Government Can Help With Refinancing

BY JAMES T. LAMPMAN
CB Commercial

Under new government initiatives, approximately 3,600 federally subsidized, low-income, multi-family properties nationwide -- and about 2,000 units in Washington state -- have become eligible for mortgage prepayment and conversion to conventional tenancy and financing.

To facilitate this, CB Commercial Real Estate Group, Inc., and Nomura Asset Capital Corporation, two of the nation's largest players in commercial real estate, have implemented a joint program to provide conventional refinancing to federally subsidized multi-family properties that qualify for mortgage prepayment under the Housing Opportunity Program Extension Act of 1996.

To qualify for prepayment, the properties must have FHA-insured Section 221(d)(3) or Section 236 mortgages in their 20th year of 40-year terms.

One advantage of refinancing federally funded projects is that it takes the burden of real estate asset management off the government and shifts it to the private sector. In addition, by shifting the subsidy from project-based to individual tenants under a voucher system, it allows HUD funding to be focused on the needs of individual tenants, not driven by the necessity of maintaining an entire property.

However, these properties are difficult to refinance in the conventional mortgage market due to the highly regulated environments, complicated by regulated below market rents, in which they have historically operated.

CB Commercial's Multi-housing HUD Specialties Group, based in Seattle, will work closely with L. J. Melody & Company, a wholly-owned subsidiary of CB Commercial to originate mortgage requests. CB Commercial's HUD Specialties Group and Nomura will process and close loans developed under this campaign in a joint effort.

The new mortgage program is designed to support new debt at competitive rates and terms for affordable housing projects that are eligible for prepayment. After 20 years of regulation, owners of these affordable housing properties have the opportunity to convert their projects to conventional apartments, fund necessary project improvements and upgrades, utilize the voucher system for existing tenants at market rate rents, and continue to support subsidized housing.

The program will allow owners to refinance their properties and infuse cash into renovation before converting to conventional apartments. Prime candidates for conversion are those that have the most potential for rent increases, so location and physical condition are major considerations.

Owners also should expect to spend $1,500 to $5,000 per unit in renovations in order to successfully convert their projects and compete with market rate units.

Some owners may sell and get out of property management altogether, which will also create opportunities for non-profit agencies and other conventional operators to purchase and manage these converted housing projects. Most important is that the prepayment program is one of several ways in which public risk can be transferred to the private sector.

In general, the goals of this program are to reduce the involuntary displacement of low-income tenants, improve the stature of affordable housing inventory nationwide, and reduce financial stress on the owners while enabling the multi-family property to become self-sufficient in the commercial market.

James T. Lampman is associate director of the Multi-Housing HUD Specialties Group at CB Commercial Real Estate Group, Inc.