Section 236 Transactions: An Overview

In addition to the mortgage prepayment approval request, the preservation of a Section 236 property can require several other transactions. The following summaries describe these various transactions, any one of which or any combination thereof can pertain to a given property. For more comprehensive information about the requirements, guidance, and various forms pertaining to these transactions, please log on to the Section 236 Online Resource Library.

Section 236 Prepayment Approval

The distinction between Owners who can prepay with or without HUD’s prior written consent is very important. Prepayments that do not require HUD’s consent are called “Section 219” prepayments, and those that do require HUD’s consent are called “Section 250” prepayments. HUD will determine which requirements apply to a given 236 prepayment application: the more restrictive "Section 250" requirements (originally applicable to non-profit developers) or the less restrictive "Section 219" requirements (originally applicable to most for-profit developers).

Excess Income Compliance

Excess income is simply the amount of income collected that is greater than the Basic Rent gross rent potential. The Section 236 program includes an "excess income" requirement in which some or all excess income is returned to HUD by the Owner on a monthly basis unless HUD authorizes the retention of excess income.

Interest Reduction Payments Decoupling

The term “Decoupling” describes a transaction in which the Owner’s Interest Reduction Payment subsidy stream remains in place but the underlying Section 236 loan is prepaid. The owner may “re-couple,” or retain the IRP subsidy stream as long as the project continues to operate as a Section 236 project through the remaining term of the original 236 financing, plus five years. Owners will generally request Decoupling approval when several years of IRP still remain on the property and they want to use the remaining subsidy to offset debt service on a new loan; in many instances owners do not "re-couple" as the remaining amount of IRP is too small to materially offset new debt service.

Tenant Protection Vouchers

When a 236 property Owner proposes to take an action that would negatively impact the property’s affordability, or when a rental assistance contract is scheduled to expire, HUD may issue Tenant Protection Vouchers to eligible tenants who do not currently have Section 8 or similar rental assistance.

Flexible Subsidy Deferral

Many Section 236 projects received direct loans under HUD’s Flexible Subsidy program. Flexible Subsidy loans generally imposed restrictions on an Owner’s ability to prepay the 236 mortgage, and the property received a Use Agreement containing these restrictions. There were two main types of Flex loans: 1) Operating Assistance Program, these are non-amortizing and 2) Capital Improvement Loan Program, these are typically amortizing loans that must be paid off when the Section 236 mortgage matures or is prepaid; however there was considerable variability in the actual terms of Flex loans. HUD's policy is that CILP loans must be paid off when due, with no exceptions. For OAP loans, HUD generally requires repayment in full when due, but HUD may allow repayment to be deferred.

Unit Rent Increases

All Section 236 projects have a minimum rent and a maximum rent standard for their respective units. Rents are calculated by the Owner and approved by HUD based on overall property operation costs. Generally, budget based rent increases for Section 8 units are approved by the Section 8 Contract Administrator, with HUD's concurrence; however, HUD's prior written approval is needed to implement certain rent increases that exceed the contract administrator’s authority.

Non-Profit Retention of Sales Proceeds

Nonprofit Owners may request HUD approval to receive equity in cash or otherwise retain proceeds of a sale. Historically, Nonprofit Owners were not allowed to: 1) receive developer fees, 2) receive distributions from cash flow, or 3) receive sales proceeds. However, recently HUD has instituted policies allowing these types of compensation for Nonprofit Owners in certain circumstances when the transaction preserves or improves affordability and meets other HUD requirements.

LIHPRHA/ELIHPA Use Agreement

Some 236 projects received incentives under the Low Income Housing Preservation and Resident Homeownership Act of 1990 (LIHPRHA). In exchange for receiving incentives, the Owner agreed not to prepay the underlying loan and to accept a long term use agreement (the longer of 50 years or the remaining useful life of the property). There are three specific provisions of the LIHPRHA Use Agreement that HUD will consider removing: the Amended Owner Distribution, Use of Proceeds, and the Prohibition Against Tax Credits.

Unit Conversions

Owners may wish to convert units into more marketable unit types when units become obsolete and result in significant vacancy losses. HUD typically does not allow reductions in unit counts for Section 236 properties because of constant demand for affordable housing. However, there is an exception for efficiency units that are experiencing high vacancy losses. HUD will also consider other conversions on a case-by-case basis.

Subsidy Contract Assumptions

Most Section 236 projects have project based Section 8 Housing Assistance Payment (HAP) contracts. If the project is proposed to be transferred, the purchaser will have to be approved by HUD to assume the HAP contract(s).