RURAL RENTAL HOUSING

POLICY RECOMMENDATIONS

The roundtable dialogues sparked interesting debate primarily about the Section 515 program. In the course of these discussions, panelists offered several recommendations for streamlining or changing affordable housing programs, and increasing the stock of affordable rental units. While HAC is not endorsing any specific policy suggestions, they are included in the report to encourage further consideration.

Every discussion participant praised the Section 515 program as one of the few funding sources supporting rental housing development in small rural towns. However, participants at all three roundtables agreed that past efforts to increase program funding had not been successful. The three groups all felt that increased congressional funding depends on one of two things. Either the current program needs substantial funding increases and revisions, or Section 515 has to be replaced by an alternative rural rental housing program.

One Washington roundtable participant noted that it was often difficult to receive firm commitments from other funding sources until they were assured the project would receive a Section 515 award. He suggested that Rural Development might revise the application process for Section 515, and score conditional commitments from other funders as leveraged funds. ³⁹
A number of participants in the Washington and San Francisco roundtables felt strongly that leveraged funds had to carry no debt to make Section 515 projects financially feasible and able to serve tenants with very low incomes. They also emphasized that even if a project has no debt service, if there is no rental assistance for the units or another source of operating funds, it is difficult to cover the operating costs on typical Section 515 projects.
Another issue raised by a number of roundtable panelists was that some of Rural Development’s targeting guidelines may hinder Section 515 project development, particularly in smaller rural communities. Rural Development’s guidelines, they said, require documentation of at least 250 prospective tenant households in a proposed project’s market area. ⁴⁰ Small towns in areas with dispersed populations may have a real need for a small rental project, but not enough to generate 250 applications from prospective households.
Several participants thought it would be helpful if it were less difficult for Rural Development to subordinate its Section 515 loans to other funding sources in financing deals. More flexibility in taking a subordinate position would also make it easier to leverage other financing sources for a project with Section 515 funds, making new rental projects a more attractive investment for private lenders and reducing the difficulty of getting large funding commitments from state housing agencies.
It was also suggested by one panelist that Section 515 be changed to a capital grant program, similar to the very successful Section 202 elderly housing program. A number of points were made about the merits of a rural rental housing capital grant program. Having a capital grant at the beginning of a project would attract greater investment from other funders. It would provide more development funding up front for construction costs, and would encourage higher quality of design and construction. Some of the San Francisco panelists felt that the program should also allow the sponsor to receive a developer’s fee, which is not done in the Section 202 program. Some of the panelists speaking favorably about the capital grant proposal also felt that the current Section 515 program could be maintained for preservation and maintenance of the existing portfolio. Panelists at each roundtable agreed that rental assistance would still be needed in projects receiving a rural rental housing grant, since even a debt-free project would have to find a source of operating funds in order to serve very low-income households. It would also be difficult to get Congress to support this more costly program.
Each roundtable included discussions on the merits and limitations of making Section 515 a nonprofit program. Those speaking favorably all felt that if the program was restricted to nonprofit housing developers, a service component should also be attached to the project. Nonprofit organizations have typically served the lowest income families, and because of the public service missions of community-based organizations, they would be committed to keeping units affordable for the long term. A number of panelists in each group pointed out one limitation to this proposal. These panelists felt that for-profit developers are important constituents of the program, and that their contribution would be important to win more support for Section 515 funding.
Panelists in San Francisco and Washington discussed states’ use of annuity funds to subsidize rural rental housing. Annuity funds have been used in both California and Delaware to provide rental assistance for rural projects.

Roundtable participants were extremely concerned about preservation and prepayment issues. Panelists talked at length about ways to preserve the rural rental housing stock and aid residents living in units that may be prepaid.

In Kansas City, one panelist felt that there needs to be a combination of both “carrots” and “sticks” to entice project owners to keep their units affordable. This panelist described how the Missouri Housing Development Commission will tell tax credit applicants who have pending prepayment requests that if they want the tax credits for a new project, they should also participate in a preservation deal. Minnesota has a plan for reduced property taxes for owners who do not prepay their projects. Some of the private lenders attending the roundtables also expressed interest in developing lending products that would help nonprofit organizations buy prepaying projects. But these private lenders also expressed reluctance to provide equity loans to for-profit owners as an inducement to keep their units affordable.
Roundtable participants discussed the issue of giving rental assistance vouchers to tenants displaced by prepayment. Panelists at each roundtable noted that HUD has proposed using “super” vouchers to assist some tenants in prepaid projects, which would allow them to receive assistance whatever the rent level set by the owner. These tenants would therefore be able to stay in place.
Each roundtable reached consensus that more information needs to be disseminated about preservation issues, and that more targeted technical assistance is needed to help rural nonprofit housing organizations purchase and preserve rural rental projects.
All roundtable participants strongly agreed that nonprofit acquisition and ownership of prepaying projects would be the best way to meet the preservation challenge. Panelists described how the social commitment and community base of most rural nonprofit housing groups meant that they are likely to keep projects affordable for the long term.

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