HUD Provides Guidance on Unit Conversions
POLICY ON CONVERTING efficiency apartments to one-bedroom units was
recently established by HUD and presented in a February 1, 2008 memo.
Until now, HUD’s policy on this issue was established on a case by
case basis and was often inconsistent.
Authority for the conversion of units will remain at HUD Central
although the Program Center and HUBs will review requests and submit their
recommendation to Central. The
memo applies to 202/811 properties, Section 236, Section 221(d)(3) BMIRs,
Section 8 project-based assistance, RAP, Rent Supplement and any property
subject to a HUD Use Agreement or Deed Restriction.
Requirements
HUD lays out the requirements that owner/property must meet before
being permitted to proceed with a conversion.
Included is the stipulation that the conversion will not result in the
need for additional budget authority for the property. Further, the average
vacancy in the efficiency units should be at least 25 percent for at least 24
months over the prior three year period.
Owners must also provide evidence of its efforts to market the units
proposed for conversion as well as evidence the demand for the post-conversion
unit type. After the unit
conversion, the project debt service coverage ration must be 1.1 or greater.
In addition, the proposed conversion must be apples to apples (Section
8 to Section 8, 236 to 236 etc.).
Rents for the units will be capped at current rents.
For example, in a Section 8 project, the rents may not be higher than
the current one bedroom rent, or the combined rents of two converted
efficiency apartments. HUD makes
clear that if tax credits are involved, rents may not exceed the LESSER of the
tax credit rents or the comparable market rents.
In the case of a 236 refinancing and decoupling, a new IRP must be
calculated to reflect any reduction in IRP units.
An interesting position, since the IRP has already been appropriated
and if not used will be recaptured and lost.
The memo also includes specific submission requirements including
documentation that the lender has consented to the transaction.
For a copy of the memo, please contact the NLHA office or go to the
members page of www.hudnlha.com and click
on HUD Documents/Multifamiy.
