Using a HUD Insured Loan to Reopen and Refinance 35-Year Old HUD Insured Section 8 Housing

description

Cathedral Place Apartments is a 192 unit Section 236 project located in Mobile, AL. The Project was developed in the mid 1970's and is sponsored by the Archdiocese of Mobile. At the time, the HUD Section 236 loan program was one of a few avenues to finance housing specifically for the elderly. In a 236 project financing, the original loan was placed with an investor at the prevailing interest rate, but HUD provided a subsidy in the form of an Interest Reduction Payment (IRP). The Project was required to pay interest at a statutory rate of 1% while the IRP made up the difference between 1% and the prevailing rate, in this case, 7.75%.

Cathedral Place - Mobile, AL

challenge

In recent years, the Project became plagued by a failure in the roofing and window systems which lead to an infiltration of water, thereby rendering nearly a third of the units non-operational. Since the building's reserves were insufficient to rectify the water infiltration problem, the situation forced the Sponsor to commit scarce funds to mitigate the problem. However, in the end, the Sponsor lacked the funds to rehabilitate the damaged units. With the damaged units off-line and not generating any Section 8 rental income, the financial condition of the Project quickly deteriorated. With the building closing in on its 35th anniversary of service and in much need of an overhaul, the Sponsor looked for various ways to recapitalize the project.

solution

Sims Mortgage Funding, with the assistance of the management agent and the Borrower's consultant/legal counsel, proposed a three-pronged plan to revitalize the Project and keep the elderly residents in a comfortable, safe housing complex. First, by commissioning a Rent Comparability Study, Sims was able to determine and persuade the local HUD office that an increase in the Section 8 rents was needed and justified. Second, the remaining IRP subsidy totaling more than $1.1 million dollars was still available for use by the Project. HUD allows for a "Decoupling" of the IRP subsidy from the Section 236 loan and permits the recasting of the subsidy, which in turn provides an additional source of funding. Finally, Sims underwrote and placed an FHA insured Section 223(f) loan, with the proceeds being utilized to repay the outstanding Section 236 indebtedness. The new insured loan funded $1.78 million in renovations, paid all loan closing charges, replenished the reserves accounts, reimbursed the Sponsor for previous loans, and provided funds to temporarily relocate the residents within the building as renovations progress. All of these goals were accomplished with the Sponsor not "coming out of pocket" with any monies and, in fact, receiving funds previously loaned to the Project.