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Comprehensive
Property Assessment and Portfolio Analysis
| The U.S.
Department of Agriculture (USDA) Rural Development
contracted with ICF International and its team of consultants
to assess the long-term physical needs of properties
in Rural Development's (RD) Section 515 Multi-family
Rental Housing Program.
This important study estimates the
scope of these needs among a portfolio of nearly
16,000 rental properties with over 430,000 dwelling
units, and provides policy recommendations to the USDA
for cost effectively responding to these needs.
ICF International's recommendations are included in its
November 2004 final report entitled, "Rural
Rental Housing—
Comprehensive Property Assessment and
Portfolio Analysis Final Study Report." This
Final Report has been released to the public by the
Agency. USDA currently is considering the findings
and recommendations, but has not taken any formal position
on the results.
The Project Team includes ICF International, Inc.; Beekman
Advisors; AEW
Capital Management, L.P.; Compass Group LLC; On-Site
Insight; and Carter and Associates. Download the full
study and appendix here. |
Please refer to our Terms
of Use policy regarding acceptable use of content
on the ICF International Web site. |
Study Results and Implications
Several key findings from the study report are highlighted
below:
- 40% of the loans
have been made on age-restricted properties; overall the
existing tenant base is 58% elderly, handicapped and disabled,
or both; the average property age is 23 years; the average
annual adjusted household income is $9,075.
- Based on a sample of properties, which the Department
selected in order to be statistically valid, the following
was determined.
- While there are few immediate life and safety
issues, no property has adequate reserves or sufficient
cash flow to do needed repairs and for adequate maintenance
over time.
- Doing nothing is not an option…unless
the roofs never leak, the paint job lasts forever,
no furnaces or air-conditioners ever need replacement,
etc.
- Several factors
may contribute to owners lacking motivation to maintain,
upgrade, or transfer their properties, including tax
consequences, lack of equity in the property, and the inability
to receive a return on investment.
- The location, physical condition
and tenant profile of the properties suggest that the
public interest is best served by revitalizing most of
this housing as affordable housing for the long-term.
- Based on the data we reviewed and reasonable
economic assumptions, a large majority of the owners
do not have an economically attractive alternative to continuing
in the program, and therefore we think prepayment is
unlikely to occur at the rates previously assumed.
Using a combination of approaches and adopting market-based
solutions with private sector resources, the Study Team believes,
over time, that Rural Development can address the financial
and physical deterioration issues. Under our suggested approach,
costs to the Government will be significantly less than if
these same issues are addressed using traditional approaches.
However, it is clear that addressing these issues will cost
more than the current budget "baseline" can support.
In any event, continuing the status quo is an unattractive
alternative, there is continued pressure on the Agency's
Rental Assistance budget as costs go up and tenant incomes
remain low; and deterioration of the properties causing foreclosures
and tense, unproductive relationships with private owners
distracting attention from the future of the rural communities
being served.
The Multifamily
Revitalization Proposal
This recommendation by the Study Team has three main components
and must be viewed as a package—partial implementation,
in our view, will only cause confusion and increase costs
substantially:
Additional capital and a new bargain
with the owners and tenants: The capital would
come primary from debt relief on the current Rural Development
(RD) loans with built-in recapture provisions and new private
capital—including
potential co-investment by the owners. The new bargain
would be that owners must accept a regulatory and enforcement
regime that would ensure affordability and accountability
for performance, but also offer incentives for good ownership
and good management. A minimum contribution for shelter
would be expected from all tenants.
Market determines prepayment: RD would protect current
tenants for a finite period (as determined by Congress and
the Administration) from the rent burden that would result
from prepayment. For purposes of modeling the level of resources
needed, we used a five-year period of protection for currently
assisted tenants to be consistent with pre-2004 Rental Assistance
Contract renewals (a 30-month protection period was used
for non-assisted tenants). Allowing the market to determine
prepayment avoids potential windfalls to owners, and goes
beyond the current focus of preventing prepayment with limited
resources.
Reorganize the multifamily program: To meet the challenges
of implementing the new functions under the Revitalization
Initiative, we recommend expanding the Agency’s technical
expertise, and making organizational changes that provide
the Agency the authority, flexibility, and accountability
to succeed. We are proposing the establishment of an empowered
Office of Portfolio Revitalization (OPR), which would be
exclusively focused on the existing portfolio. We have broken
the entire portfolio into five (5) transaction types and
analyzed the resources necessary to address the long-term
recapitalization needs. This program envisages a significant
role for the State RD offices as well as outside experts.
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