TITLE-VI -- Preservation of Affordable Rental Housing


Subtitle A-Prepayment of Mortgages Insured under the National Housing
Act

Background: During the next 12 years, over 360,000 units of federally
assisted housing may be withdrawn from the affordable housing supply by
their owners. Contracts entered into by the federal government and
private developers under low interest loan programs of the 1960's
(section 236 and section 221(d)(3)) permitted certain owners to prepay
the federally assisted mortgage after the twentieth year of the forty
year mortgage term. A mortgage prepayment and termination of the
mortgage insurance contract has the effect of ending federal
restrictions over the use of the property for the benefit of low and
moderate income households.

Faced with an immediate threat of losing this resource, and the real
prospect that thousands of low income households would be involuntarily
displaced through prepayment, Congress enacted an emergency measure in
1987. This temporary measure was designed to give Congress time to
fashion a permanent program for the preservation of this housing. During
this time, much has been learned about the strengths and weaknesses of
the administrative process and the financial, tax and regulatory
underpinnings of the prepayment decision. More importantly, a consensus
has finally emerged on how best to strike the balance among the
interests of owners, the tenants and the communities most affected by
the consequences of prepayment. The fundamental principle of the 1987
Act was that the housing should be preserved for its intended
beneficiaries and that owners should be guaranteed a fair and reasonable
return on their investment through new incentives. While the principle
of the 1987 Act is retained, this legislation transforms the goal of a
fair and reasonable return into a set of concrete economic alternatives
for the owner that can be pursued through a more objective and
streamlined process.

Senate bill: The Senate bill placed prime emphasis on the need to retain
this affordable housing stock for its remaining useful life. Owners of
eligible housing had three options. They could: (1) seek to terminate
the low-income affordability restrictions of the housing (through
prepayment); (2) extend the low-income use of the housing; or (3)
transfer the housing to a qualified purchaser. Unlike current law, the
proposal explicitly established a clear preservation value of eligible
low-income housing. The value was an amount equal to the fair market
value of the housing as multifamily rental housing-less costs that would
have been incurred for rehabilitation and conversion to market rate
housing. The preservation value also included a discount to reflect the
residual value of federal assistance that was provided to the project
over the years.

For owners who sought to extend the low-income use of the housing, HUD
was directed to provide incentives that gave the owner an 8 percent
return on its equity in the housing (the preservation value minus the
existing debt). HUD was also directed to provide additional subsidies
to bring the housing up to standard.

Owners who sought to transfer the housing were directed to give priority
purchasers (residents, nonprofits and public agencies) a first
opportunity to acquire the housing. Once a designated period passed, the
owner could sell the housing to any qualified purchaser (i.e. any entity
that agreed to extend the low-income use of the housing for the
remaining useful life of the property). HUD was directed to give
qualified purchasers sufficient subsidies to (a) acquire the housing at
the preservation value; (b) rehabilitate the housing up to standard; and
(c) establish sufficient operating and replacement reserves.

For owners who sought to prepay and terminate the low-income
affordability restrictions, HUD was to make sure that such action would
neither (1) create economic hardship for current tenants or displace
them where comparable affordable housing is not readily available; nor
(2) harm availability of low-income housing, lessen ability of
low-income families to find housing near jobs, or reduce housing
opportunities for minorities.

House Amendment: The House amendment contained a bipartisan provision
that recognized owners' contractual interests at the same time it
provided broad tenant protections. Owners would file notice to receive
incentives, sell the housing, or pay off the mortgage subject to a
one-year right of first refusal by qualified purchasers. The House
amendment set up a streamlined process for the delivery of incentives,
but also set new standards of property maintenance to protect tenants'
rights.

Owners receiving incentives were required to preserve the property for
up to 30 years beyond the eligibility date, for a total of 50 years of
use agreements.

The House amendment established a mechanism for recognizing the property
owners' contractual interest while not paying overly generous benefits
to owners. Under the appraisals, owners would be notified of two values.
First, owners deciding to stay in the program would receive an appraisal
evaluating their property at highest and best rent residential usage.
Owners choosing to sell or forced to sell their property would be paid
at highest and best usage, without restrictions. Incentives paid by the
government were capped at 110% of the fair market rent, and were
available to current owners as well as prospective purchasers.

The House amendment set forth generous tenant protections in the case
of an owner paying the mortgage, including three-year rent extensions in
low-vacancy areas, and guaranteed access to Section 8 assistance.

In seeking an equitable and expeditious workout of this complicated
policy issue, and providing generous incentives and protections for
owners and tenants alike, the House amendment preempted any state and
local laws not of general applicability.

Conference Report/Summary: The conference report contains the Senate
provision with a series of amendments to: (1) authorize sales based on
"highest and best use" valuation; (2) permit federal mortgage
insurance for equity-take out loans as well as acquisition loans; (3)
eliminate any "public discount" on value; (4) place controls on the
federal expenditure for preserving individual housing projects; (5)
allow owners to prepay under limited circumstances; (6) provide stronger
safeguards in the event of prepayment; (7) preempt certain State and
local laws; and (8) make a variety of other changes to Senate
provisions.

The significant elements of the conference report are as follows:

1. Fair Market Return: Owners would receive fair market return on their
property. If, within cost limits noted below, HUD is able to offer the
owner that fair market return, the owner would be required either to
maintain certain affordability restrictions on the housing for its
remaining useful life or to transfer the housing to a qualified
purchaser (e.g. nonprofit) that will.

If an owner decides to sell, the housing would be appraised at "highest
and best use" value, less costs the owner would have incurred under
conversion. HUD would enable a qualified purchaser to pay that value.

If an owner decides to retain the housing's affordability restrictions,
the housing would be appraised at its highest residential rental value,
less costs the owner would have incurred under conversion. HUD would
give the owner an 8 percent return on the equity derived from that
value.

2. Federal Cost Limits: HUD would make an initial assessment of the
aggregate project income ("preservation rent") that will be needed to
support preservation costs. HUD would then compare the preservation rent
with cost limits pegged at a percentage of the Section 8 fair market
rents or, in rare cases, the comparable local market rents.

If the preservation rent test shows that incentives above the federal
limits are needed, owners would have to give qualified purchasers
(tenants, nonprofits, and others) an opportunity to supplement the HUD
subsidy and purchase the property at the appraised "highest and best
use" value. A special set-aside of capital grant funds would be
established to assist priority purchasers cover the gap.

3. Permissible Prepayment: Owners would be permitted to prepay in three
circumstances: (1) if a prepayment would not harm long-established
policy objectives; (2) if HUD is unable to fund preservation incentives
within 15 months (or shorter in the case of owners who attempt to sell
their properties); or (3) where there is no willing qualified purchaser
in the case of a voluntary or mandatory sale.

4. Tenant Protections: In the event of a prepayment, strong tenant
protections and relocation requirements would be included.

5. Preemption: The solution would recognize that a fair Federal
preservation policy must apply uniformly to all affected properties
regardless of location. For that reason, the solution would preempt
State and local laws that target only prepayment projects for special
treatment. Laws applicable to both assisted and nonassisted housing
would be in full force.

Conference report/detailed explanation

Notice-An owner of eligible low-income housing would be required to file
a notice indicating its intent to pursue one of three options: seek to
terminate the low-income affordability restrictions through prepayment
or voluntary termination, seek incentives to extend such restrictions
or seek to transfer the housing to a qualified purchaser. The owner
could file this notice up to 24 months before the date of eligibility
to prepay. The conference report would require the owner simultaneously
to file the notice with the appropriate State and local government and
the mortgagee and to notify the tenants of the housing.

Termination of affordability restrictions: Within 6 months of receipt
of a notice seeking to terminate the low-income affordability
restrictions, the HUD Secretary would be required to provide the owner
with such information as the owner needs to prepare a plan of action.
HUD would, in particular, provide information relating to the criteria
governing such termination and the documentation required to satisfy
such criteria. HUD would also provide relevant market area and
demographic information and other information to assist the owner in
preparing the plan of action.

The criteria for approval of plans of action that seek termination of
the low-income affordability restrictions essentially mirror the
criteria contained in the 1987 Housing Act (as amended by the McKinney
Homeless Assistance Amendments of 1988). The HUD Secretary could approve
such a plan of action upon finding that the plan satisfies
long-established national objectives. Specifically, the Secretary must
find that implementation of the plan of action would neither (1) create
hardship for current tenants or displace them where comparable and
affordable housing is not readily available nor (2) materially affect
the general supply of low-income housing in the market area, lessen the
ability of low-income people to find housing near job opportunities or
reduce housing opportunities for minorities.

If the Secretary determined that the public purpose criteria had not
been satisfied, the owner's plan of action would be disapproved. In this
event, the owner would have the option to seek incentives to extend the
affordability restrictions or transfer the housing to a qualified
purchaser. A new notice of intent would then be filed and the general
process governing such notices would then apply.

Incentives to Remain in Program or Transfer to Qualified Purchasers:
Receipt of a notice of intent from an owner who wishes to accept
preservation incentives and continue ownership or to transfer the
housing to a purchaser that will extend affordability restrictions,
triggers a different process than the one described above.

Within 9 months HUD would perform three essential tasks: (1) establish
(through an appraisal process) the preservation value of the property;
(2) estimate the cost of preserving the housing; and (3) determine
whether these costs could be supported by a rent stream within the
federal cost limits. After completing these tasks, HUD would provide
owners with the information obtained and inform them about the
determinations that have been made. Owners will then have the
opportunity to make an informed decision as to how to proceed under the
federal preservation process.

Step One: Valuation: After a notice of intent is filed, the first step
in the incentive process is to value the property. The conference report
would establish a standard method for calculating two "preservation
values" for each property. The first preservation value would equal the
appraised fair market value of the housing as multifamily rental housing
less certain adjustments. The second preservation value would equal the
appraised "highest and best use" value of the property less certain
adjustments.

The conference report adopts the 3 appraiser approach currently used
under the Farmers Home prepayment provisions. The preservation values
of the property would be set by two independent appraisers, one chosen
by the Secretary and one chosen by the owner. If the two appraisals
conflict and the Secretary and the owner cannot agree on a value, then
a third appraisal would be used to resolve the conflict between the
owner and the Secretary's appraisals, so that a final value
determination could be reached.

The valuation process is designed primarily to determine what economic
result an owner might have achieved by prepaying the existing
HUD-assisted mortgage, ending the affordability restrictions on the
housing and converting the housing to alternative use (i.e. market rate
rental housing, condominiums or nonresidential uses). Appraisers will
need to estimate the particular costs that would have been incurred as
a result of such actions including the costs of (1) bringing the subject
property up to standards that are necessary to attract and sustain a
market rate tenancy; and (2) converting the housing or property to
alternative use. The Committee Report accompanying the Senate bill
included a detailed discussion-which HUD should examine closely-of the
types of costs owners would have incurred in the event of prepayment and
conversion. The conferees note, in particular, that appraisers will need
to examine the effects that State and local laws applying to assisted
and nonassisted housing (e.g. condo conversion, zoning, rent control)
would have had on an owner's conversion plans. In addition, any separate
use agreements entered into by the owner with an entity or agency must
be considered. The conferees have determined that some state housing
finance agencies could play a useful role in assisting appraisers in
assessing rehabilitation needs and costs as well as determining
conversion costs that would have been borne by a prepaying owner.

The Secretary would be directed to establish specific guidelines for the
appraisals conducted under the preservation program, in accordance with
a series of instructions set forth in the conference report. These
instructions emphasize the unique nature of these "preservation"
appraisals. Appraisers will need to make a number of special inquiries
in order to determine the economic result that an owner would have
received in the event of prepayment and conversion. It is expected that
some of these inquiries will supplement what appraisers generally
consider within the context of routine real estate transactions. The
conferees believe that HUD is well positioned, given the history and
experience under the 1987 Act, to provide clear and consistent
guidelines on this vital aspect of the preservation process. HUD should
consult closely with knowledgeable parties, particularly state housing
finance agencies and others that have participated in the existing
system.

The conference report specifically directs that appraisers use the
greater of actual project operating expenses at the time of the
appraisal (based on the average expenses during the previous three
years) or projected operating expenses upon conversion. The purpose of
the statutory language on average expenses is to enable an appraiser to
adjust for extraordinary and nonrecurring costs that make the current
year operating expenses abnormally high or abnormally low. To the extent
that current project expenses reflect costs that are unlikely to
decrease in the future, the appraiser should use current project
expenses in making the comparison with post-conversion expenses.

Step 2: Assessing Preservation Rents Against Federal Cost Limits: After
determining the preservation values of a housing project, HUD would make
an initial assessment of the aggregate project income ("preservation
rent") that will be needed to support preservation costs. HUD would
then compare this project income to federal cost limits-capped at a
percentage of Section 8 FMRs or prevailing rents in the relevant local
market area. This determination will separate the higher cost properties
from the bulk of the inventory and set the stage for the remainder of
the preservation process.

Preservation Rent: The conference report directs HUD to make an attempt
early in the process to assess the costs of preservation in terms of
necessary project income-the aggregate "preservation rent".

Where an owner stays in, the aggregate preservation rent would be the
amount required to cover the following costs: the authorized return,
debt service on any rehabilitation loan, debt service on the
federally-assisted mortgage (net of the interest reduction payment in
a Section 236 project), project operating expenses and adequate
reserves. The annual authorized return would be set at 8 percent.

Where an owner sells, the aggregate preservation rent would be the
amount required to cover the following costs: debt service on the loan
for acquisition of the housing, debt service on any rehabilitation loan,
debt service on the federally assisted mortgage (net of the interest
reduction payment in a Section 236 project), project operating expenses
and adequate reserves.

The conferees caution the Secretary in the application of the
preservation rent concept. The Secretary may not have all necessary cost
information at the early stages of the process. In particular, no
decisions may have been reached about which costs (including
rehabilitation or payment of preservation equity in a sale) should be
supported through the rent stream and which should be defrayed through
other incentives. Yet the time periods required to implement the
mandatory sale provisions (described below) make it necessary to provide
an initial estimate of costs and project income very early in the
process.

Federal Cost Limits: The Secretary would compare the aggregate
preservation rents for a given property against special cost limits
established for the preservation program. The aggregate preservation
rent would first be compared against 120% of the jurisdiction's Section
8 Existing Fair Market Rents multiplied by the total number of units in
the project. If the aggregate preservation rent is equal to or less than
the income stream created by 120% of the jurisdiction's fair market
rents, the cost of preserving the project would be considered within the
federal cost limits and the owner would proceed as described below in
step three.

If the aggregate preservation rent exceeds 120% of the jurisdiction's
fair market rents, the Secretary would administer a second cost limit
test. Specifically, the conference report would direct HUD to look at
the rent levels in the immediate area in which the housing is located
(the "Local Market Rent"). If the aggregate preservation rent is equal
to or less than 120% of the Local Market Rents (multiplied by the number
of units), the cost of preserving the project would be considered within
the federal cost limits and the owner would proceed as described below
in step three. If the aggregate reservation rent exceeds 120% of the
Local Market Rents (multiplied by the number of units) the cost of
preserving the project would be considered outside the federal cost
limits and the owner would proceed as described below in step four.

The second cost limit test was developed because of a serious concern
that, in some cases, there might be no correlation between the fair
market value of eligible housing upon conversion and the Section 8 Fair
Market Rents. Section 8 FMRs have several deficiencies for purposes of
establishing a federal cost limit for the federal preservation program:
they are based on the 45th percentile rent; they exclude newly
constructed housing; and they generally cover the large geographic
areas.

Step Three: Preservation Rents within Federal Cost Limits: Owners of
housing that can be preserved for low income use within the federal cost
limits would have two choices: seek incentives to stay in and maintain
the affordability of the housing or transfer the housing to a qualified
purchaser who will do so.

Stay In: Owners who elect to stay in would file a plan of action within
6 months of receiving information from the Secretary as described above.
HUD would be directed to provide such owners with incentives that, inter
alia: (1) enable the owners to receive an authorized return on their
preservation equity; (2) pay debt service on the existing HUD mortgage
(net of interest reduction subsidies); (3) pay debt serivce on any loan
for rehabilitation approved by HUD; (4) meet project operating expenses;
and (5) establish adequate reserves. Section 8 rental assistance could
be set higher than 120% of Existing FMRs to cover these costs. Owners
would also have access to a portion of their preservation equity through
the Section 241(f) program as described below.

Voluntary Sale: Owners who elect to sell would be required to file a
second notice of intent stating that fact. A "right of first offer"
process would then ensue. The owner would be required to give "priority
purchasers" 12 months (from the date the second notice of intent is
filed) to make a bona fide offer for the property and to negotiate a
purchase agreement with the owner.

If no bona fide offer is made within this period, owners would have to
give "qualified purchasers" an additional three months to make a bona
fide offer for the property and to negotiate a purchase agreement with
the owner. It is expected that after an agreement is reached with a
purchaser, the parties will file a plan of action requesting the
necessary incentives. Filing may not occur until quite late in the
process-a key distinction with the situation where the owner seeks to
maintain the affordability of the housing.

The conferees recognize that a qualified purchaser might not be able to
consummate a purchase for reasons other than the absence of sufficient
appropriations. If the time periods referenced above have not expired,
an owner would need to continue marketing the housing in accordance with
those time periods. This provision is included in section 224.

The conferees have provided for this special "right of first offer"
period in order to establish a genuine advantage for priority
purchasers. In doing so the conferees balanced the legitimate interests
of the Department, owners and tenants in not creating unnecessary or
unjustified delays through unlimited negotiations against a clear and
legitimate policy interest in facilitating and encouraging transfers to
priority purchasers.

The conference report would define priority purchasers as including
three kinds of entities: (1) a resident council that is organized to
develop and implement an approvable resident ownership program, (2) a
qualified nonprofit organization that is dedicated to the promotion of
affordable housing and agrees to maintain the low-income affordability
restrictions for the housing's remaining useful life, and (3) State and
local housing agencies which agree to maintain the low-income
affordability restrictions for the housing's remaining useful life. The
Committee intends that qualified nonprofit organizations essentially
conform with the requirements established for community housing
development organizations under the HOME program.

A qualified purchaser would be defined as including priority purchasers
and any other entity (including for-profit entities) that agrees to
retain the housing affordability restrictions for the remaining useful
life of the housing.

For approvable plans of action, HUD would provide qualified purchasers
with subsidies sufficient to, inter alia, (1) acquire the property at
a price no greater than the preservation value; (2) pay debt service on
any loan approved by HUD for the rehabilitation of the housing; (3) pay
debt service on the existing HUD loan (net of interest reduction
subsidies); and (4) establish sufficient operating and replacement
reserves. Resident councils would also receive additional subsidies for
training purposes and homeownership counseling. Priority purchasers
could receive additional assistance to cover transaction costs and
related expenses.

Acquisition subsidies could take various forms. For priority purchasers,
the Secretary could provide a grant that does not exceed the present
value of the projected published Section 8 existing housing fair market
rents for the next 10 years (or such longer period if needed to cover
the eligible costs referenced above). The Administration proposal
authorized this form of subsidy only for acquisitions made by resident
councils. The conferees believed that the focus on resident ownership
was too narrow and expanded the pool of eligible recipients to include
nonprofit organizations and public agencies. The conferees also provided
the Secretary with more flexibility in setting the amount of assistance.
The conferees intend that the Secretary work closely with priority
purchasers to determine which mix of subsidies best suits their
preferences and organizational capacity.

For all qualified purchasers, the Secretary could provide the same
incentives that are available to owners who seek to retain ownership and
extend the affordability restrictions. Acquisition financing would be
permitted under the Section 241(f) program, described below.

Step Four: Preservation Rents Exceed Federal Cost Limits: Owners of
housing that cannot be preserved for low income use within the federal
cost limits would have two choices: (1) voluntarily decide to seek
incentives within the federal cost limits under the process described
under step three; or (2) seek to prepay the mortgage, subject to
offering the housing for sale in accordance with mandatory sale
provisions.

Under mandatory sale process owners would be required to file a second
notice of intent, triggering the start of a "right of first offer".
The owner would be required to give "priority purchasers" a 12 month
period (from the date the second notice of intent is filed) to make a
bona fide offer to purchase the housing at the housing's preservation
value (the "highest and best use value"). If no offer is received from
a priority purchaser, the owner would then offer the project for sale
to other qualified purchasers at the preservation value. Owners would
be required to accept any bona fide offers at such value.

To facilitate these transfers, HUD would provide a stream of rental
subsidies set at 120% of the Local Market Rents and any other incentives
authorized in a sale situation. HUD would then assist the purchaser in
closing the gap between the level of incentives described above and the
preservation value of the housing. HUD would, for example, assist
potential purchasers in their efforts to secure funding from state or
local governments, or concessions (local real estate taxes, water and
sewer assessments). Most importantly, HUD would have access to a special
capital grant pot to provide the necessary gap financing. This funding
source would need to be separately approved in appropriations Acts.

Step five: Safeguards in event of prepayment

Unlike the existing law, the conference report recognizes that some
prepayments may need to occur. A willing buyer, for example, may not
emerge during the voluntary or mandatory sale periods. Alternatively,
HUD may approve a plan of action only to find that it does not have
sufficient funds for the approved incentives. An owner may prepay where
the owner's plan to extend the affordability restrictions is approved
but HUD does not provide any assistance to fund the approved incentives
for the 15 months following the date of approval.

Special rules will apply to owners who wish to sell the housing. Where
a sale plan is approved after the original prepayment date for the
housing, an owner would be permitted to prepay if HUD fails to fund the
approved incentives within the 2 month period following the beginning
of the next fiscal year (but in no event later than 6 months following
the date the plan of action is approved).

Where a sale plan is approved before the original prepayment date for
the housing, an owner would be permitted to prepay if HUD fails to fund
the approved incentives within the 2 month period following the
beginning of the next fiscal year (but in no event later than 9 months
following the date the plan of action is approved).

In the event of prepayment, HUD would have several tools to protect the
existing tenants and assist the affected community in replacing the lost
stock. The tenant protections build upon provisions contained in the
House bill as well as in State laws such as the Maryland Assisted
Housing Preservation Act. Six major protections would be provided:

1. Section 8 certificates or vouchers would be provided to tenants with
incomes below 80% of area median incomes. HUD would work with local
public housing agencies to ensure that displaced tenants are able to
find affordable, comparable housing in the vicinity.

2. Special rules would apply to owners of housing located in a
low-vacancy area. Such owners must allow existing tenants to remain in
the housing at the rent levels existing at the time of prepayment for
three years.

3. Three-year lease extensions would also be provided to tenants with
special needs in all areas (including elderly, persons with disabilities
and other populations designated by the Secretary as special needs
populations).

4. Owners would be required to pay 50% of moving expenses as provided
in House bill (unless state or local law of general applicability
provides a higher level of benefits and assistance).

5. Owners who prepay and retain rental character of housing would be
obligated to accept tenants with rental certificates or vouchers. HUD
would be authorized to set FMR levels at the "exception rent".

6. HUD would be directed to set-aside from appropriations for the
preservation solution (or from annual Section 8 appropriations) the
funding that is necessary to provide assistance for tenants displaced
from prepaid projects.

Miscellaneous provisions

1. Insurance for Second Mortgage Financing: The Senate bill did not
authorize the Secretary to insure equity take-out loans under the
Section 241(f) program on behalf of current owners, as provided by
existing law. The Senate's action reflected a concern that the
combination of permanent affordability restrictions and substantial
insured equity loans would remove owner incentives for long-term
maintenance, posing unwarranted risk to the mortgage insurance funds.
In contrast, the House bill authorized insurance for up to 80 percent
of the owner's equity in the project.

The conference report contains a limited Section 241(f) program for
current owners who elect to maintain the affordability of their
projects. The report would restrict the amount of equity take-out loans
to the lesser of: (1) 70% of the owner's preservation equity in the
project; or (2) the amount that is supportable by an 8% return on
preservation equity. For example, if the preservation value is $60,000
and the outstanding debt relating to the property is $10,000 per unit,
the preservation equity would be $50,000 per unit and the amount
available to service the equity loan is $4,000 per unit ($3,600 per unit
with 90% debt service coverage). The maximum equity loan that could be
serviced from this return at 10.5% for 40 years is approximately $33,700
per unit or $67% of preservation equity.

Under the conference report, owners who choose to convert their annual
authorized return into debt through an insured equity take-out loan will
not be given a greater economic benefit than owners who take their
return annually out of cash flow. The conference report seeks to achieve
economic parity between these two groups of owners, by providing that
debt service payments on equity take-out loans will be made from the
annual authorized return. To encourage responsible ownership, the
conferees have provided for a holdback of 10 percent of the loan
proceeds to be made available to the owner after five years, subject to
compliance with the maintenance and low income affordability standards.

The conferees intend to encourage the use of the section 241(f) program
to transition the housing to resident, nonprofit and public ownership.
In fact, the conferees have revised the existing program to allow for
95% financing for qualified purchasers. Subject to approval by the
Secretary, insured acquisition loans for priority purchasers may also
include transaction costs, financing costs, and costs associated with
implementing the Plan of Action (such as operating losses attributable
to the rent phase-in, if any).

With respect to mandatory sales, the amount of the insured acquisition
loan will be restricted by federal cost limits, providing a gross
potential income for the project equal to 120% of the prevailing rents
for the relevant local market area. The conferees intend that grant
funds authorized under section 221(d)(2) be allocated to priority
purchasers to cover non-mortgageable acquisition and related costs where
the federal cost limits are exceeded.

2. Remaining Useful Life: The conference report requires that owners
accepting incentives as well as purchasers of the housing maintain the
affordability restrictions for the remaining useful life of the housing.
This commitment to permanent affordability constitutes one of the major
decisions of the conference and a departure from both the 1987 Act and
the House bill.

The conferees specifically considered and rejected the Resolution Trust
Corporation's interpretation of the term "remaining useful life" that
was contained in the FIRREA legislation. Rather, the conferees decided
to define the term and establish procedures to govern its enforcement.

The term "remaining useful life" would be defined as meaning the
physical life of a building assuming normal maintenance and repairs and
such replacement of major systems and capital components as necessary.
HUD would be authorized to apply the definition to individual buildings
and to determine, specifically, when a building's useful life has ended.
The Secretary would establish standards-by notice-and-comment
rulemaking-to govern such determinations.

Owners would have the right to petition HUD to declare that their
housing's useful life has ended. Such petition could not be filed until
50 years after the date on which the owner's plan of action is approved.
The burden would be on the owner to prove that the useful life of their
housing has ended for reasons other than owner failure to regularly
repair and replace systems; evidentiary rules would be established by
the Secretary.

Tenants and local communities would have the right to comment on owner's
petition and to administratively appeal an adverse HUD determination.

3. Consultation with Other Parties. Section 228 requires the Secretary
to consult with interested parties in the development of a plan of
action. The conferees also believe that it would be beneficial for the
Secretary to enter into discussions with a variety of national and
regional nonprofit organizations and associations representing state
housing agencies and local housing officials. Some of these
organizations have considerable expertise in the preservation area, as
well as a communication network with local organizations that are
concerned with this issue. These discussions should concentrate on the
implementation of the voluntary and mandatory sale program, including
homeownership opportunities. The conferees are aware with the
acquisition program will be determinative of the preservation future of
many projects and that in the absence of strong technical assistance
support, projects will be lost and local preservation efforts will
founder. The training and capacity building process must begin
immediately to avert this result.

4. Related Party Rule. The conferees expect the Secretary to develop
sensible rules to implement the related party provisions.

The Secretary's regulations must distinguish between transactions where
an impermissible identity of interest or relationship is present and
those transactions which are not tainted. If, for example, an individual
is involved in the ownership of an assisted project and also
participates, in his or her personal capacity and without compensation,
on the board of directors of a nonprofit organization that seeks to
acquire a project from the owner, this participation alone should not
trigger the application of the related party rule. In other words,
participation on the board of directors of any acquiring entity by a
person who has a relationship with the seller is not, in and of itself,
evidence of "partial control".

5. Windfall Profits Test: The conferees expect that the "windfall
profits" test in the Act will only be utilized by the Secretary in
exceptional cases. The test was added in response to Administration
concerns that the preservation solution should not be used to provide
incentives to owners who would not have prepaid, given local market
conditions. The conferees share that concern. Yet the conferees strongly
believe that the use of appraisals will limit the provision of
incentives to owners of housing which have a market alternative other
than low income housing.

The conferees expect the Administration to define how the "windfall
profits" test will be implemented in notice and comment rulemaking. The
conferees expect that the test would be applied in a manner consistent
with the process established in this Act. In particular, HUD should
apply the test early in the process so that all parties can achieve a
definitive outcome within the time frames set forth in the Act.

Subtitle B-Other Preservation Provisions

Section 236 rents: The House amendment contained a provision not
included in the Senate bill that would amend the definition of income
for Section 236 to exclude amounts not actually received by a family.
The conference report contains the House provision.

Advances for Capital Improvements: The House amendment contained a
provision not included in the Senate bill that would allow HUD to repay
owners for advances for capital and operating loss expenditures made by
them for the benefit of projects assisted under sections 226 and 221 of
the National Housing Act. The repayment would be made in the form of
incremental rent increases. The conference report contains the House
provision with an amendment to restrict the provision's coverage to
advances for capital improvements and to phase in rent increases in
accordance with the Low Income Housing Preservation and Resident
Homeownership Act. The conferees intend that the authority granted to
the Secretary in this section be used only under special circumstances
in which no other existing means to finance needed capital improvements
can be used. The conferees note that the Secretary has at his disposal
existing below market interest rate loan programs to finance necessary
rehabilitation in subject properties. As a consequence, the conferees
wish to specify that the discretion granted by this section shall be
used by the Secretary only when owners have requested assistance but not
received it through the Flexible Subsidy program or other programs that
could provide such capital (such as Section 241(d) loan insurance) and
where the owner can certify to the Secretary's satisfaction that the
interest rate to be paid on the advance and the term of the advance
itself will be less costly to HUD and require smaller rent increases
than other alternatives available to the owner, such as third party
loans. In agreeing to permit interest to be paid on such advances
through increased rents the Secretary shall ensure that the interest
rate and terms of the advance are reasonable and fair and are not more
costly than the rates and terms commonly available for such loans
through bona fide third party arrangements. Moreover, the conferees
expect the Secretary to make such adjustments as necessary to existing
Section 8 contracts in the properties to assure that tenant payments are
not increased as a result of this section and that where Section 8
contracts are not in place, Section 8 assistance will be made available
to income eligible residents to the extent that such rent increases as
provided for in this section would cause such residents' rents to rise
above 30 percent of their adjusted gross income. In properties where
there is no section 8 assistance and income eligible residents are
already paying in excess of 30 percent of their adjusted gross income
for rent, then the conferees expect the Secretary to withhold approval
of further rent increases subject to this section.

The conferees intend that this provision permit rent increases only for
necessary capital improvements, not to cover the costs of correcting
deferred maintenance by the owners. Any such increases should be limited
to those approved by HUD after tenants receive notice and comment rights
under existing law, which should also be directed to the necessity of
the improvement. Once the advance has been recovered the rent should
decrease by the amount of the increase that was due to the advance.

The conferees also note that many of the projects to which this section
applies may also be eligible for additional incentives under the
provisions of the Low Income Housing Preservation and Resident
Homeownership Act contained in this Act. The conferees do not expect the
Secretary to approve higher rents for payment of interest on advances
for any projects that are eligible to receive incentives under these
provisions. Rather, the conferees expect necessary rehabilitation and
capital improvement needs to be considered and resolved through the
negotiation of new incentives or through the sale of the property to
new, bona fide third party owners who will preserve the housing's low
income character for its remaining useful life.

Management and Preservation of Federally Assisted Housing: The Senate
bill contained a provision not contained in the House amendment to
require tenants living in Section 236 and 221(d)(3) housing whose
incomes exceed 80 percent of area median income to pay as rent the lower
of the following amounts: (1) 30 percent of the tenant's adjusted
monthly income; or (2) the relevant fair market rent established under
Section 8 for the area in which the housing is located. The conference
report contains the Senate provision. The conferees intend that any rent
increases be phased in accordance with the rules established under
section 222(a) of the Low Income Housing Preservation and Resident
Homeownership Act of 1990. The change in rent rules would apply to all
Section 236 and 221(d)(3) housing, including housing which has received
flexible subsidy assistance under Section 201 of the Housing and
Community Development Amendments of 1978.

Assistance to Prevent Payment under State Mortgage Programs: The House
amendment contained a provision not contained in the Senate bill to
assist States in preserving State-subsidized affordable housing that is
subject to loss through mortgage prepayments. The conference report
contains the House provision.