Section 202 Program Overview and Finance Options
Acquisition or Refinance
The Section 202 program was established in 1959 to provide affordable housing for low income, elderly residents. Originally the program provided direct loans, which changed in 1990 to capital grants. The capital grants are only required to be repaid if the owner fails to operate projects in accordance with 202 requirements, and are no longer available for new properties. The direct loans are funded by long term HAP contracts, while the grants are funded by short term PRAC contracts.
Section 202 Preservation Challenges
- Many Section 202 direct loan or capital advance projects need capital improvements.
- Current revenue from existing rental subsidies are not enough to prepay or repair property.
- PRAC contracts are short term and subject to annual appropriations.
- Section 202 direct loans generally have high interest rates.
- The Board of Directors or other principals may have explored various financing or recapitalization options before, but found limited assistance available or determined any change was not feasible.
Section202.com is a division of Bedford Lending, a licensed HUD multifamily lender. We have been offering complementary consulting services and direct loans to Section 202 properties for 30 years and have helped preserve over 1,000 units of affordable housing in the past 10 years alone. Our direct HUD 223(f) program provides high leverage, long-term, non-recourse financing for Section 202 properties nationwide, and can even be used by Section 202s with PRAC contracts which were previously restricted from refinancing.
The 223(f) program is most frequently utilized to refinance Section 202s as there is no risk to the borrower, the Board of Directors / principals are not subject to credit review, and the loan program itself is insured by HUD, which allows for efficiencies in administration and processing. Critically, even if a loan is not feasible at this time, we still provide complementary guidance and honest assistance to explore all options available.
We have a long track record of assisting with mark-up-to-market rent increases in preparation for refinances, and frequently assist with HAP contract and other regulatory issues commonly dealt with by our clients.;
By utilizing the HUD 223(f) loan program, Section 202s can secure:
- 35 year fixed rate at historic lows, which can significantly reduce existing debt service
- Fully amortizing loan terms
- Non-recourse
- Minimum 90% LTV (80% Cash-out)
- Developer's Fee available
- Can combine with RAD, which allows Section 202s with PRAC contracts to convert to long-term, project based HAP contracts
Capital improvements can be completed as part of the loan (up to ~$35,000 per unit), and reserve deposits are a mortgageable cost. Unlike HUD's 221(d)(4) construction or rehabilitation program, repairs and improvements completed under the 223(f) program do not require Davis Bacon wage rates, and typically require limited architectural and engineering work.
The 223(f) program takes about 4 months to complete. To qualify, properties must have been constructed or rehabilitated at least two and a half years ago, and must have an average occupancy rate of 85% or higher for six months.
The first step in the loan process is a formal discussion with HUD - called a "Concept Meeting", before any third parties are secured or money is spent. This "pre-loan committee" provides comfort before moving into the formal underwriting process. We are a direct lender, not a broker or intermediary.
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