Policy

Limit Owner Returns

Impose Procedural Requirements

Fund Preservation Purchases

Allow Preemptive Purchase Offers

Provide Additional Preservation Incentives to Current Owners

Clarify Potential Federal/State Conflicts

Faced with the growing need for affordable rental housing, housing advocates and state and local governments have begun to take action to preserve this housing stock. Local advocates can replicate or build on these initiatives to create a more consistent and effective set of protections for tenants and the affordable housing stock.

Limit Owner Returns

Since the primary purpose of market-rate conversions is to increase the owner's income and profits, one obvious approach to preventing a conversion is to reduce the profitability of the transaction. This can be done either through direct regulation of rent levels or through any requirement that increases an owner's conversion costs.

The greatest advantages of this type of approach are complete protection for tenants and continued affordability of the housing. It is simple and usually extremely cost-effective. Owners assessing the economic benefits of conversion may simply view a conversion that would yield only restricted rents as not worth the time and expense, and remain under the federal program.

Another alternative involves so-called "statutory leases," in which tenants in converted buildings get mandatory temporary lease renewals under terms specified by law, at rent levels roughly equal to those in effect under the federal program before a conversion. Rhode Island and Maryland both have statutes employing this concept. A similar statute in Maine requires owners to "allow tenants to remain" for up to six months at rent levels equal to those at conversion.

Several other legislatures have enacted measures imposing certain costs on owners who prepay or opt-out. These provisions generally take the form of payments for services or reimbursements to affected tenants. San Francisco charges owners a relocation fee of $5,250 per household for displaced tenants. Rhode Island and Maryland statutes require coverage of reasonable moving costs up to a certain limit.

Impose Procedural Requirements

One of the most popular restrictions on conversion involves the imposition of a time-consuming process that must be completed before conversion, usually in the form of a required notice to tenants or local governments. Since May 1999, HUD has required owners to clearly state in their notice whether or not they intend to renew the federal assistance. 

Many state and local laws also require things above and beyond the federal requirements, such as additional notice time, disclosure of more information, or a right of first refusal for tenant, nonprofit or government purchasers. Statutes requiring written prepayment notices more than five months ahead are of particular use in discouraging conversions.

Fund Preservation Purchases

If cost were no object, the best way to permanently preserve at-risk properties would be transferring them to non-speculative ownership. Moving projects into the hands of entities whose purpose is providing housing rather than generating profit-such as tenant-endorsed or controlled nonprofits-is more likely to keep tenants in their homes and preserve the property as a future housing resource.

Although there are a wide variety of sources of housing dollars, very few of these are currently earmarked for preservation.

There are some limited federal resources for this purpose, including HUD's Mark Up to Market program and other federal financing tools, but obtaining sufficient capital funds will usually require state or local financial contributions, which may include passed-through federal funds such as Low-Income Housing Tax Credits, HOME or CDBG funds. Financing

State and local governments can and should set aside some housing money for preservation.

• Washington , Minnesota, and California have all recently dedicated some general revenues to maintaining affordability in HUD-subsidized housing.
• San Francisco has established a comprehensive "Affordable Housing Preservation Program" operated by the San Francisco Redevelopment Agency.
• Federal Low-Income Housing Tax Credits, a limited resource for every state, often provide an important source of "equity" funds for nonprofit acquisitions. These scarce credits are usually allocated through a competitive process, which could award preference points for preserving at-risk housing.
• Tax-exempt bond allocations can provide an important source of below-market debt financing for nonprofit acquisitions.

Beyond providing support for capital or operating costs, government can reduce the costs of acquiring or operating an expiring-use property in exchange for affordability restrictions. This would usually be done after it has been bought by a targeted purchaser. Cost reductions may be an important component of maintaining affordability after transfer, particularly where the HUD subsidy will cease or be limited, or where a property contains unassisted units. Cost reduction measures that have been considered or proposed include exemption from various state taxes and lower utility rates for nonprofit purchasers.

Allow Preemptive Purchase Offers

A number of state and local governments have enacted "rights of first refusal," providing nonprofits or public agencies with rights to purchase expiring use properties that are up for sale. The utility of those laws is limited, however, since these rights are only triggered by sale or transfer. Owners can therefore convert first and then sell when they are no longer covered by the law. To overcome this limitation, governments can introduce "preemptive options," triggered by the act of prepayment or opt-out.

Provide Additional Preservation Incentives to Current Owners

Some owners who might otherwise exit government programs can be enticed to stay with financial or other benefits. Incentives are often useful, but when they rely on relaxing restrictions or on providing additional debt financing, care must be taken to ensure that tenants are not adversely affected by rent increases to cover the costs of the incentives. Poorly implemented incentive programs can serve to enrich the owner without providing corresponding benefits to tenants or the property, or longer affordability commitments.

Incentives can work well too. Some creative programs include:

• offering refinancing to decrease debt service or cash-out current equity
• equity takeout loans for other purposes
• allowing partial access to residual receipts or excess income accounts
• allowing increased dividends

These benefits are usually exchanged for new or extended use agreements.

Another possible incentive is streamlined regulatory burdens. Vermont reports that their concerted effort to reduce reporting requirements and to condense and simplify their program guidelines has reduced owner opt-outs.

Clarify Potential Federal/State Conflicts

Many prospective state or local preservation measures potentially share a common obstacle: the prospect of being overruled ("preempted") by Section 232 of the Low-Income Housing Preservation and Resident Homeownership Act ("LIHPRHA"). Section 232 purports to preempt state or local laws if they restrict owners' ability to prepay or receive incentives authorized by LIHPRHA, are incompatible with the terms of LIHPRHA, or are otherwise targeted exclusively at units that are considered "eligible low-income housing" under LIHPRHA. Owners have also argued, although not yet successfully, that Section 232's language requires preemption of any legislation that has the effect of reducing the profitability or ease of prepayment. Laws of "general applicability," like zoning, are not affected.

Although Congress is no longer funding LIHPRHA, it has not been repealed and the preemption provision arguably remains effective. To avoid the cloud of preemption, proponents of local preservation initiatives must ensure that the initiative's language affects a wider array of projects than those eligible under LIHPRHA.