Finance.

Given the capital-intensive nature of the apartment industry, finance remains one of NAA/NMHC's most important issues. The current success of the multifamily housing debt and equity markets underscores both the legacy of federal housing finance programs, as well as their continuing importance to the apartment sector.

We will continue to work toward establishing a wider availability of capital for all phases of apartment activity--new construction, refinancing, rehabilitation and sale. We will also continue to work to improve the efficacy of financing programs that produce high-quality rental housing for everyone from lower-income families to the millions of moderate-income families not eligible for government subsidy, but nevertheless struggling to cover the cost of their housing.

FHA Multifamily Mortgage Insurance Program

NAA/NMHC Position: NAA/NMHC support the Federal Housing Authority (FHA) multifamily housing insurance program as a critical source of funding for the production of affordable rental housing. We seek additional program changes to make it more competitive with the private market.

Background: The FHA multifamily housing insurance program provides necessary funding for affordable rental housing production. However, the program is complex and time consuming compared to conventional financing programs. As a result, it has failed to attract the interest of the broader apartment sector.

Both HUD and Congress have implemented several changes to improve the program, including raising per-unit loan limits, providing for higher limits in high-cost areas and reducing the insurance premium to its lowest level in two decades.

HUD has also taken great strides to improve the FHA program through its multifamily accelerated processing (MAP) program. While beneficial, these changes have not been enough to attract broader use of the program by apartment firms. To compete with the private market, the program must be more uniform in its administration and more competitive with the private market.

Some NAA/NMHC members report it can take two to three times more at-risk capital to secure an FHA loan compared to conventional financing, lb secure FHA approval, a developer must provide a complete development plan with certified costs of development (i.e., contractor bids awarded or approved). The cost associated with control of the property (title, taxes, insurance), maintaining contractor bids over an extended and sometimes uncertain period, changes in underwriting throughout the loan approval process and the effect of fluctuating interest rates create a significant burden to a developer prior to final HUD approval. The risk undertaken many times far outweighs the reward.

Action Requested: NAA/NMHC urge HUD to further modify the FHA multifamily housing insurance program to reduce the amount capital developers are required to put at risk in order to obtain HUD-insured financing.

FHA Multifamily Mortgage Insurance Variable Rate Bond Credit Enhancement 

NAA/NMHC Position: NAA/NMHC seek expansion of the HUD/FHA multifamily housing mortgage program to ensure variable rate, tax-exempt bonds, thereby providing credit enhancement for the popular variable rate bond product as it now does for fixed-rate bonds. NAA/NMHC advocate that HUD work with the apartment and finance industry to develop a pilot or model program that would be competitive with other private market programs that provide credit enhancement for variable rate tax-exempt bonds.

Background: In late 2004, the FHA multifamily insurance loan program was modified to allow developers the use of variable rate tax-exempt bonds only during the construction period. After that, owners must convert the bonds to fixed rate for the full mortgage term. This modification, while an expansion to the current program, does not provide a complete product comparable to those offered by other market providers, such as Wall Street, guaranty companies, Fannie Mae and Freddie Mac. Without an insurance product that provides the necessary credit enhancement for the mortgage period, the HUD/FHA program does not offer a true FHA option to apartment developers and sponsors.

HUD agreed to work with the apartment and financial services industry to develop a comprehensive, tax-exempt bond product, but it has challenged the private sector to put together a product development team. Working with other trade organizations, NAA/NMHC will participate in a coalition to create a model product. NAA/NMHC are seeking members interested in participating in this effort.

Action Requested: NAA/NMHC urge HUD to continue to work with the industry to develop a comprehensive FHA program for tax-exempt bonds that is competitive with market-based credit enhancement products.

Utility Adjustments for Tax Credit Properties

NAA/NMHC Position: NAA/NMHC strongly advocate changing Section 42 of the Internal Revenue Code to create alternative methods for establishing utility allowances for low-income housing tax credit projects (LIHTC).

Background: Internal Revenue Service (IRS) rules require rents at LIHTC properties to include a utility allowance for resident-paid utilities. However, the methods currently used to estimate those costs tend to overestimate actual resident utility cost, which, in turn, reduces the gross rent received by property owners.

The two methods allowed under current law are (1) local public housing authority (PHA) utility estimates or, (2) local utility company cost estimates. The PHA allowances, which are based on older public housing properties, have little correlation with utility costs for newer, more energy-efficient tax credit properties, and utility company data is generally very difficult to obtain. Recent efforts by HUD, state housing authorities, developers and owners to develop more accurate utility charges based on consumption and utility rates at the local and property level have become more readily available but are not permitted by the present IRS regulations governing the program.

NAA/NMHC created an industry coalition to seek appropriate changes. After an exhaustive evaluation of all the alternative methods and practices available to estimate utility costs, a proposal to expand the allowable methods was submitted to the IRS.

The proposal retains the two existing options, but recommends adding a new option to allow property owners to use energy consumption models and estimates based on consumption data that reflects current building design standards, materials, appliances and fixtures.

Action Requested: NAA/NMHC urge the IRS to quickly adopt the industry proposal on alternative procedures to estimate LIHTC utility allowances.