of Policy Development and ResearchPrepared by:Econometrica, Inc.Bethesda, MarylandAbt Associates, Inc.Cambridge, MassachusettsWith:Meryl FinkelCharles HansonRichard HiltonKen LamMelissa VandawalkerContract No.:GS-10F-0269KJanuary 2006

AcknowledgementsThe authors gratefully acknowledge all the support and input provided by numerous people whoparticipated in this project.We thank Mr. Steve Martin and staff members in the Federal Housing Administration’s (FHA’s) Office ofProgram Systems Management for providing the list that identified opt-out properties for this study.We also thank the FHA multifamily program office as well as the multifamily propertyowners and managers for sharing their insights and taking the time to meet with theauthors in the site-visit cities.We thank Mr. Todd Richardson, who originated the idea of using Taxpayer Identification Numbers (TINs)to identify voucher renters in opt-out properties, and Mr. Robert W. Gray, the Director of the Division ofProgram Monitoring and Research and his staff for carrying out the TIN matching.We thank Mr. Dmitriy Goryachev, Mr. Clint Thompson, and Mr. Olu Ajayi for providingvaluable analytic support at various stages of the project, and Ms. Priscila Prunella for her support andcomments in developing the Research Design and Data Collection and Analysis sPlan.We thank Dr. Felicia Miller and Mr. Larry Campbell for their outstanding technical writing, editing, andformatting of the study deliverables.Dr. Jill Khadduri of Abt Associates, Inc. and Dr. Frederick Eggers of Econometrica, Inc. provided valuableinput on the study design, and their review improved the quality of allstudy deliverables. Mr. Frank Malone and Dr. Roberto Cavazos provided invaluable comments and input tothe final drafts.We particularly would like to thank Dr. Jennifer Stoloff of the Office of Policy Development and Researchfor all the guidance and assistance she provided on all aspects of the study.The contents of this report are the views of the contractor and do not necessarily reflect the views or policiesof the U.S. Department of Housing and Urban Development or the U.S. Government.

FOREWORDThe U.S. Department of Housing and Urban Development's project-based multifamilyhousing stock includes more than 22,000 properties with more than 1.5 million units,representing a significant proportion of federally assisted housing for low-income families. Themultifamily stock was developed under programs created in the 1960s and 1970s to supplementconventional public housing and promote privately owned development of affordable housing.This study examines the characteristics of properties that have left the assisted stock,either through prepayment or through opt out, and compares them with properties that haveremained in HUD programs. In addition, the study examines the affordability of rents charged atproperties that have left the assisted stock.The quantitative analysis uses data on the full HUD-assisted multifamily housing stockand compares properties whose owners chose to remain in the stock with properties that have leftthe stock due to opt-outtprepayment and with properties that are in foreclosure or that have beenreferred to HUD's Enforcement Center. Properties were more likely to opt out if they were inmarkets that could support higher rents upon opting out. These tended to be properties with rentsthat were below market rate, and in locations with relatively low poverty rates.In order to illustrate the opt out decision making process, case studies were undertaken aspart of the study. The case studies, not surprisingly, revealed that a key factor in the decision toopt out was whether the property was in a market that could support rents high enough to coverthe property's costs.This study represents a valuable summary of the current disposition of the HUDmultifamily housing stock. It also provides some insights as to what characteristics areassociated with leaving or remaining in the stock. As expected, markets matter. Properties withassisted rents below prevailing market levels are more likely to leave the stock than areproperties with rents closer to market levels. Non-economic factors also influence ownerdecisions. Once properties leave the assisted stock, some owners do reposition properties andraise rents, but at least a portion of the properties that leave the stock remain rented andaffordable to low-income households.Assistant Secretary for PolicyDevelopment and Research

Multifamily Properties: Opting In, Opting Out and Remaining AffordableTable of ContentsExecutive Summary . viiSummary of Key Findings . viiStudy Design. viiiQuantitative Analysis. viiiCase Studies . xAffordability Analysis . xPolicy Recommendations. xi1. Introduction.11.1 Background.11.2 Purpose of the Study .41.3 Glossary of Key Terms.41.4 Overview of Final Report .52. Research Objectives and Methodology.72.1 Research Objectives.72.2 Data Sources and Data Sets .8Data Sources . 8Data Elements . 102.3 Methodology .123. Results from the Quantitative Analysis .193.1 Descriptive Cross Tabulation Analyses.20Property Characteristics . 20Owner Characteristics. 23Financing Characteristics. 25Location Characteristics. 26Tenant Characteristics. 29Fiscal and Physical Characteristics. 30Timing of Opt-outs and Prepayments . 323.2 Multivariate Analysis of Opt-out Decision .334. Case Study Results .414.1 Summary Observations .414.2 Site Summaries.42Sacramento. 42Dallas . 47Cincinnati. 53iii

Multifamily Properties: Opting In, Opting Out and Remaining AffordableTable of Contents(continued)5. Results from the Affordability Analysis .576. Conclusions and Policy Recommendations .676.1 Key Findings .67Quantitative Analysis. 67Case Studies . 69Affordability Analysis . 706.2 Recommendations .71Appendix—Data Collection Guides for Case Studies .A-11. Discussion Guide for HUD Asset Manager.A-12. Discussion Guide for HUD Regional Economist .A-53. Discussion Guide for Property Owners Who Have Opted Out .A-74. Discussion Guide for Property Owners of Opt-In Properties .A-95. Discussion Guide for Property Site Managers of Opt-Out Properties.A-116. Discussion Guide for Property Site Managers of Opt-In Properties .A-137. Discussion Guide for Expert Informants .A-15iv

Multifamily Properties: Opting In, Opting Out and Remaining AffordableList of ExhibitsTable 2.1. Data Elements and Sources for the Quantitative Analysis . 11Table 2.2. Properties and Units by HUD Assistance Type and Outcome . 14Table 2.3. Categories of Analysis . 15Table 3.1. Property Characteristics. 20Figure 3.1. Status of Properties by Occupancy Type. 22Table 3.2. Owner Characteristics. 24Table 3.3. Nonprofit Owner Characteristics . 25Table 3.4. Financing Type . 26Table 3.5. States Associated with Defined Census Division . 27Table 3.6. Location Characteristics . 28Table 3.7. Tenant Characteristics. 29Table 3.8. Physical Condition and Financial Operating Characteristics (1998–1999). 30Table 3.9. Timing of Opt-outs and Prepayments (Number of Properties). 32Table 3.10. Regression Model Variables. 34Table 3.11. Coefficient Estimates of Opt-out Logistic Regression Model. 37Table 5.1. Post-opt-out Rent Affordability of Opt-out/Prepay Units . 58Table 5.2. Number of Units and Median Gross Rent by Region. 59Table 5.3. Units across Post-opt-out Rent Affordability Categories . 61Table 5.4. Post-opt-out/prepay Rent Affordability of Units by Income Group. 63Table 5.5. Units Affordable by Income Groups . 65v

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Multifamily Properties: Opting In, Opting Out and Remaining AffordableExecutive SummaryThe U.S. Department of Housing and Urban Development’s (HUD’s) assisted project-basedmultifamily properties are privately owned properties representing a significant componentof federally assisted housing for low-income families. This is in contrast to the publichousing stock, which is publicly owned and operated. The HUD-assisted project-basedmultifamily housing stock includes more than 22,000 properties with more than 1.5 millionunits. They were developed under programs that were created in the 1960s and 1970s tosupplement the public housing program, as part of a policy change that aimed to promotemore privately owned development of affordable housing.In this study, we examine the characteristics of properties that have left the assisted stockeither through prepayment or through opt out and compare them with the characteristics ofproperties that have remained in the HUD programs. In addition, the study examines theaffordability of rents charged at properties that have left the assisted stock through eitherprepayment or opt out.A variety of incentives and financial assistance were provided to private developers ofmultifamily housing in exchange for an agreement to rent the housing to low- and moderateincome households. Among the incentives provided was a provision that allowed them eitherto prepay a subsidized mortgage (under the older mortgage subsidy programs) after 20 years,or simply not renew a Section 8 contract when the initial subsidy contracts expired (termed“opting out” in this study). In either case, these incentives permitted owners to leave theassisted stock by converting their properties to another use and no longer required them torent to low-income residents. Even with a variety of incentives and policy prescriptionsavailable for maintaining low-income housing, many owners of both older and newersubsidized housing have chosen to prepay their mortgages and/or opt-out of their expiringSection 8 contracts, converting properties to alternative uses.Summary of Key FindingsFrom the detailed results of this study, we can establish several key findings. First, it appearsthat family-occupied properties in relatively well-off neighborhoods with market rentsgreater than the rents charged in the assisted properties have a higher likelihood of leavingthe HUD-assisted stock. Second, Older Assisted properties tend to leave the stock—eitherthrough prepayment/opt-out or through an enforcement action—to a much greater degreethan Newer Assisted properties. Third, for properties that do leave the HUD-assisted stock, amajority of those units would be affordable to families who receive a voucher after theproperty has left the stock. Without vouchers, however, only a very small number of unitswould be affordable for families with very low incomes.vii

Multifamily Properties: Opting In, Opting Out and Remaining AffordableStudy DesignThe study had three components. The first is a quantitative analysis that comparescharacteristics of properties—such as age, location, and occupancy type—that have left thestock with those that have remained in the assisted stock, and with properties that have eitherbeen referred to the Enforcement Center or have had their mortgages foreclosed. This studycomponent also includes a regression analysis to identify which types of properties are mostlikely to opt out of their Section 8 contracts. The second component uses onsiteexaminations of a small number of properties that have opted out of the program andproperties that have “opted in” in the same metropolitan areas to identify factors that leadcertain property owners to opt out and other owners to remain in the HUD programs. Sitevisits took place in cities where a significant number of opt-outs have occurred: Cincinnati,Dallas, and Sacramento. The third study component looks at the affordability of units afterproperties leave the assisted stock.We present more detailed findings from each of the study components below.Quantitative AnalysisThis portion of the analysis used data on the full HUD-assisted multifamily housing stock tocompare characteristics of properties whose owners chose to remain in the stock withcharacteristics of properties that have left the stock due to opt-out/prepayment, and withproperties that are in foreclosure or have been referred to HUD’s Enforcement Center.Properties were more likely to opt out if they were in markets that could support higher rentsupon opting out. These tended to be properties with opt-out/prepayment rents that werebelow market rate, and in locations with relatively low poverty rates. In particular: Properties whose rents were less than the HUD-published Fair Market Rents (FMRs)were more likely to opt out. Indeed, the regression analysis indicates that a property’spre-opt-out rent level relative to the local FMR is the most important determinant,controlling for all other property, program, and location characteristics. Theseproperties tend to be in markets that have higher rents than the rents at the opt-outproperties, and the owners apparently believed they could obtain higher rents in theunassisted market. Older Assisted properties were significantly more likely than Newer Assistedproperties either to leave the assisted stock (that is, in some terms to be financiallysuccessful), or to be in foreclosure/enforcement,1 rather than remain in the assistedstock as financially viable properties.1“Foreclosure/enforcement” includes properties that, as of December 2004, faced foreclosure or other paymentor compliance challenges. “Enforcement” properties are those that have been referred to HUD’s EnforcementCenter for having some form of physical or financial difficulties and requiring remedial action.viii

Multifamily Properties: Opting In, Opting Out and Remaining Affordable Both the cross-tabulation analyses and the regression analyses showed that propertiesthat left the assisted stock tended to be in metropolitan/central city locations. Takenalone, the cross-tabulation analyses suggest that suburban properties are also likely toopt out relative to non-metropolitan locations, whereas the regression analysisindicates that non-metropolitan properties were more likely to opt out than those insuburban areas. Properties that opted out were also located in neighborhoods with higher medianincomes, higher median rents, and lower poverty and vacancy rates.Foreclosure/enforcement properties were in neighborhoods with the lowest medianincomes and homeownership rates, and in neighborhoods with the highest vacancyand poverty rates of the groups of properties examined. Properties that remained in the assisted stock were more likely to have zero- and onebedroom units, consistent with an elderly/disabled tenancy. Properties that left thestock and properties in foreclosure or referred to the Enforcement Center were morelikely to have two- and three-bedroom (family) units. Properties with units for largefamilies (four or more bedrooms) were even more likely to be inforeclosure/enforcement. The vast majority (91.1 percent) of properties inforeclosure/enforcement were family-designated. Properties that left the assisted stock had on average lower rating scores on physicalcondition than those that stayed in. The median Real Estate Assessment Center(REAC) score was above 60 for properties that left the assisted stock, for those thatstayed in the stock, and for those that were in the foreclosure/enforcement group. Aportion of all properties in the aforementioned categories had scores below 60.However, the foreclosure/enforcement category had the highest percentage of scoresbelow 60, followed by the properties that left the stock voluntarily. (Perhaps theowners of these properties were not maintaining them during the period before theyleft the assisted housing program because they planned to undertake majorrenovations for the conversion to market rate.) As expected, nonprofit owners were much less likely to opt out compared with forprofit owners. Nonprofit owners are often mission-driven to continue to provideaffordable housing. In addition, some nonprofit owners were precluded from optingout based on use restriction agreements that were required by lenders as a conditionfor receiving the funding. The regression analysis indicates that family occupancy and smaller development sizeare other factors associated with an increased likelihood of opting out. All else being equal, the regression analysis shows that properties with 100 percent ofunits receiving project-based assistance are at a higher risk of opting out. The regression analysis also indicates that properties located in census tracts withhigh poverty rates are much less likely to opt out, presumably because those marketsix

Multifamily Properties: Opting In, Opting Out and Remaining Affordablecannot support rents high enough to make opting out attractive. Properties located inthe Pacific, Mountain, and West South Central regions have a higher probability ofopting out that those in the South Atlantic region.Case StudiesTo learn about the full range of factors (including the non-market factors) that lead someowners to leave the Section 8 program and other owners to remain in the program, thisanalysis included case studies in three metropolitan statistical areas (MSAs) that haveexperienced large numbers of opt outs. In each of the three MSAs—Sacramento, Dallas, andCincinnati—we visited two pairs of seemingly similar properties in terms of neighborhood,size, and occupancy type. One property owner in each pair had opted out of the Section 8program, while the second owner had chosen to keep the property in the Section 8 stock.The case studies, like the predictive analysis, focused only on Section 8 properties. Notsurprisingly, the case studies revealed that a key factor in the decision to opt out was whetherthe property was in a market that could support rents high enough to cover the property’scosts. Beyond this expected market-related factor, however, other key findings include thefollowing: Non-economic issues also had an influence on the opt-out decision. Several of theowners opted out of the Section 8 program, even though it did not seem to makefinancial sense to do so. This decision was largely attributed to uncertainty about thefuture and difficult relationships with local HUD offices. Owners with portfolios that included both assisted and unassisted properties said thatas more of their portfolio left the Section 8 stock, it became less economicallyfeasible to maintain the Section 8 portion of their portfolios. This was becauseoperating a Section 8 property requires administrative skills specific to the program,and as a smaller portion of the portfolio is in Section 8, the owners may not be able toeconomically maintain staff members with the needed skills. Not all properties that left the assisted stock became unaffordable to low- andmoderate-income households. In each of the three MSAs visited, at least one of theopt-out properties was still occupied primarily by low-income households.Affordability AnalysisThe level of policy concern about opt-out properties will vary depending on what happens torents at the properties after they leave the stock. If rents at those properties becomeunaffordable to low-income households, the level of concern will be much higher than ifthese properties continue to provide affordable housing to low-income households. Toaddress this issue, we compared post-opt-out rents in a sample of units that left the assistedstock with the local FMRs to assess the degree of affordability in the opt-out units. We alsox

Multifamily Properties: Opting In, Opting Out and Remaining Affordableestimated the degree to which those units were affordable for unassisted households earningvarious incomes. Key findings include the following: At the end of 2004, nearly 60 percent of the opt-out units had rents that were belowthe FMR, indicating that the units would be affordable to households with vouchers.An additional 31 percent had rents that were between 100 and 125 percent of theFMR, indicating they might still be affordable to voucher holders, depending on thepayment standards chosen by voucher program administrators and families’ ability topay more than 30 percent of their income for housing. Only 6 percent of the units would have been affordable to unassisted householdsearning 30 percent of the local area median income. Sixty-four percent would havebeen affordable to unassisted households earning 50 percent of the local area medianincome. We cannot determine whether the rents for the opt-out units are now higher than thecontract rents on the basis of which HUD paid subsidies when the units were part ofthe assisted stock, because we do not have rent data for that period.Policy RecommendationsBased on the results of this study, we make the following policy recommendations to HUD:If HUD’s policy goal is to maintain properties in the assisted housing stock, we suggest thatHUD consider policies to offset both the economic and the non-economic incentives to optout. We have two recommendations for policies bearing on economic factors: First, considerwhether the Section 8 project-based program rules can be made less complex or supportedmore fully through software to reduce the burden on owners. Second, target resources andincentives to areas where rents after opt-out are less affordable.With respect to non-economic factors, we suggest that HUD establish better communicationregarding rent-setting policies, not only within the Mark-to-Market program, but also for theMark-up-to-Market policy affecting regular renewals.xi

Multifamily Properties: Opting In, Opting Out and Remaining Affordable1. IntroductionThis study compares the U.S. Department of Housing and Urban Development’s (HUD’s)project-based assisted multifamily properties that have left the HUD programs—eitherthrough opting out of a Section 8 contract or prepaying a subsidized mortgage—with otherproperties whose owners actively choose to continue receiving HUD subsidies (“opt-ins”).The report also examines the degree to which properties remain affordable after they haveopted out or prepaid and left the HUD-assisted inventory.1.1 BackgroundThe study focuses on properties that were developed under project-based Section 8 programs,as well as under earlier subsidized mortgage-interest programs. The main characteristic of allthese multifamily properties is that they have HUD project-based assistance that is linked tothe property (rather than the tenant), through project-based Section 8 or other type of rentalassistance, or through subsidized mortgage interest.The HUD-assisted project-based multifamily programs fund low-income housing propertiesthat are privately owned. They represent a significant component of federally assistedhousing for low-income families. These programs, created in the 1960s and 1970s, led to thedevelopment of roughly 1.5 million units of assisted housing with restrictions on the incomesof the people who may live there and the rents that the owners may charge.HUD multifamily programs are distinct from the public housing program, which producespublicly owned and operated housing. The HUD-assisted multifamily programs were createdto supplement the public housing program as part of a policy change that aimed to promotemore privately owned development of affordable housing.The project-based multifamily programs fall into two distinct groups. The first group is madeup of the “older” mortgage subsidy programs that were based on pre-Section 8 types ofsubsidies. Approximately 700,000 units were built under these mortgage subsidy programsfrom the mid-1960s through the mid-1970s. Specifically, these programs are the FederalHousing Administration (FHA) Section 221(d) (3) Below Market Interest Rate (BMIR)program and the Section 236 program. The subsidies for these two programs covered thedifference between ex

We thank Dr. Felicia Miller and Mr. Larry Campbell for their outstanding technical writing, editing, and formatting of the study deliverables. Dr. Jill Khadduri of Abt Associates, Inc. and Dr. Frederick Eggers of Econometrica, Inc. provided valuable input on the study design, and their review improved the quality of all study deliverables. Mr.

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