I. INTRODUCTION

This manual is a brief overview of the HUD Section 202 program, which provides funds for affordable housing development for low-income elderly people. The intention of this manual is to provide basic background information on the purpose and process of the program. It presents information on program eligibility for fund recipients and residents, with emphasis on the program's definition of sponsors and owners. This manual also contains information on the basic process of applying for 202 funds. Case studies of several rural projects using Section 202 funds provide examples of each major stage of the development process, from project design and site selection to financing and marketing strategies. Significant resources are also attached to this report in the appendices to help potential housing developers apply for 202 funds.⁽¹⁾

II. Overview of the HUD Section 202 Program

This program, authorized by Section 202 of the Housing Act of 1959, provides federal capital advances and project rental assistance to private nonprofit corporations in order to develop new housing or substantially rehabilitate housing to serve low-income elderly people. Projects funded by HUD Section 202 provide health, continuing education, and recreational services to occupants, including homemaking, meal and nutritional services, counseling, referral services, and transportation, which help residents maintain an independent living arrangement.

Until Fiscal Year 1991, the Section 202 program provided this assistance in the form of direct federal loans. These loans, made to approved sponsors of Section 202 housing, frequently covered 100 percent of the project's development costs. In addition, Section 8 rental assistance was given directly to low-income elderly and handicapped residents to subsidize their rent in the projects. The debt service owed to HUD on the direct loan was then paid by the housing owner using the Section 8 subsidies and additional rent paid by residents. In 1991, capital advances replaced direct loans for the 202 program. These capital advances are granted to approved low-income housing developers, and cover 100 percent of the approved development costs. The major difference between these two funding processes is that the capital advance does not have to be repaid, so the project rental assistance covers only operating costs, not debt service, as under Section 8. HUD provides the difference between what tenants pay in rent and what it actually costs the sponsor to operate and maintain the project. Because capital advances are not loans, there is no debt service.

In addition to instituting these changes in the Section 202 program, the National Affordable Housing Act of 1990 created a separate program, Section 811, to support the development of housing for people with disabilities. Prior to 1990, Section 202 funds could be used to develop housing for disabled people in addition to low-income elderly people.

There are three major stages in the 202 program, all of which must be successfully completed for a project to receive funds from the Department of Housing and Urban Development: Fund Reservation, Conditional Commitment, and Firm Commitment. The Fund Reservation application is a highly competitive regional process in which numerous groups across a federal region compete for a limited number of HUD-funded housing units once a year. This competition was previously conducted within each field office, but as the amount of HUD funds began to diminish, regional competitions were used to disseminate 202 program funds. To receive a Fund Reservation, the sponsoring nonprofit developer submits information on its history, experience, and financial status. Applications from metropolitan areas compete against other metro-area applications, as there is a set-aside for nonmetro/rural funding.

The following criteria are used by HUD regional offices to evaluate proposals for Section 202 funds during the Fund Reservation Stage:

1. the sponsor's capacity to develop and operate the proposed housing on a long-term basis (20 percent);

2. the sponsor's financial capacity and commitment (25 percent);

3. the need for supportive housing for elderly people in the area to be served and the desirability of the site (20 percent);

4. adequacy of the project design (15 percent);

5. adequacy of the provision of supportive services (20 percent).

All applications are rated and ranked based on these criteria, which are published in HUD Handbook 4571.3 Rev.-1, entitled "Section 202 Supportive Housing for the Elderly." This information is also provided by HUD field offices during annual workshops covering the program. Potential sponsors and their development team members such as architects, contractors, and consultants are provided information packages which include all required application forms and instructions.

Once a Fund Reservation has been made to a particular project, Section 202 funds are reserved, but are not disbursed until the Conditional Commitment and Firm Commitment have been approved, and final closing has transpired between HUD and the owner corporation.

The Conditional and Firm Commitment stages are more detailed expansions of the sponsor's Fund Reservation application. To receive a Conditional Commitment, the sponsor submits preliminary architectural drawings, including specifications of materials to be used, and information related to the site chosen, such as the results of soil tests, topographic surveys, and proposed site layout. The sponsor also completes certifications stating that no member of the staff or board of directors of either the project's sponsor or its owner corporation is in a conflict of interest position in relation to the proposed development. The HUD area office reviews the material submitted and makes changes necessary for the project to move to the Firm Commitment stage.

After the Conditional Commitment has been granted by HUD, firm cost estimates are gathered by the sponsor from the development's general contractor. The project's architect completes final building plans and specifications, and these are submitted to HUD by the owner. A Firm Commitment is made when these plans have been approved. Initial closing on the loan takes place when the existence of title and other insurance, fidelity bonds, and building permits, as well as information on the owner entity, is approved. After the initial closing, construction takes place. When construction on the project is complete, and cost certifications have been undertaken by HUD for the project's construction expenses, then final closing can transpire. At this time, the sponsor must formally request disbursement of the loan from HUD.

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III. Overview of Key Program Elements

This section reviews eligibility requirements for recipients of Section 202 funds. It outlines eligibility for both the owner and the sponsor of a proposed project.

A. Program Eligibility

Two distinct corporations are required to complete a low-income housing development project using HUD Section 202 funds. The "sponsor" of the project is granted a Fund Reservation based on its experience providing social services and managing housing developments in the area. The sponsor provides a .5 percent "minimum capital requirement" (.5 percent of the total grant, up to $25,000). When the Fund Reservation is secured, a separate single-purpose organization is created by the sponsor to own the particular project being developed. Once a Fund Reservation has been granted, the original sponsorship of the project may not be transferred to another organization, but co-sponsors may be added with approval from the Department of Housing and Urban Development. The loan from HUD is actually made to the "owner" corporation of the project.

1. Regulatory Definition of Sponsor

The sponsor of a 202 project must meet the following restrictions.

a. A sponsor must be a private nonprofit entity (it need not be incorporated) and must have an IRS tax exemption ruling.

b. It may not be a public body or instrumentality of a public body.

c. No part of its earnings may benefit any private shareholder, contributor or individual.

d. It may not be controlled or directed by persons or firms seeking to derive profit or gain from it.

The importance of a project's sponsor should not be underestimated, despite the fact that the owner of an affordable housing project is responsible for daily operation and management. HUD provides a Section 202 fund reservation on the basis of a sponsor's management experience and its pledge of financial support to the project. (The other criteria used by HUD to rate a proposed project are included in Section II of this manual.) The sponsoring organization is evaluated on the strength of its activities as an organization and not on the individual records of the officers, board members, or general membership.

2. Regulatory Definition of Owner

The owner corporation, which is formed by the project's sponsor after the Fund Reservation stage, must comply with the following requirements.

a. It must be a private nonprofit corporation or nonprofit consumer cooperative, whose purposes must include the promotion of the welfare of elderly families.

b. It may not be a public body or instrumentality of a public body.

c. No part of its net earnings may benefit any private shareholder, contributor, or individual.

d. It may not be controlled by or directed by persons or firms seeking to derive profit or gain from the project.

e. It must be a single asset corporation. It may not engage in any other business or activity or incur any liability or obligation unrelated to the project.

f. It must be exempt from federal income taxes under Section 501(c)(3) or (4) of the Internal Revenue Code.

B. Ineligible Participants

Under the constitutional requirement for separation of church and state, Section 202 capital advances may not be made to religious organizations, or those that have primarily religious purposes. A religious body may be a sponsor of a 202 project, but cannot be an owner. "Public bodies" such as public housing agencies and agencies of local government are also ineligible to receive Section 202 funds.

C. Resident Eligibility

Occupancy in Section 202 housing is open to any household composed of one or more persons, one of whom is 62 years of age or more at the time of initial occupancy, if other occupancy requirements related to income are met.

IV. Case Studies

For this report, three low-income housing developments for the elderly in Central Georgia were selected as examples of the type of projects using HUD Section 202 funds in nonmetro areas. ⁽²⁾ Each major stage of the development process, from project design and site selection to financing and marketing strategies, is examined in detail. In these case studies, an attempt is made to determine which program characteristics may be predictive of success, to illustrate some innovative approaches to development and marketing that contributed to the usefulness of the projects, and to identify obstacles experienced during the development process and the strategies used to overcome them. The successes and obstacles experienced by these projects can serve as useful examples for other potential developers of low-income housing using Section 202 funds.

While insights drawn from these case studies will provide helpful guidance for the development of Section 202 projects, they are not intended to provide definitive conclusions or exhaustive samples of all the successes and failures experienced by nonprofit developers attempting to build low-income housing for the elderly in rural America, nor to analyze the 202 program itself. All of the projects chosen for this study were given direct loans from HUD under Section 202 prior to 1991, when HUD began distributing 202 funds using capital advances. The specific post-development implications of the new capital advance procedure are, therefore, not covered in this sample. Another limitation of this sample is the fact that they are all located in the same area. While Department of Housing and Urban Development regulations are consistent nationally, the ways in which HUD area offices process requests and information from project sponsors differ.

A. Elder Manor, Forsyth, GA

Project Number: 061-EH152-L8-WAH

Number of Units: 25 (19 one-bedroom and 6 efficiency)

Sponsor: Community Improvement Coalition of Monroe County

Project Status: FY1985 Fund Reservation, constructed, 100% occupied, closed 1990

Amount of HUD Loan: $710,600

1. Site Overview

Forsyth, Georgia is a small, racially mixed town of about 4300 people located 12 miles from Macon. Elder Manor's 19 one-bedroom and 6 efficiency units are grouped four to a building with back-to-back plumbing for cost efficiency. The office/laundry facility is grouped with two units. Elder Manor provides transportation by extension service to medical, food, and recreation services. (Changes in HUD policy made at the same time capital advances replaced direct loans require that Fund Reservation proposals include a comprehensive Service Plan. With HUD's growing emphasis on the frail elderly, transportation to and from social services is no longer considered an adequate service provision arrangement for projects using 202 funds.)

2. Project Design/Site Selection

The sponsor of this project, the Community Improvement Coalition of Monroe County, began as a small grass-roots nonprofit made up of concerned citizens. CIC's members organized themselves to successfully apply for and disseminate funds from the Farmers Home Administration Section 504 housing rehabilitation loan and grant program. The organization also operated a home day care provider training program in Monroe County.

Prior to receiving Section 202 funds for Elder Manor, CIC worked with the City of Forsyth to provide services using the city's Community Development Block Grant. The Coalition also assisted in rehabilitating a large number of homes using CDBG money. This experience helped significantly when they applied for a Fund Reservation from HUD's Section 202 funding program, despite the fact that CIC had virtually no capital available to invest in their proposed project.

The site chosen for Elder Manor is a three-acre parcel located in a quiet multiracial neighborhood of modest single-family houses. A site was selected pursuant to the criteria set by HUD for all 202 projects, with consideration to (1) adequacy of size, exposure and utilities; (2) absence of natural and/or manmade environmental hazards or conditions; (3) accessibility to services and facilities; and (4) comparability of available services and facilities to those found in neighborhoods of similar market rents.

Several problems with the site emerged after its acquisition despite following HUD guidelines. A zoning change was required to accommodate multi-family housing development. This change was requested and received without consuming valuable time, as Elder Manor had the support of local elected officials and citizens. In addition, easements for power, gas, and sewage crossed the site. Construction on the project had to be undertaken around these easements, resulting in significant design problems. Fortunately, CIC had purchased enough land that they were able to build around the easements. Finally, to ensure a strong foundation, construction had to avoid swampy soils on the site. The Coalition was able to cover these additional site development costs in the loan from HUD.

CIC was financially capable of purchasing a more suitable site, but experienced a problem common to low-income housing developers. CIC negotiated with the owners of several other sites, but these owners refused to sell their land for low-income housing -- despite CIC's ability to pay the asking price.

Choosing a competent management agent for the site early in the development process was one of the most important decisions made by the Coalition. The management agent chosen for Elder Manor had extensive experience handling HUD-funded sites, and knew all of the HUD requirements on how to set up accounting books and select tenants. Operating and management procedures had already been developed to meet HUD guidelines. In addition, the agent already had a good working relationship with the HUD area office. This experience helped Elder Manor avoid problems that can occur when an inexperienced management agent attempts to learn HUD regulations from scratch.

Elder Manor's sponsor also chose the management agent early enough in the development process so that the agent could be involved in the architectural planning. The project was therefore able to circumvent problems that can occur when management needs are not taken into consideration at the project design stage. In addition to securing an experienced management agent, the boards of directors of the sponsor and owner corporations received training in the responsibilities of operating a federally financed housing project.

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3. Financing/Construction

The Community Improvement Coalition had virtually no capital to cover the project's start-up costs, including fees for the architect, engineer, attorney, and consultant, as well as for land acquisition. HUD requires that each sponsor of Section 202 projects fulfills a minimum capital requirement of one half of one percent of the total development cost (up to $25,000). The sponsor must place this amount in escrow to be used in case of unforeseen problems. CIC was not able to provide this capital, so the organization successfully requested that city and county governments provide small grants that were used to cover the minimum capital requirement. CIC's previous work with local governments facilitated this level of financial cooperation. The attorney and consultant for the project agreed to work on a contingency basis until the initial loan closing with HUD.

After the Conditional Commitment Request was submitted to HUD, almost one year passed before processing was completed, due to a lengthy delay in HUD's Valuation Branch. The Architectural, Engineering and Cost Branch required a redesign of the project to remove offsets, face brick and porches for cost containment purposes before the Conditional Commitment was approved.⁽³⁾ A bank loan was needed to purchase the site and pay the initial architectural and engineering fees in light of this delay. The sponsor of Elder Manor had to undertake soil tests and boundary and topographic surveys in preparation for the Firm Commitment stage of the loan. HUD does not release any portion of the loan money until initial closing has taken place after the Firm Commitment, so these expenses had to be covered by another source.

A loan from a local bank was also necessary to buy the site because the owner of Elder Manor only had a one year option to purchase the land. This option would have run out before any HUD funds were released. When the owners of Elder Manor had some difficulty paying the interest on the loan prior to receiving funds from HUD, they successfully approached the local business community for help. CIC repaid the bank loan in full when HUD disbursed the 202 funds.

At the time of initial loan closing with HUD, two percent of the total loan is set aside in a Contingency Fund to cover any unforeseen costs accrued during the construction process. If this Fund is not used during construction, it can be used for capital purchases not included in the line item budget submitted for the project. The Contingency Fund for Elder Manor was used, after approval from the HUD regional office, when drainage problems were encountered during construction of the project. The Fund was used to build a retaining wall, and to install drainage piping. Remaining contingency funds were used after construction to purchase a sign for the development, and office and outdoor furniture.

Although this project was slow to go to final closing due to problems with the contractor's weekly wage reports, the management agent kept it in top running order from initial rent-up to final loan closing which occurred two years later.

4. Marketing

Applications for HUD Section 202 Fund Reservations are required to include an Affirmative Fair Housing Marketing plan, which is undertaken by the sponsor during the Conditional Commitment stage to study the needs of low-income elderly residents of the area, and to determine how the neediest potential residents can be informed of and attracted to the new project. Identifying the low-income group least likely to apply as tenants for the proposed project is also an element of the AFHM plan. The sponsor must indicate in the AFHM plan how it intends to target this group during its marketing.

The Affirmative Fair Housing Marketing plan for Elder Manor indicated that elderly white people were the least likely to apply for units because the project was located in a predominantly black neighborhood and the membership of the sponsoring organization was also largely black. The AFHM plan called for the placement of notices in local social service offices, drug stores, churches and elderly meal sites frequented by elderly white residents of Forsyth. The notices proved to be a very effective marketing tool, as this is how most prospective tenants learned of Elder Manor. Advertisements in local newspapers and public service announcements on area radio stations were also utilized. Elder Manor reached 100 percent occupancy within four months of completion.

5. Community Involvement

Because of the Community Improvement Coalition's track record of providing services to low-income elderly people in Forsyth, elected officials, the business community and local citizens embraced the Elder Manor project from its inception. The partnership that began with the city when CIC successfully aided elderly citizens to apply for rehabilitation loans and grants under Farmers Home Administration and CDBG programs remained strong when help was needed from the community to complete Elder Manor. The presence of local officials and members of the business community on CIC's Board of Directors also helped raise funds when they were needed for the project. Keeping local citizens apprised of the project through newspaper reports helped to ensure occupancy once construction was completed.

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B. Elderwood Homes, Baxley, GA

Project Number: 061-EH133-L8-WAH

Number of Units: 30 (22 one-bedroom and 8 efficiency)

Sponsors: Concerted Services, Inc.

Communities Acting Together, Inc. (original sponsor)

Project Status: FY1984 Fund Reservation, constructed, occupied, cost certified, not yet closed

Amount of HUD Loan: $970,500

1. Site Overview

Baxley, Georgia, the county seat of Appling County, has a population of about 3800, 62 percent of which is white. Elderwood Homes is constructed on a 3.2 acre site in a racially mixed residential neighborhood adjacent to another low-income housing project. The project also includes an office/laundry building which has a multi-purpose community room with a small kitchen. Transportation to food and recreation services is provided to tenants.

2. Project Design/Site Selection

The initial sponsor of Elderwood Homes was Communities Acting Together, a multi-county service agency with extensive experience providing social services in Appling County. CAT filed for bankruptcy during the first three months of Elderwood Homes construction, for reasons unrelated to this project. Potential problems associated with this bankruptcy were avoided because the final loan closing with HUD had already taken place.

Since the single-purpose owner corporation for Elderwood Homes was in place prior to CAT's bankruptcy, CAT needed an acceptable co-sponsor to assist the owner corporation through the development of the project. Negotiations with HUD were undertaken to approve the proposed co-sponsor, Concerted Services, Inc. Because Concerted Services was already providing extensive social services to residents of the county, and because HUD is reluctant to lose low-income units once they have been funded, the co-sponsorship request was approved. Thus, the original sponsor's bankruptcy, which could have been fatal to the project if it had occurred earlier in the development process, merely slowed project completion.

3. Financing/Construction

Prior to its bankruptcy, Communities Acting Together paid for site acquisition, engineering and architectural fees using a predevelopment loan from Rural America. The consultant and attorney for the project agreed to delay payment of their fees until the initial loan closing with HUD. The project reached initial closing in September 1987.

Several critical problems with this site were discovered when construction on Elderwood Homes began. Initial soil tests, submitted during the Conditional Commitment phase, were taken during a record drought in the area. Rough grading started following a period of very heavy rains, at which time the contractor discovered that the soil on the site could not bear the weight of the buildings. The existing soil had to be completely replaced before construction on the project could be resumed. A year and a half passed before HUD approved and disbursed an increased loan to fund the additional development costs.

During this year and a half, the project attorney and the general contractor were removed from the development team. The attorney was debarred by HUD for reasons unrelated to his involvement in the Elderwood Homes project. The loan increase approved by HUD covered fees for the second attorney. Because the delay in construction lasted for more than one year, the original contractor asked to be removed from the project. A second contractor was found to resume the project using the additional money provided by HUD and the project's Contingency Fund.

Once construction was complete, attempts by the new contractor to inflate his costs were noted during HUD's cost certification process. This process must be completed before HUD can release funds for permanent financing to the owner corporation. In this process, HUD can disallow funding for elements of the construction it finds superfluous or fraudulent.

During the cost certification process for Elderwood Homes, HUD disallowed approximately $200,000 in construction fees already paid to the contractor. The contractor unsuccessfully challenged the low HUD-approved amount for construction. The payment he had already received for his work would have required him to make a sizeable refund to the project's owner corporation. The owner, in turn, needed to make up this shortfall in its construction contract with HUD (released after the initial loan closing) in order to complete the final loan closing (when permanent financing begins). The funds remaining in the construction contract will not cover the amount of disallowed construction costs. Neither the borrower corporation nor the sponsor has the funds required to cover the contractor's disallowed construction costs. Final closing on this loan has not been completed pending negotiations between HUD and Concerted Services.

After the problems encountered during the cost certification process, it was discovered that the second contractor used subcontractors he owned. A HUD investigation determined that the subcontractors charged additional amounts for overhead and profit, thus doubling the amount the contractor charged Elderwood Homes for his own profit. The contractor was debarred from participating in any other HUD-funded projects for one year.

4. Marketing

The Affordable Fair Housing Marketing plan submitted regarding Elderwood Homes indicated that elderly white people were the least likely to apply for occupancy. The management agent advertised in newspapers and distributed announcements to locations frequented by white residents, while not undertaking any significant marketing to the black community. When the management agents had difficulty filling the project, they attempted to recruit handicapped white people instead of re-targeting elderly black residents of Baxley and the surrounding area. Elderwood Homes took more than a year from completion to reach sustaining occupancy. Because the fraudulent activities of Elderwood Homes' contractor were not discovered until many months after the project was complete, it is not likely that the fraud negatively affected occupancy.

5. Community Involvement

The original sponsor of Elderwood Homes, Communities Acting Together, recruited the Mayor of Baxley and several county commissioners to serve on their Board of Directors. This involvement of local officials helped garner community support for the project, and was a contributing factor to its receipt of the Fund Reservation from HUD. When Concerted Services took over the project, they replaced CAT's Board with their own. The occupancy problems encountered by the project might have been assuaged by greater involvement of local officials on the Concerted Services Board of Directors, since the officials would have had greater interest in helping to fill the project.

C. Heart Homes, Hawkinsville, GA

Project Number: 061-EH180-L8-WAH

Number of Units: 30 units (22 one-bedroom and 8 efficiency)

Sponsor: Heart of Georgia CAC, Inc.

Communities Acting Together, Inc. (original sponsor)

Project Status: FY1986 Fund Reservation, constructed, occupied in 1991, cost certified, not yet closed

Amount of HUD Loan: $1,008,000

1. Site Overview

The Heart Homes project is located in Hawkinsville, Georgia, which has a population of just over 3500. Hawkinsville is the county seat of Pulaski County. Heart Homes is situated on a four-acre tract of land adjacent to a single family subdivision of modest homes and faces a vacant lot. A family public housing project is several blocks away. In addition to 22 one-bedroom and eight efficiency units, an office/laundry facility with a multi-purpose meeting room and serving kitchen are provided to tenants.

2. Project Design/Site Selection

When the original sponsor of this program (the same as that for Elderwood Homes) went bankrupt, they successfully petitioned HUD for the addition of Heart of Georgia Community Action Council as co-sponsor. Heart of Georgia is a nonprofit, multi-county community action agency. In addition to Heart Homes, it operates other service delivery programs for both the elderly and the general population of a nine-county area in Southcentral Georgia. The agency provides respite and sitter services for the frail elderly, ombudsman services for residents of nursing and personal care homes, home delivered meals, Head Start programs, energy assistance, emergency food and shelter services, Job Training Partnership Act activities, child nutrition programs, weatherization funds and a homemaker aide program. Many of the programs are funded by a Community Services Block Grant. Heart Homes is Heart of Georgia's first successful housing development effort.

After CAT's dreadful experience with the site of Elderwood Homes (see preceding case study), they were more sophisticated in their analysis of the location for Heart Homes. No problems were encountered regarding this site.

3. Financing/Construction

The project's start-up costs -- architectural fees, engineering fees, attorney's fees, consultant's fees and land acquisition -- were handled in three ways. The architect, attorney and consultant agreed to work on a contingency basis through the Fund Reservation stage. The attorney and consultant agreed to delay payment of their fees until the initial closing of the HUD loan. The architect agreed to receive a portion of his fee pending the initial closing of the loan. This fee, along with engineering fees and land acquisition costs, were funded through a bank loan to the sponsor. Heart of Georgia repaid the bank loan at the time of the initial closing with HUD.

The original cost estimate submitted by the contractor for this project was rejected by HUD during the Conditional Commitment stage of the loan process. Another contractor was hired when the original contractor reached a stalemate with HUD regarding the cost estimate. At HUD's suggestion, the second contractor's cost estimate included changes to the exterior surface of the project's buildings and the addition of underground utilities. These changes increased HUD's estimation of construction costs, so the total loan amount provided to this project increased. Shortly after HUD approved the second contractor's estimate, he experienced a reorganization of the company and had problems securing a bond. The sponsors then approached the first contractor again, and he agreed to build the project using the HUD-approved cost estimate submitted by the second contractor. Construction was not completed on the project until 1991, five years after the Fund Reservation to the project.

Because of these delays starting construction and the lack of a comprehensive marketing plan, Heart Homes experienced severe occupancy problems. These problems led to others when the owner had difficulty repaying construction loans. After the initial closing of a HUD 202 project loan, the owner of a project is able to draw down the loan in increments, in order to pay construction costs. Interest is charged by HUD on this amount, and is taken out of the total loan released after the final closing. Once construction is finished, but before the final closing, the interest is paid by the tenants' rent and by the HUD-provided rent subsidy to the owner.

Because of the occupancy problems encountered by the project, the amount collected from tenants and the subsidy provided by HUD (which is based on occupancy levels) were too low for the owner to pay the interest to HUD or its own project maintenance costs. The owner owes HUD $72,000 in interest on the released construction funds.

In order to recover this amount, the owner submitted Vacancy and Debt Service Claims to HUD. A project experiencing occupancy problems can submit a Vacancy Claim to HUD requesting 80 percent of the contract rent for a unit for up to 60 days of vacancy, if the management agent has followed HUD marketing requirements. If the unit is still vacant after 60 days, the owner can submit a Debt Service Claim, which requests the amount lost in principal and interest from the vacant unit(s). Because the Heart Homes agent failed to market units 90 days before construction was complete, HUD rejected the project's Vacancy Claim. The Debt Service Claim was approved by HUD, and will cover the majority of the $72,000 still owed in back interest. Final closing cannot transpire until the full amount is repaid. Negotiations between HUD and the owner of Heart Homes are ongoing to determine how the additional money will be repaid.

4. Marketing

No professional market study was performed for this project. However, serious thought was given to the availability of a market for the proposed project. The HUD Economic Market Analysis Division (EMAD) market demand estimate for Pulaski County was used as an initial indication of the need for elderly housing in the county. The study showed that 40 units of elderly housing were needed and that the county had been underserved relative to the rest of the state. Based on this analysis and first-hand knowledge of the living conditions of the low-income elderly in the county, the sponsor felt there was sufficient need and demand to justify the project. The original Fund Reservation of 40 units assigned to Communities Acting Together was reduced by HUD when the project location was changed.

Occupancy started in June 1991 when construction was completed, but almost 12 months passed before the project was fully occupied. A number of eligible elderly tenants who were over-housed in public housing units a few blocks from Heart Homes were not interested in moving from the two- and three-bedroom units they occupied. The Housing Authority does not have the authority to require them to move into a smaller unit in the Heart Homes project, though the larger units occupied by elderly persons are needed for families on its waiting list.

The management agent for Heart Homes was creative in its attempt to solve these occupancy problems. Transportation to the project site was provided to prospective tenants who lacked transportation. A community-wide garage sale was sponsored to help tenants moving from larger units dispose of excess belongings. A model unit was decorated by a local furniture store to show prospective tenants how a smaller space could be decorated and work for them. The sponsor also did a great deal of outreach through its other programs serving the elderly in at least three surrounding counties. This combination of marketing efforts allowed the project to succeed in reaching 100 percent occupancy.

5. Community Involvement

Both Communities Acting Together and Heart of Georgia invited city and county officials to serve on their Boards of Directors. Multi-county community action agencies frequently have government officials on their Boards. CAT and Heart of Georgia took the extra step of inviting this participation on the Board of the owner entity as well. The presence of these officials helped ease the transition following CAT's bankruptcy, and helped garner community support when rezoning was necessary. An absence of community support and involvement could have debilitated the project during its extensive construction delays.

V. Conclusion

Very few projects avoid all of the pitfalls associated with the development of low-income housing, no matter how well conceived and implemented. This is illustrated by Elder Manor, Elderwood Homes, and Heart Homes. Yet careful planning and innovative problem-solving can help mitigate these pitfalls when they do arise. Some preliminary conclusions about useful strategies can be drawn using the projects from this case study.

Thorough planning in each of the three major development stages covered in these studies, project design/site selection, financing/construction, and marketing, is the single most important factor to ensure the success of low-income housing developments. Sponsors of Section 202 housing projects must have the resources to undertake this planning. They must either have or be able to raise enough capital to cover the minimum capital investment and any unforeseen costs that may arise during site development. Experience soliciting grants and loans from local governments, members of the business community, and local banks is helpful.

Strong community support for a project is also essential to its success, as is illustrated in the case studies. Involving elected officials, members of the business community, and social service providers in the planning and development of low-income housing for the elderly is necessary to nourish this support. The expertise of these community members will help build comprehensive planning of the project. Community support and involvement are vital when bank loans or grants are needed to cover pre-development costs, or when rezoning petitions must be submitted.

A thorough marketing plan is also necessary. An adequate investigation of the market prior to development will help the sponsor design the project to meet the community's housing needs. Reliable identification of the groups least likely to apply for occupancy helps avoid vacancy problems. It is also the obligation of Section 202 project sponsors to accurately identify and target the groups in greatest need of the housing project. Compliance with HUD marketing plan requirements is a good beginning, but does not necessarily fulfill this obligation.

Choosing an experienced management agent early in the project's design and development stage is also critical. Involving the agent early ensures that architectural plans meet the operational needs of the project's manager. Mistakes made by inexperienced management agents can cause lengthy delays in subsidy disbursement, and can lead to HUD's refusal to approve Vacancy Claims. A competent agent will also implement the project's marketing plan in an accurate and timely fashion, thereby helping to fill the units as soon as possible after construction is complete.

The obstacles experienced by Elder Manor, Elderwood Homes, and Heart Homes, and the strategies used to overcome them, can also be useful lessons to planners of Section 202 housing projects. Many of the problems encountered were related to site selection. These problems are complicated by some landowners' refusal to sell suitable and affordable sites for the development of low-income housing. This problem notwithstanding, most difficulties can be avoided by scrupulously following the HUD guidelines for site selection. Careful monitoring of the conditions under which initial soil and topographic surveys are taken can also help avoid development of an unsuitable site.

The case studies also exposed some serious problems with contractors. The inability to keep experienced contractors over lengthy application and fund disbursement timeframes is a common difficulty of HUD-sponsored housing projects. Potential sponsors of such projects should expect and plan for unforeseen construction and financing delays. Contractor fraud and cost inflation are also serious problems encountered by housing developments. Using contractors with experience building HUD-funded housing, as well as careful oversight of their activities once the project has been started, can help limit such difficulties.

IV. Additional Information

Additional information about the Section 202 program is attached in several appendices. These resources include a 202/811 application checklist (Appendix A), an explanation of HUD's rating factors and bonus points (Appendix B), tips and techniques for submitting a 202 application (Appendix C), and a list of HUD field offices (Appendix D). Additional resources available from the Department of Housing and Urban Development are listed in the Bibliography at the end of this manual.

Footnotes

1. For comprehensive information about the entire housing development process, including financing, financial planning, development team composition, and other issues, see Building Rural Housing: A Guide for Housing Providers, a publication of the Housing Assistance Council.

2. The Housing Assistance Council acted as a consultant to all of the housing development projects described here.

3. Regulations initiated in FY1991 no longer require radical redesign for "cost containment." HUD now has "design and cost standards" for the total project, rather than reviewing individual elements of the architectural plan for cost containment purposes.

Continue on to Appendices

Appendix A: The Application Checklist**

Appendix B: Rating Factors and Bonus Points**

Appendix C: Tips and Techniques**

Appendix D: HUD Field Offices(HUD's website)

Bibliography

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