oversight

Housing Preservation: Policies and Administrative Problems Increase Costs and Hinder Program Operations

Published by the Government Accountability Office on 1997-07-18.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                  United States General Accounting Office

GAO               Report to Congressional Committees




July 1997
                  HOUSING
                  PRESERVATION
                  Policies and
                  Administrative
                  Problems Increase
                  Costs and Hinder
                  Program Operations




GAO/RCED-97-169
      United States
GAO   General Accounting Office
      Washington, D.C. 20548




      B-276544

      July 18, 1997

      The Honorable Christopher S. Bond
      Chairman
      The Honorable Barbara A. Mikulski
      Ranking Minority Member
      Subcommittee on VA, HUD,
        and Independent Agencies
      Committee on Appropriations
      United States Senate

      The Honorable Jerry Lewis
      Chairman
      The Honorable Louis Stokes
      Ranking Minority Member
      Subcommittee on VA, HUD,
        and Independent Agencies
      Committee on Appropriations
      House of Representatives

      The Congress created the preservation program 10 years ago to keep
      existing multifamily housing affordable for lower-income households as
      the owners of several thousand federally insured multifamily properties
      were approaching eligibility to prepay (pay off) their mortgages.
      Prepayment would allow these owners to terminate the existing
      affordability restrictions, such as the limits on the income levels of
      residents and the rents that can be charged. The program, which offers
      incentives to owners and purchasers of federally insured multifamily
      properties who agree to maintain their properties for low-income
      occupancy, has been amended frequently. Currently, the financial
      incentives are provided through grants or loans and primarily cover a
      payment to (1) the existing owner for equity in the property—essentially
      an amount derived from the appraised value of the property less the
      unpaid principal balance on the loan insured by the Federal Housing
      Administration (FHA) and (2) the owner or purchaser to rehabilitate the
      property. The preservation program has proven to be costly and complex.

      This report was prepared to comply with the requirements of House
      Conference Report 104-812, accompanying the fiscal year 1997
      appropriations act for the Departments of Veterans Affairs, Housing and
      Urban Development (HUD), and Independent Agencies (P.L. 104-204),
      which requested a GAO study of the preservation program. As requested,
      we reviewed (1) the funding provided for preservation properties as



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                   compared with the properties’ values, (2) the levels of rehabilitation grants
                   provided to properties compared with their physical needs, and (3) the
                   administrative and other problems that have arisen under the program. In
                   addition, we identified lessons from the preservation program that can be
                   applied to portfolio reengineering, a program designed to address
                   long-standing problems affecting FHA’s insured portfolio of multifamily
                   properties which is being tested on a limited scale. These lessons are
                   discussed in appendix I.

                   To respond to the first two objectives, we obtained information on 40
                   properties that were processed by four of HUD’s field offices. At each field
                   office, the properties that we selected for review were those that were
                   closest to the top of HUD’s preservation “funding queue”—a list of
                   properties with approved incentives that are awaiting funding. As of
                   October 1996, 477 properties were on the funding queue. Twenty-seven of
                   the 40 properties we reviewed represented sales to new owners, and 13
                   represented extensions of affordability restrictions by current owners.
                   Because the properties we reviewed were not randomly selected,
                   information about them cannot be projected to all of the properties on
                   HUD’s funding queue. Also, the property values that we used in addressing
                   the first objective reflect the values of the properties that HUD and the
                   property owners agreed to in establishing the properties’ preservation
                   funding. Essentially, these values reflect the “as is” fair market values of
                   the properties based on their highest and best use as unsubsidized
                   market-rate residential properties. As such, these values do not reflect any
                   increases in property values that may result from improvements funded
                   under the preservation program. We did not conduct our own independent
                   assessments of property values.


                   For the 40 properties that we reviewed, HUD approved $239 million for
Results in Brief   preservation grants or loans, which averages about $6 million per
                   property. The approved funding ranged from about $580,000 to $27 million
                   per property or from about $8,000 to $120,000 per unit. Overall, there were
                   wide variations between the amounts of approved preservation funding
                   and the values of the 40 properties we reviewed. The approved funding
                   ranged from one-fourth of a property’s value to more than 3 times its
                   value. For 22 of the 40 properties, the approved funding exceeded the
                   property’s value by an average of 62 percent.

                   As part of the preservation funding for the 27 sales transactions we
                   reviewed, HUD approved a total of $111.9 million for rehabilitation funding



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             that owners or purchasers had requested. This amount was 568 percent
             higher than the $16.7 million that HUD contractors had identified as needed
             to cover repairs that would return the properties to good condition. The
             approval of a higher funding level is largely attributable to HUD’s broad
             criteria for funding rehabilitation costs presented in a 1994 HUD
             preservation policy notice. The policy on eligible rehabilitation costs is
             aimed at facilitating sales to nonprofit purchasers and maximizing the
             remaining life and quality of preservation properties. While HUD is likely to
             reduce rehabilitation funding for some of these properties in order to
             comply with fiscal year 1997 funding caps that the Congress established,
             the overall rehabilitation funding for the 27 properties will still be
             substantial.

             HUD’s administration of the preservation program is hampered by a
             number of factors that collectively limit the Department’s ability to ensure
             that the program is being managed effectively and efficiently, that federal
             funds are being spent wisely, and that preservation operations are
             consistent with program requirements. These factors include the
             program’s complexity, frequent changes in program requirements, the tight
             time frames under which approval and funding decisions are often made,
             program guidance that is fragmented and sometimes ambiguous or
             incomplete, and HUD’s limited oversight of its field office operations. For
             example, we found these factors contributed to two cases in which HUD
             erroneously funded and in a third case planned to provide preservation
             funding that exceeded legislatively mandated funding caps by a total of
             $1.5 million. After we notified HUD of these situations, it took action to
             recover the excess funds. We also found two cases in which the
             Department used its waiver authority to provide preservation funds to
             properties whose operations were already governed by use agreements
             requiring the owners to maintain them as affordable housing for extended
             periods even if they prepaid their mortgages.


             The private owners of more than 3,600 multifamily housing projects (with
Background   about 397,000 units) developed during the 1960s and 1970s under sections
             221(d)(3) and 236 of the National Housing Act have the option to prepay
             their federally subsidized 40-year mortgages after 20 years. In many cases,
             such prepayment could remove the restrictions that reserve these units for
             lower-income households. Concerned about the possible loss of these
             units from the affordable housing stock and the potential displacement of
             the residents, the Congress enacted the Emergency Low-Income Housing
             and Preservation Act of 1987 (also known as title II or ELIHPA) as a



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temporary measure until a permanent program to preserve the units could
be enacted. Title II authorized incentives to owners to continue
low-income use restrictions through the life of the existing financing
(generally 20 years or less) while effectively prohibiting prepayments
unless HUD determined that there would be no adverse effect on the
availability of affordable housing.

In 1990, title II was effectively replaced by the Low-Income Housing
Preservation and Resident Homeownership Act (also known as title VI or
LIHPRHA), which was aimed at ensuring that property units remained
available and affordable to lower-income families and that the current
owners were fairly compensated if they agreed to maintain affordability
restrictions. Under title VI, limitations on the right to prepay were
continued, but the amount of time that low-income use restrictions would
be required was generally increased from the life of the existing mortgage
to the remaining useful life of the property, or at least 50 years.

Under both preservation laws, owners may choose to receive incentives to
continue low-income use restrictions at their properties without a change
of property ownership (referred to as “extensions”) or they may sell their
properties to new owners who agree to extend the low-income use
restrictions (referred to as “sales” or “transfers”).

In fiscal year 1996, the Congress made further revisions to the preservation
program. Most notably, it restored the right of owners to prepay their
mortgages and to terminate affordability restrictions at their properties
provided they agreed not to raise the rents for 60 days. During that year,
HUD also revised the way it provided incentives. Specifically, most of the
sales transactions funded in that year provided incentives to the buyer and
the seller in the form of a grant. Subsequently, in the fiscal year 1997
appropriations law, the Congress required that all preservation
transactions be provided in the form of grants or loans. For sales, the
incentives go to the buyer and the seller in the form of a grant.1 Grants
may cover owner equity take-outs, rehabilitation (repairs, a repair
contingency, and replacement reserves2), and transaction costs. For
extensions, the owners receive the financial incentives in the form of a
loan payable upon the sale of the property or the termination of the

1
 Prior to the use of grants and loans, HUD had provided incentives with increased levels of Section 8
project-based rental assistance and FHA-insured Section 241 (f) loans covering equity take-outs and
repairs. These incentives were terminated by the fiscal year 1997 appropriations law to reduce
excessive program costs.
2
 Replacement reserves are escrow funds established to ensure that funds are available for needed
repair and replacement costs.



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                           FHA-insured mortgage. Loans may cover equity take-outs and rehabilitation
                           but not transaction costs. See appendix II.

                           The fiscal year 1997 appropriations law also modified the program. For
                           example, new funding caps on the amount of incentives that may be
                           provided for individual transactions were established. The 1997 law also
                           reduced the overall federal funding from $624 million to $350 million,
                           including $100 million specifically designated for residents of properties
                           whose owners prepay the mortgages and end the low-income use
                           restrictions.3 The remaining $250 million may be used for preservation
                           incentives. In 1996 and 1997, the Congress placed a funding priority on
                           sales to priority purchasers—resident groups and several categories of
                           nonprofit organizations that agree to extend affordability restrictions at
                           the properties. However, in 1997, $75 million of the $350 million provided
                           for the program was designated for three categories of properties, referred
                           to as “carve-outs.” The carve-out properties, discussed further in appendix
                           III, include those where outside factors, such as earthquakes, delayed
                           preservation funding requests. Carve-outs include both extensions and
                           sales to priority purchasers.

                           The 1997 appropriations law established caps that limit the amount of
                           funding that HUD can provide to preserve individual properties. Essentially,
                           these caps limit grants to 7 times the annual fair market rent for the area in
                           which the property is located and loans to the lesser of 6 times the annual
                           fair market rent for that area or 65 percent of equity plus the funds to pay
                           for needed repairs.4


The Preservation Funding   The funding process begins when an owner files a notice of intent to
Process                    participate in the preservation program. HUD then has 9 months to provide
                           the owner with, among other things, the results of an independent
                           appraisal of the property. As part of the appraisal process, the Department
                           also contracts for an assessment of the property’s capital needs, which is
                           used in the determination of preservation value. Within 6 months of
                           receiving this information from HUD, the owner or purchaser is required to
                           file a plan of action describing how they intend to continue the
                           affordability restrictions. This plan must include, among other things, a

                           3
                            Unused portions of the $100 million that are not needed for resident protection may be used to
                           provide preservation funding.
                           4
                            HUD establishes fair market rents annually for geographic areas and uses them as limits for the rents
                           that HUD can subsidize under its tenant-based Section 8 certificate program. The caps used to
                           establish funding limits for each preservation grant or loan take into account the mix of unit sizes in
                           each project.



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                             description of the federal incentives needed and an analysis of how any
                             financial or physical deficiencies connected with the property will be
                             addressed. The field office then reviews the plan of action and, for
                             approved plans, submits summary funding information to HUD’s
                             preservation office at headquarters, which places the property on a
                             funding queue. Subject to the availability of funds and the program’s rules,
                             the approved properties are funded in the order in which HUD placed them
                             on the funding queue.


Status of the Preservation   According to HUD’s data, through fiscal year 1996, 751 properties with more
Program                      than 90,000 units have received preservation funding. In addition, as of
                             October 1996, another 477 properties with about 56,000 units were on
                             HUD’s preservation funding queue. The HUD-approved funding for the 477
                             properties totaled approximately $1.6 billion. As of June 1997, HUD
                             anticipated funding at least 69 of these properties in fiscal year 1997.

                             In 1996, the Congress restored the right of owners to prepay the mortgages
                             on preservation properties and terminate use restrictions. According to
                             HUD, as of March 5, 1997, the Department had received notices from the
                             owners of 247 properties indicating their intent to prepay their mortgages,
                             and the owners of 109 properties had done so. Appendix IV provides
                             additional information on prepayments and legislative provisions to
                             protect tenants from being displaced when property owners prepay.


                             For 22 of the 40 properties that we reviewed, the preservation funding
Preservation Funding         approved by the Department exceeded the HUD-approved values of the
Often Exceeds HUD’s          properties. The approved funding is contingent upon the availability of
Appraisal Values             appropriations and compliance with program rules, such as the funding
                             caps mandated by the fiscal year 1997 appropriations law.


Preservation Funding         HUD approved a total of $239 million to fund plans of action for the 40
Varies                       properties that we reviewed, which averages $6 million per property or
                             about $35,000 per unit.5 The approved funding ranges from about $580,000
                             to $27 million per property or about $8,000 to $120,000 per unit. Overall,
                             41 percent of the funding covers equity take-outs, 52 percent covers
                             rehabilitation needs (e.g., repairs, a repair contingency, and replacement

                             5
                              This approved funding reflects the fiscal year 1997 funding caps. Without the caps, the approved
                             funding would be $256 million. The percentages of funding by category are based on the unadjusted
                             amount of $256 million because, as of May 1997, for a number of properties, it was not clear how the
                             cuts would be allocated among the categories (i.e., equity, rehabilitation, and transaction costs).



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                          reserves), and 7 percent of the incentives covers transactions costs.6 The
                          funding for the 40 properties reflects the caps mandated by the fiscal year
                          1997 appropriations law, except for 2 properties that had waiver requests
                          pending as of May 15, 1997.

                          In comparison, according to HUD’s data, the average amount of funding for
                          the 58 properties that HUD had scheduled for fiscal year 1997 funding as of
                          March 21, 1997, was approximately $4.3 million per property or about
                          $26,000 per unit. However, because this amount does not reflect the effect
                          of the 1997 funding caps for all properties, it is likely to be somewhat
                          overstated. Twenty-four of the 40 properties we reviewed are included in
                          these 58 properties.7

                          The amount of incentives approved for the 40 properties we reviewed
                          varied considerably depending upon whether the transaction represented
                          (1) a grant that reflected a sale to a priority purchaser or (2) a loan that
                          reflected an extension where the current owner retains ownership. For
                          instance, the amount of funding for the 27 sales we reviewed ranged from
                          about $1 million to $27 million per property or an average of about $50,000
                          per unit. In contrast, the 13 loans ranged from about $580,000 to
                          $9.8 million per property, averaging about $13,000 per unit. This variance
                          in financial incentives is due to the significantly higher rehabilitation costs
                          associated with sales. For example, the average per-unit rehabilitation cost
                          for sales was over $31,000, while the cost to rehabilitate properties whose
                          ownership was extended was about $2,600 per unit.


Preservation Funding      We found the HUD-approved preservation funding exceeded property
Often Exceeded Property   values for 22 of the 40 properties we reviewed. For these 22 properties, the
Values                    funding approved was on average about 62 percent higher than the
                          property values. The property values that we used in our analysis reflect
                          the values of the properties that HUD agreed to in determining the amount
                          of equity take-out to which the owners would be entitled.8 The values are
                          based on appraisals of the property conducted on behalf of HUD and the
                          property owner. Essentially, these values reflect each property’s “as is” fair
                          market value based on its highest and best use as an unsubsidized

                          6
                          See appendix V for a list of the incentives in the approved plans of action for each of the 40 properties
                          we examined.
                          7
                           In June 1997, HUD indicated it would fund an additional 11 properties with fiscal year 1997 funding,
                          for a total of 69 properties. As of June 1997, 32 of the 40 properties we reviewed have either been
                          funded or are scheduled for funding in fiscal year 1997.
                          8
                           HUD refers to these values as preservation values. In this report, we refer to the preservation values
                          as property values.



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                                    market-rate residential property. As such, the values do not reflect any
                                    increases in property values that may derive from improvements funded
                                    under the preservation program. We did not conduct our own independent
                                    assessments of property values.

                                    The HUD-approved funding varied considerably compared to property
                                    values—ranging from about one-fourth of the value to more than 3 times
                                    the value of a property (see app. VI). As shown in table 1, the preservation
                                    funding for transactions involving sales under the title VI program totaled
                                    $200.7 million, compared with property values totaling $148 million. HUD
                                    officials said the primary reason that preservation funding exceeds
                                    property values is a 1994 policy decision that broadened the scope of
                                    rehabilitation work that may be funded under the program. This policy is
                                    discussed more fully in the next section of our report.

Table 1: Preservation Funding and
Property Values for 40 Properties   Dollar in millions
                                                                                                                        Ratio of
                                    Type of                               Total                         Difference   funding to
                                    preservation         Number of preservation              Property     (funding        value
                                    funding                projects    fundinga                valueb minus value) (percentage)
                                    TitleVI
                                    Sales                          27           $200.7          $148.0            $52.6                136
                                    Extensions                      3              8.0            18.8            (10.8)               43
                                    Subtotal                       30            208.7           166.8             41.8                125
                                    Title II
                                    Extensions                     10             30.3            73.4            (43.1)               41
                                    Total                          40           $238.9          $240.2            $(1.3)               99
                                    Note: Totals may not add due to rounding.
                                    a
                                     Preservation funding represents amounts in approved plans of action, adjusted for funding caps
                                    unless HUD had waiver requests pending (as of May 15, 1997).
                                    b
                                     Property value represents the value of the property that HUD agreed to in determining the
                                    amount of equity to which the owner would be entitled—essentially, the “as is” fair market value
                                    based on the property’s highest and best use as an unsubsidized market-rate residential
                                    property, reflecting the deduction of all improvements as well as the repair and the conversion
                                    costs to transition the property from subsidized to market-rate housing.




                                    As a result of a 1994 policy decision by HUD, preservation funding for
Funding for                         property rehabilitation has increased substantially, particularly for title VI
Rehabilitation Has                  sales transactions. This policy allows property owners and purchasers to
Grown Substantially                 receive preservation funding for a broad category of property




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                          improvements, including improvements that “enhance the economic life of
                          the project and its livability for the tenants.”


HUD’s Processes for       HUD usually determines the rehabilitation needs of preservation properties
Identifying and Funding   and the funding to address these needs at two stages of the preservation
Rehabilitation            process. Early in this process, HUD contracts for preservation capital needs
                          assessments to determine the repairs that are needed at properties whose
                          owners have applied to participate in HUD’s preservation program. Later,
                          owners or purchasers may request additional funding for repairs and
                          improvements when they file plans of action under the program.

                          Preservation capital needs assessments are used to determine the
                          “required” repairs, including corrections and replacements, needed to
                          restore a property back to its original physical standards and their
                          associated costs. As such, the costs reflect work needed to bring the
                          property to “good” physical condition, which generally means that the
                          property meets local codes and HUD’s housing quality standards. In
                          addition, the required repairs may include operational or energy upgrades
                          that will increase the efficiency of how a property functions and/or its
                          energy usage, such as new windows. Under most circumstances, required
                          repairs may not include new amenities, facilities, and equipment for the
                          property, nor replacement of items that are operational and functional,
                          unless items are inconsistent—such as mismatched kitchen appliances.
                          When HUD promulgated procedures and standards in 1992 for
                          implementing title VI, the Department noted that the repairs identified in
                          the initial capital needs assessments represent a beginning basis for
                          estimating the rehabilitation needs and costs. However, the Department
                          explained that the amounts would not be binding for purposes of funding
                          rehabilitation under a plan of action because (1) the limited scope of some
                          assessments may not have identified all of the costs associated with
                          repairing the properties to meet HUD’s housing quality standards and
                          (2) the costs identified may be outdated by the time the plan of action is
                          approved. Thus, these two exceptions seek to address shortcomings in
                          some capital needs assessments and changed physical needs between the
                          time of the assessment and the plan of action.

                          In 1994, HUD revised its policies on rehabilitation needs that may be funded
                          under the preservation program to allow owners and purchasers to
                          request funding for additional repairs as well as improvements that go far
                          beyond those items covered in the capital needs assessments. Specifically,
                          HUD determined that it would fund improvements that would enhance the




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                             economic life of the property and/or its livability for the residents.
                             Examples of the types of repairs HUD indicated it would fund include new
                             amenities; replacing items that are near the end of their useful life;
                             upgrading items that currently exist at the property, such as lighting to
                             enhance security; modernization of unit space (e.g., common areas,
                             kitchens, bathrooms, and new flooring) and energy upgrades not proposed
                             as a required repair, such as utility conversions or energy-efficient
                             windows. However, the policy specifically disallows certain items, such as
                             swimming pools, saunas, bowling alleys, decks, dishwashers, and washers
                             and dryers in individual units.

                             In its 1994 policy decision, the Department also indicated it would fund a
                             10-percent contingency for all repairs and improvements for sales of
                             properties to priority purchasers under title VI. According to HUD
                             preservation officials, this 10-percent contingency is now available for all
                             preservation transactions being funded in 1997, including extensions to
                             current profit-motivated owners. While unused repair contingencies are to
                             be deposited in replacement reserve accounts for properties that are sold,
                             any unused contingencies for extensions are to be used to reduce the
                             balance of the capital loan provided under the preservation program.


Rehabilitation Funding Has   For the 27 transactions involving sales to resident or nonprofit entities that
Substantially Increased      we reviewed, purchasers requested and received approval for
                             rehabilitation funding that greatly exceeded the needs that had been
                             identified in HUD’s preservation capital needs assessments (see table 2).
                             Overall, the plans of action that HUD has approved for the sales
                             transactions have provided funding for repairs (which include
                             improvements) and repair contingencies that is 568 percent higher than
                             the repairs identified in the preservation capital needs assessments.9 That
                             is, the Department initially identified about $16.7 million in needed repairs
                             but agreed to provide about $111.9 million in funding (not including
                             funding for replacement reserves). The average approved repair funding
                             for the 27 properties was about $28,066 per unit. In comparison, according
                             to HUD’s data, the average approved repair funding for 37 sales




                             9
                              These amounts do not fully reflect the impact of the fiscal year 1997 funding caps. As of May 1997, it
                             was not clear how the funding cuts needed for a number of properties to comply with the funding caps
                             would be allocated among equity, rehabilitation, and transaction costs. We note that if all of the
                             approved funding in excess of the caps was taken from rehabilitation costs, these costs would still be
                             465 percent higher than the repairs identified in the capital needs assessments.



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                                          transactions scheduled for funding in fiscal year 1997 as of March 21, 1997,
                                          was about $11,168 per unit.10

                                          The cost growth for preserving the 27 properties is largely attributable to
                                          funding improvements requested by nonprofit purchasers. Other factors
                                          that contribute to the growth, but to a far lesser extent, include (1) HUD’s
                                          decision to include a 10-percent contingency for repairs and improvements
                                          in the plan-of-action funding and (2) inflation in the cases where the
                                          capital needs assessments are several years old.


Table 2: Repair Needs Identified in HUD’s Capital Needs Assessments and Funding for Repairs in Plans of Action
Approved by HUD for 40 Properties
                                         Repair needs
                                           identified in   Per unit repair      Funding for
                                         HUD’s capital    needs in HUD’s repairs in plans of
Title/ transaction      Number of                needs      capital needs  action approved Per unit plan of                            Percent
type                      projects       assessments        assessments             by HUDa action repairs                            increase
Title VI Sales                 27        $16,735,548                   $4,199           $111,871,201               $28,066                  568
Title VI Extensions             3              1,013,364                 1,675              1,001,653                1,656                    (1)
Subtotal-Title VI              30          17,748,912                    3,866           112,872,854                24,586                  536
Title II Extensions            10              4,907,387                 2,169              6,486,630                2,866                    32
TOTAL                          40        $22,656,299                   $3,306           $119,359,484               $17,415                  427
                                          a
                                           Includes funding for repairs and the repair contingencies and excludes funding for replacement
                                          reserve accounts. Reserves are included in the total rehabilitation funding for the 40 properties
                                          reported in appendix V.



                                          In contrast, the funding increased by only 32 percent for the 10
                                          transactions covering extensions funded or approved for funding with title
                                          II incentives through capital loans. The increases in rehabilitation costs for
                                          these properties generally stem from HUD’s decision to fund a 10-percent
                                          repair contingency and, according to preservation guidance issued in
                                          January 1997, repairs that correct unsafe or life-threatening conditions that
                                          may have developed since the approval of the plan of action, and an
                                          inspection fee. Similarly, for the three extensions funded under title VI,
                                          only one owner requested a minor increase. According to a HUD official,
                                          because owners receive their incentives as a loan for extensions as

                                          10
                                            As shown in appendix V, when funding for initial deposits to replacement reserves is included, the
                                          average approved amount of rehabilitation funding for the 27 properties was $31,230 per unit. In
                                          comparison, according to HUD’s data, the average approved rehabilitation cost was $14,313 per unit
                                          for 37 sales scheduled for funding in fiscal year 1997 as of March 21, 1997. This average does not
                                          include the additional 11 properties (8 of which are included in our sample of 40 properties) that HUD
                                          approved for fiscal year 1997 funding in June 1997. Also, according to HUD’s data, the average amount
                                          of approved rehabilitation funding for the 313 sales on HUD’s November 1996 funding queue was
                                          $12,921 per unit (including initial deposits to replacement reserves).



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                             opposed to a grant, they are motivated to minimize rehabilitation costs to
                             the extent they want to minimize the debt they carry.


Cost Growth Stems From       The significant growth in funds for rehabilitation needs that we identified
Broad Criteria and Goal to   at the properties we reviewed is largely attributable to the broad criteria
Transfer Properties to       for funding capital needs, as contained in HUD’s 1994 policy decision, and
                             HUD’s desire to facilitate sales of properties to nonprofit owners.
Nonprofits
                             In 1994, HUD established broad criteria for rehabilitation work eligible for
                             preservation funding. Allowable rehabilitation includes items that enhance
                             living conditions, make a property more marketable, extend the life of
                             material, enhance security, or reduce maintenance costs or other
                             operating expenses. As a result, the scope of rehabilitation work eligible
                             for preservation funding shifted from a narrowly prescribed standard
                             focused on restoring properties to good condition to a broad standard,
                             with few specific limitations, that generally supports rehabilitation
                             proposals as long as they increase the life of the property or its livability
                             for the residents.

                             According to HUD, this policy was established to encourage additional
                             repairs to facilitate sales to nonprofit purchasers and to maximize the
                             remaining life and quality of the affordable housing stock. HUD officials
                             also cited other benefits of the policy, such as reducing properties’
                             operating expenses, enhancing property values, and preventing the
                             short-sighted, “band-aid” type solutions that have historically plagued the
                             Department.

                             The rehabilitation funding requested in plans of action is based on
                             assessments carried out for the owners or the purchasers and incorporates
                             input from the tenants.11 Each funding request is to be reviewed and
                             approved by HUD field office architectural, engineering, and
                             cost-processing staff on the basis of eligibility; benefit to the project,
                             tenants, and HUD; cost-effectiveness; and availability of funds. For the 27
                             title VI sales we reviewed, we found that HUD often approved the
                             rehabilitation funding requested by nonprofit buyers with little or no
                             change, other than in some cases increasing funding for replacement
                             reserves. For example, we reviewed 14 sales handled by HUD’s
                             Massachusetts and Connecticut state offices. In these cases, the amounts
                             requested by the owners or buyers were essentially approved without any

                             11
                              In contrast, the repair needs in preservation capital needs assessments are based on reviews carried
                             out by contractors on HUD’s behalf.



                             Page 12                                                  GAO/RCED-97-169 Housing Preservation
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downward adjustment. In the only case in which HUD reduced the request
for repairs (which includes improvements), it also increased the funding
for replacement reserves, approving a total amount higher than the
request. Furthermore, in five of these cases, the HUD field offices increased
the funding incentives provided for replacement reserves with no
downward adjustments for repairs. These 14 cases accounted for
58 percent of the funding approved for the 40 properties we examined.

For the three title VI sales we reviewed that were handled by HUD’s Illinois
state office, this office increased the repair funding requested in all cases
by between about $300,000 and $394,000. In contrast, HUD’s Los Angeles
area office reduced the repair funding requested for seven properties by
amounts ranging from about $30,000 to $1,274,000. It increased funding for
repairs at the other three properties by amounts ranging from about
$101,000 to $150,000.

In some cases we reviewed, it was questionable whether the reviews
performed by HUD’s field office staff were sufficient to ensure that the cost
of items requested and approved for funding were prudent and
represented the best use of preservation funds. For example, we found
that the HUD-approved plan of action for Chauncy House Apartments in
Boston, Massachusetts, included about $455,000 to replace the storm
windows in all units within the first year, even though, according to a
property official, the existing double-pane windows had been replaced
between 3 and 4 years earlier. The plan of action indicated that the
windows had to be replaced because of “structural inadequacies and
moisture conditions between the prime windows and the interior storm
windows,” but it did not indicate the existing windows had been recently
installed. While HUD officials believe that funding this item is appropriate,
we question whether HUD’s review was sufficient to determine whether
there were less costly maintenance and repair tasks that could have been
taken to correct moisture problems rather than replacing all of the
windows again. Furthermore, the purchaser’s plan of action for Chauncy
House, which was approved by HUD without change, also includes about
$536,000 for painting and caulking in its justification for replacement
reserves. HUD’s policies do not authorize the inclusion of painting and
caulking for replacement reserve funding.12 However, according to HUD
preservation officials, while such items are not acceptable replacement

12
  The approved funding for Chauncy House is about $1.5 million in excess of the fiscal year 1997
funding cap. HUD’s Massachusetts state office requested a waiver for this property on the basis that
the funds were needed to renovate and repair the property and because the fair market rents for fiscal
year 1997 “are not an accurate reflection of the market rents in Boston.” On May 30, 1997, the Deputy
Assistant Secretary for Multifamily Housing denied the waiver request.



Page 13                                                   GAO/RCED-97-169 Housing Preservation
                          B-276544




                          reserve items, HUD state and area offices can waive this requirement
                          because it does not represent a statutory or regulatory prohibition.

                          In addition, at one property we noted substantial differences in the
                          estimates for replacing items in HUD’s capital needs assessment compared
                          with those in the plan of action. For Alewife Parkway Apartments in
                          Cambridge, Massachusetts, a new refrigerator was estimated to cost $430
                          in the replacement reserve analysis included in HUD’s April 1995
                          preservation capital needs assessment, while the purchaser’s estimate in
                          the June 1996 plan of action was $653. The preservation capital needs
                          assessment per-unit estimate for oven/ranges was $330 compared with
                          $547 in the plan of action, which also included an additional estimate of
                          $429 for oven hoods. Similarly, the estimates for kitchen counters was
                          $282 versus $435.

                          According to HUD field office staff, a key factor that has contributed to the
                          increase in funding for rehabilitation is HUD’s desire to facilitate sales to
                          nonprofits. Several of these staff with responsibility for reviewing costs in
                          the plan of action requests said that they interpreted headquarter’s
                          guidance on rehabilitation funding as directing them to give the tenants
                          and nonprofits what they want. Furthermore, some of them view these
                          requests for repairs as “wish lists,” but they have approved the funding
                          requests because of HUD’s broad criteria and informal guidance. When we
                          discussed our preliminary findings with the Department, HUD’s General
                          Deputy Assistant Secretary for Housing and other HUD officials
                          acknowledged that the criteria for improvements were too broad given the
                          limits of the staff’s capacity to process cases and monitor the program.
                          They also acknowledged the need to emphasize that the additional repairs
                          are not intended to be a “wish list” in which nonprofits are given what they
                          ask for without attention to the costs and benefits. Nonetheless, they
                          believed that this weakness did not result in widespread excessive costs
                          for improvements and repairs.


Equity Amounts Not        In HUD’s preservation program, there is a direct link between a property’s
Adjusted to Reflect       repair needs and the funding for equity an owner receives. Specifically,
Increased Capital Needs   repairs required to restore the property to good condition (as well as
                          upgrades and conversion costs associated with changing the property
Funding                   from subsidized housing to a market-rate property) reduce the equity HUD
                          may provide to owners (see table 3).




                          Page 14                                    GAO/RCED-97-169 Housing Preservation
                                   B-276544




Table 3: Hypothetical Example of
Computation to Determine Owner’s
Equity Under HUD’s Preservation    Property’s appraised value                                              $12,000,000
Program
                                   Less required repairs (to restore property to
                                   good condition in compliance with local
                                   codes and HUD’s housing quality standards
                                   as identified in preservation capital needs
                                   assessments)                                                              (1,000,000)
                                   Less upgrades and conversion costs
                                   (identified in appraisals)                                                (1,000,000)
                                   “As is” preservation value                                               10,000,000
                                   Less unpaid mortgage principal balance                                    (6,000,000)
                                   Owner’s equity                                                           $4,000,000

                                   HUD’s  1994 policy on funding repairs and improvements acknowledged the
                                   link between repairs, improvements, and an owner’s equity funding. That
                                   is, the policy noted that similar to the treatment of additional required
                                   repairs identified by HUD staff as a result of a time lapse between the
                                   preservation capital needs assessment and the plan of action, repairs
                                   approved at the plan-of-action stage that bring a property to a “good
                                   condition” would have the effect of decreasing the “as is” preservation
                                   value. Accordingly, an increase in required repair costs would decrease
                                   the amount of equity to which the owner would be entitled. In 1995,
                                   however, the Department determined that such downward adjustments of
                                   equity would be limited to instances where the owner had been fully
                                   aware of a required repair condition during the preservation capital needs
                                   assessment process and had not divulged it intentionally. This decision
                                   increases program costs to the extent additional repairs are funded but the
                                   equity payments to owners are not correspondingly reduced. Also,
                                   according to HUD’s guidance, approved improvements are not considered
                                   in calculating the “as is” preservation value because the improvements
                                   would not be required to bring the property to a good condition or would
                                   not be encountered in the process of converting the property to an
                                   unsubsidized use. Thus, by definition, equity is not reduced for
                                   improvements the Department agrees to fund at the plan-of-action stage.
                                   According to program officials at headquarters, this policy stems from the
                                   Department’s goal to encourage owners of these properties to sell them to
                                   resident groups and nonprofits and to maximize the remaining life and
                                   quality of its affordable housing stock.

                                   At most of the 40 properties we reviewed, while HUD has approved
                                   significantly larger amounts of funding for rehabilitation than the amounts
                                   identified in HUD’s capital needs assessments, we did not identify any



                                   Page 15                                         GAO/RCED-97-169 Housing Preservation
                          B-276544




                          reductions in equity that had been made because of increased
                          rehabilitation funding. In one case, we noted that HUD did reduce the
                          owner’s equity, but we were unable to determine from the information
                          available whether this adjustment was made to reflect increased repair
                          costs. Also, reductions in equity were made for a number of properties to
                          meet the funding caps mandated by HUD’s fiscal year 1997 appropriations
                          act.13


Funding for Replacement   Under HUD’s preservation program, purchasers are eligible to receive
Reserves May Be           funding for reserves to replace capital items, such as roofs and appliances,
Excessive                 that will need to be replaced in future years. For the 27 properties we
                          reviewed that involved sales, HUD approved about $12.6 million for
                          deposits to replacement reserves, or about 10 percent of the rehabilitation
                          needs the Department had approved. We believe that the amounts
                          approved by HUD may be excessive for two reasons.

                          First, HUD allows the property owners to retain existing replacement
                          reserve balances when selling properties under the preservation program
                          and then provides funding to the purchasers to replenish those reserves.
                          This policy can substantially add to the costs of the preservation program.
                          For example, the owner of Alewife Parkway Apartments in Cambridge,
                          Massachusetts, was allowed to retain the $539,659 replacement reserve
                          balance when the preservation funding was provided in January 1997. HUD
                          then included $900,000 in the capital grant given to the purchaser of the
                          property to fund replacement reserves. However, if the existing
                          replacement reserve balance had stayed with the property, HUD’s
                          replacement reserve funding would have been reduced to about $360,000.

                          A 1996 HUD preservation letter stated that for sales transactions the
                          Department no longer requires that the existing account for replacement
                          reserves remain with the property in most cases. The letter indicated that
                          owners are entitled to keep the money in the reserve accounts because the
                          appraisals did not reflect these amounts in establishing the values of the
                          properties. HUD program staff told us that, upon request, HUD will allow
                          owners who are selling properties under the program to retain the
                          replacement reserve balances. However, the preservation staff also told us
                          that there was considerable debate within HUD regarding the merits of this
                          policy because replacement reserves were funded in large part from



                          13
                            For some extension properties, equity reductions were also made for transaction costs and deposits
                          to the replacement reserve accounts.



                          Page 16                                                  GAO/RCED-97-169 Housing Preservation
B-276544




mortgage interest subsidies and project-based Section 8 rental assistance
provided by the government.

When we discussed our preliminary findings with the Department, HUD’s
General Deputy Assistant Secretary for Housing and other HUD officials
told us that it is the Department’s position that it is never appropriate to
allow owners receiving preservation funding to withdraw replacement
reserve funds when an initial deposit is required to meet the property’s
future capital needs. They added that the Department’s policy allowing
such withdrawals is intended to reflect the intent of the Congress. To
support this belief, the Department cited language from a 1992 House
Banking Committee report that discusses the need for an amendment to
the preservation law regarding replacement reserves. However, the
proposed amendment—which would have included the amount of the
reserve for replacement account in the preservation value of the
property— was not enacted.14

Second, we found that HUD’s process to determine the amount of
replacement reserves funded at one property we reviewed—Alewife
Parkway Apartments—did not ensure that all of the funding was actually
needed.15 Essentially, HUD determines the amount of initial deposits to
replacement reserves that can be included in the preservation funding on
the basis of the highest of three computations specified in the
Department’s preservation-processing instructions. HUD officials believed
that this approach is appropriate because of the uncertainty in estimating
replacement reserve needs and the sensitivity of the account as a resource
in averting troubled-project situations.

For Alewife Parkway Apartments, the highest of the three required
computations reflected the amount needed to replace items whose
remaining useful life was expected to expire in the first 5 years after
preservation funding as well as items whose replacement costs might be
considered “weighty” in years 6 through 10. HUD determined that
replacement reserve funding of about $1.2 million was needed. However,
this calculation did not consider all of the appliances and other items that
HUD was funding with the $5.5 million grant for property repairs. Instead,


14
  The House Banking Committee report accompanying the proposed amendment stated that the
replacement reserves, which the report described as the rightful property of the owners, should be
included in the appraised value of preservation projects, even though this may increase the cost of the
program and the compensation to the owners.
15
  Our review of the documentation supporting preservation funding for replacement reserves and the
reserve balance provided to owners was limited to Alewife Parkway Apartments, the one sales
transaction in our sample that had received fiscal year 1997 funds as of February 1, 1997.



Page 17                                                   GAO/RCED-97-169 Housing Preservation
                            B-276544




                            HUD’s analysis was based on the earlier capital needs assessment that had
                            assumed that the replacement of kitchen and bath appliances and other
                            items would be funded over time from the replacement reserve account.

                            We also found that the documentation provided by the purchaser to
                            support the initial request of $750,000 for the deposit to replacement
                            reserves included several items, such as painting walls and ceilings and
                            caulking, that are not acceptable replacement reserve items under HUD
                            policies. As stated earlier, HUD officials said that state and area offices can
                            waive the prohibition against including such items in replacement
                            reserves. Furthermore, when the purchaser requested an additional
                            $150,000 for replacement reserves, raising the total cost to $900,000, a
                            mistake in its earlier analysis was cited, but information on the items that
                            were erroneously excluded was not provided. Nonetheless, HUD approved
                            the increase.


                            A variety of factors have hampered HUD’s ability to administer the
Administrative and          preservation program effectively and to ensure that federal funds are being
Other Problems Limit        spent wisely and in accordance with program requirements. We identified
Effective and Efficient     instances in which these factors contributed to errors and other problems
                            in HUD’s processing of preservation cases and also noted other
Program Management          questionable practices relating to HUD’s awards of preservation funding. In
                            addition, HUD continues to face difficulties in (1) targeting the program to
                            only those properties whose owners will actually prepay and (2) ensuring
                            that property owners that receive preservation funding comply with the
                            affordability restrictions placed on the properties.


Program Administration Is   The preservation program has been described by some HUD officials,
Hampered by Various         including HUD’s General Deputy Assistant Secretary for Housing, as the
Factors                     Department’s most complex multifamily housing program—a program that
                            is very difficult for HUD to administer. On the basis of our review of the
                            program’s requirements, HUD’s processing of individual preservation cases,
                            and discussions with HUD preservation officials, we believe that program
                            implementation is hampered by a variety of factors, including the
                            following:

                            Frequent program changes and fragmented program guidance complicate
                            identifying and complying with current policies and procedures. From its
                            inception in 1987, the preservation program has been very complex, and it
                            has been amended seven times. Preservation rules are contained in HUD’s



                            Page 18                                      GAO/RCED-97-169 Housing Preservation
B-276544




numerous handbook transmittals, notices, and memoranda and—since
April 1996—15 preservation letters that describe the changing program
rules and provide numerous policy clarifications and changes. We found
that it was difficult to get a clear understanding from program staff of
HUD’s current requirements in some cases, and that sometimes the
program guidance was ambiguous or incomplete. One field office official
characterized the program’s criteria as “one big blur.”

Staff responsible for processing the cases frequently change. Staff
generally do not specialize only in preservation, and there is frequent
turnover among staff familiar with the program because of other priorities
and heavy workloads in the Department. Given the program’s complexity
and its fragmented guidance, these frequent staff changes increase the
potential for error. In addition, some HUD staff who process preservation
transactions expressed strong negative opinions about the program for
various reasons. For example, some staff were troubled that it has
provided substantial benefits to some owners who, as discussed in the
next section, have not complied with HUD’s policies; others questioned the
substantial amount of funds being provided for rehabilitation needs.

Approval and funding decisions are often made under tight time frames.
Frequently, new rules and requirements have had to be implemented in
conjunction with program funding. Field staff were required to process
their cases under the new rules to get them funded, often within tight time
frames, thus limiting their review of funding requests. For example,
transactions relating to the $75 million set-aside for “carve-out” properties
in the fiscal year 1997 appropriations law had to be processed in about 5
weeks.

Data are aging and files are in poor condition. Many properties awaiting
funding began the preservation process 3 or more years ago.
Consequently, the data on which decisions are based have become more
and more out of date. Furthermore, the files, upon which the funding
amounts are based, can be voluminous and disorganized. We found that
tracking case activity and final decisions was very difficult in some cases
and that documentation supporting staff decisions was missing in others.

Program operations are decentralized and headquarters oversight is
limited. Six preservation staff at headquarters provide the overall program
guidance and rules and maintain a database of properties eligible for
preservation funding and the transactions that have been funded.
However, the headquarters preservation office does not conduct



Page 19                                    GAO/RCED-97-169 Housing Preservation
                          B-276544




                          systematic reviews of field offices that process preservation transactions.
                          The information on the properties approved for funding that headquarters
                          examines is generally limited to aggregate dollar amounts of the incentives
                          approved by the field offices. Headquarters staff indicated that they obtain
                          information about specific cases when they respond to questions from the
                          field offices and that they also raise questions about some cases. However,
                          the information that is routinely submitted to and reviewed by
                          headquarters staff is insufficient, in our view, to allow them to identify
                          many of the issues and problems that arise.

                          When we discussed our preliminary findings with the Department, HUD
                          multifamily housing officials told us that they believed a number of the
                          fundamental problems with the preservation program were the result of
                          overly prescriptive legislative requirements, which they believed added
                          administrative burden and complexity to the program and increased the
                          potential for error. The officials also noted, however, that improvements
                          could be made in program oversight. For example, they noted that if the
                          program continues to be funded, ideally, preservation staff at headquarters
                          should periodically visit all field offices to monitor transactions, provide
                          technical assistance, and facilitate input from staff on programmatic
                          issues. They also believed that the availability of sophisticated, real-time
                          data management capability could greatly improve HUD’s ability to manage
                          the preservation program.


Administrative Problems   The administrative weaknesses noted above have reduced HUD’s ability to
Impair Oversight of       effectively oversee the use of preservation program funding. In our view,
Preservation Program      they have limited the Department’s ability to ensure that the program is
                          managed effectively and efficiently, that federal funds are being spent
Funding                   wisely, and that the program is carried out in a manner that is consistent
                          with program requirements. For example, as we discussed above, HUD’s
                          oversight was not sufficient, in our view, to ensure that rehabilitation
                          funding was provided in the most prudent and cost-effective manner.

                          We did not attempt to assess the extent to which each of the 40
                          transactions we examined was processed in accordance with preservation
                          program requirements. However, in carrying out our work to address this
                          report’s objectives, we did note some errors and problems that appear to
                          have resulted from the changing preservation program rules, tight
                          processing time frames, and limited headquarters oversight of field offices,
                          among other factors.




                          Page 20                                   GAO/RCED-97-169 Housing Preservation
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In particular, we found that HUD was not aware that it had approved
incentives for three transactions that were $1.5 million over the program’s
fiscal year 1997 funding caps. For various reasons, errors totalling
$1.5 million were made by field staff in determining whether the approved
financial incentives exceeded the new fiscal year 1997 funding caps. At
two properties processed by the Los Angeles office, Villa St. Andrews
Apartments and Mountclef Apartments, the Department completed the
transactions and provided excess amounts totalling $1.2 million to the
owners. Specifically, HUD provided fiscal year 1997 funding for two of the
carve-out properties that exceeded the 1997 caps by $731,283 and
$499,123. These errors occurred because the field office staff used the
incorrect number of apartment units in the funding limit formula for the
Villa St. Andrews Apartments and did not calculate the funding limit for
the Mountclef Apartments. These errors were not identified when the
cases were reviewed by the field office or headquarters. After we brought
the errors to HUD’s attention, the Department recovered the excess funding
from the new owners principally by reducing the funds that will be
provided for rehabilitation work.16 In the third case, the Connecticut state
office was unaware that the approved incentives for the Tariffville
Apartments were about $347,000 higher than the funding limits established
in the 1997 appropriations law because the staff used an incorrect formula
relating to a different preservation requirement to calculate the funding
limit. According to HUD, the Connecticut state office requested a waiver
from headquarters to fund the amount in excess of the cap, but it was
denied.

We also found that HUD added projects to the preservation funding queue
before the plans of action were received and approved. To allocate limited
preservation funding, program staff told us that properties are placed on
the preservation funding queue after field offices approve their plans of
action. The properties then receive funding in the same order in which
they are listed on the queue. We note that on July 12, 1996, HUD placed
Bayview Towers, located in Stamford, Connecticut, on the preservation
funding queue. However, the Bayview plan-of-action request for about
$12.9 million (about $64,000 per unit) in preservation funding was not
received in HUD’s Connecticut state office until July 15, 1996, and was not
approved until August 15, 1996. HUD made no adjustments to the funding
requested in the plan of action. As a result of being placed on the queue in
July before its plan of action was received and approved, this property is
receiving fiscal year 1997 funding, whereas a number of properties that

16
  When a grant is provided under the preservation program, the equity take-out and replacement
reserve funding is provided up-front, while the funding for rehabilitation (repairs and repair
contingency) is provided after the rehabilitation work is completed.



Page 21                                                 GAO/RCED-97-169 Housing Preservation
                       B-276544




                       were added to the funding queue later in July 1996 will not be funded this
                       year. We also noted that Tariffville Apartments, also located in
                       Connecticut, and six properties processed by HUD’s Massachusetts state
                       office were placed on the queue about a month before their plans of action
                       were approved.

                       We also noted that, in one case we reviewed, HUD increased the
                       preservation value of Alewife Parkway Apartments in Cambridge,
                       Massachusetts, by about $5 million on the basis of its internal appraisal,
                       resulting in a value that more closely coincided with the owner’s appraisal.
                       The preservation program generally requires that the preservation values
                       are to be based on independent appraisals, with HUD having limited
                       authority to make adjustments to the values. This approach provides some
                       protection to the Department in terms of limiting the potential for fraud,
                       waste, and abuse in establishing preservation values. However, in 1995, the
                       Department’s guidance indicated that negotiations could be used in cases
                       where HUD’s review appraiser believes that market data will support a
                       value greater than 110 percent of the HUD appraisal in lieu of contracting
                       for a third independent appraisal that would be binding. In this case, the
                       Massachusetts state office indicated that there was not sufficient time to
                       contract for a third independent appraisal. However, 9 months elapsed
                       between the time that the owner raised questions about HUD’s contract
                       appraisal and the internal appraisal prepared by the Department. HUD
                       officials acknowledged that, ideally, a third party appraiser would have
                       been engaged in this case, but that because of timing issues and competing
                       workload demands, they believed the field office’s action was appropriate.

                       In discussing our tentative findings with the Department, HUD officials
                       noted that it was inevitable that we would find some mistakes in the
                       program given the number of transactions funded and the complex nature
                       of the program. Nevertheless, they believed that, considering the
                       numerous obstacles, HUD’s administration of the program has been
                       effective.


Some Uses of Program   In several instances HUD has provided funding to preserve properties that
Funds Appear           were already bound by affordability restrictions. The Department’s
Questionable           preservation rules state that properties with use restrictions that would
                       continue after prepayment, such as those which have received flexible
                       subsidies,17 are not eligible for preservation funding. Nonetheless, the

                       17
                        Under the flexible subsidy program, loans were provided for capital needs in exchange for use
                       agreements extending the affordability restrictions for the term of the original mortgage.



                       Page 22                                                  GAO/RCED-97-169 Housing Preservation
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Department has granted waivers of this policy. During our review, we
identified two such cases.18 In one case, the Department provided
$7.7 million in fiscal year 1996 preservation funding for Northwest Towers
Apartments in Chicago, Illinois, which had a flexible subsidy contract
requiring use restrictions until 2012. A primary argument made in the
waiver request by the Deputy Assistant Secretary for Multifamily Housing
was that it would be less expensive to preserve this property now rather
than in 2012 because the appraisal value now—and the related equity
payment—would be based on regulated rents that would be lower than the
unregulated market rents that would apply in 2012. Given the limited
resources available to the preservation program, we question whether
providing preservation incentives to properties that will already be
preserved as affordable housing for extended periods represents the best
use of scarce federal resources. In addition, we noted that the appraisal
value used to determine the equity payment to the owner was based on a
rent structure from a property in another state rather than the property’s
existing rent structure. The rent structure used was derived from a use
agreement for a property in St. Louis, Missouri, that had also received
flexible subsidy funding and later had its mortgage prepaid. This rent
structure was used after an appraisal using the property’s actual rents
showed that its preservation value was less than the outstanding balance
on the property’s mortgage, which prevented the property from moving
forward in the preservation process. HUD determined that using the rent
structure from the St. Louis property represented a “more reasonable basis
for determining the rent levels and still maintaining a rent structure which
would be considered affordable.” HUD paid the owner about $2.5 million
for equity.

HUD officials told us that the Department has approved preservation
funding for three or four properties that had received flexible subsidies
“on a trial basis” after the Congress had proposed language in an
authorization bill that would have made one such property—Northwest
Towers—eligible to receive preservation incentives. The officials stated
that those approvals were given because HUD believed that allowing only a
particular project to receive preservation incentives would inappropriately
benefit one owner. However, they stated that HUD subsequently concluded
that providing incentives to such properties was not an effective use of
preservation funds and HUD has stopped granting such waivers.


18
  We did not review previously completed preservation transactions to determine how many involved
flexible subsidies. However, in examining a completed case in one office, we found the Department
had previously provided flexible subsidies to that property. This file also identified one other such
case.



Page 23                                                  GAO/RCED-97-169 Housing Preservation
                         B-276544




                         We also found that the Department has provided preservation funding to
                         owners who HUD believed had violated its regulations. In 1994, HUD used
                         preservation funding as a tool to negotiate a settlement agreement with an
                         owner who, among other things, HUD believed had diverted funds from
                         HUD-insured properties in violation of the regulatory agreements. HUD
                         agreed not only to provide preservation funding for 8 of this owner’s
                         properties—the proceeds of which were to be used to repay the diverted
                         funds and HUD-imposed fines—but for 26 other properties as well. Eight of
                         the properties were funded in 1995, and funding for seven of the owner’s
                         other properties was provided with fiscal year 1997 funds under the
                         carve-out category (see app. III). HUD officials told us that other than the
                         funding provided to that owner under the carve-out category established
                         in the 1997 appropriations act, the only preservation funding the
                         Department had previously provided to that owner was an amount
                         sufficient to cover the owner’s obligations to repay the diverted funds and
                         associated fines.19 We found that HUD used preservation funding as a tool
                         to reach settlement agreements covering two other properties in
                         Connecticut in 1995 and 1996. Under the agreement, the owners were
                         required to repay HUD about $4.5 million that had been diverted from the
                         HUD-insured properties in violation of the regulatory agreements, along
                         with a $500,000 fine.


Difficulties Exist in    In addition to the administrative problems discussed earlier, HUD also faces
Targeting Program        two other issues in administering the preservation program: (1) how to
Funding and Monitoring   target the program to properties whose owners will actually prepay and
                         (2) how to ensure that property owners comply with affordability
Compliance               restrictions.

                         One of the problems that has existed under the preservation program
                         throughout much of its history is how to target funds to only those
                         properties whose owners would actually prepay their mortgages. The 1990
                         revisions to the preservation program addressed this problem by
                         permitting HUD to limit incentive payments to property sales or extensions
                         in rental markets that had an inadequate supply of decent and affordable
                         housing. This provision, called the windfall profits test, was included in
                         the law in response to the administration’s concerns that the preservation
                         program should not be used to provide incentives to owners who would
                         not have prepaid because of local market conditions.

                         19
                           As discussed further in appendix III, in 1994 HUD and the owner entered into an agreement to settle
                         allegations in a HUD Office of Inspector General report that the owner had violated several regulatory
                         agreements. The owner agreed to pay an $11.1 million settlement that included penalties. In 1995, HUD
                         provided about $26.7 million in preservation funding, of which $22.2 million was for the owner’s equity.



                         Page 24                                                   GAO/RCED-97-169 Housing Preservation
B-276544




However, the windfall profits test was controversial and repealed by the
Congress in 1992 before HUD implemented it because of concerns that a
test designed to distinguish between properties with future value and
eligible to receive incentives and those without value was imprecise,
unfair, and unnecessary. The House Banking Committee considered the
preservation program’s appraisal system sufficient for determining if
incentives should be made available to property owners and purchasers.
The Committee expected that the appraisals and HUD’s review of plans of
action would protect against owners’ receiving windfall profits.

Questions continue, however, concerning the extent to which the program
provides incentives to owners of projects who are unlikely to prepay. HUD
preservation staff in the field offices in which our work was performed
had mixed views on the extent that owners would prepay if incentives
were not available. Due to one area’s bad economy, staff in that field office
said it was unlikely that any of the owners who received incentives would
have actually prepaid. Similarly, staff in another office told us that even
though the Congress has restored the right of owners to prepay, they did
not believe that most owners in their area were planning to prepay. On the
other hand, staff in two other field offices felt very strongly that owners
would prepay if the preservation program was discontinued. Due to the
strong market in the area, one office is processing 40 prepayment
applications. The other office is currently processing eight prepayment
applications; and for the 10 projects that received incentives in fiscal year
1996, the preservation coordinator told us that most of those owners
would have prepaid if incentives had not been offered to them.

Targeting preservation incentives to the owners that are most likely to
prepay is difficult because there are no criteria that HUD can use to clearly
identify such owners. According to HUD and industry officials, the
appraisal process serves as a test for prepayment because a property’s
market value is a key factor in whether an owner will prepay. However,
according to these officials, business considerations and the availability of
financing also influence whether an owner actually decides to prepay.

According to some housing industry officials, however, one option that
could potentially improve the targeting of preservation funding would be
to have the states or the localities in which properties are located
contribute a portion of the preservation funding—either from their own
funding or from other housing-related federal funding that they receive.
These officials stated that states or localities would only be willing to




Page 25                                    GAO/RCED-97-169 Housing Preservation
              B-276544




              provide funding to preserve properties that they believed were likely to
              prepay and truly needed to be preserved as affordable housing.

              Concerns also exist about HUD’s ability to monitor the properties that have
              received preservation funds to ensure that the long-term use agreements
              are adhered to by property owners. Without oversight, neither the
              Congress nor the Department can be assurred that the long-term
              affordability promised in exchange for financial incentives will be
              achieved. At the present time, HUD does not have a departmentwide system
              in place to identify and monitor owners’ compliance with its various
              regulatory obligations, including the low-income affordability restrictions
              that owners agreed to extend in exchange for receiving preservation
              funds. The program’s monitoring guidance in HUD’s preservation handbook
              was prepared in 1993 and does not address the numerous, substantial
              changes that have occurred in the program since then.

              Officials at three field offices expressed concerns over tracking all of the
              different use agreements for preservation properties, which vary in terms
              of the affordability restrictions depending upon when the properties were
              funded. In general, officials we contacted were most concerned about the
              lack of guidance on monitoring projects that no longer have mortgage
              insurance or existing Section 8 contracts. According to a HUD asset
              management chief, preservation projects can easily “fall off HUD’s radar
              screen,” particularly when the loan is paid off and Section 8 assistance is
              not renewed. This official said that due to limited resources, properties
              without mortgage insurance or Section 8 assistance were generally low
              priority in the field offices.


              HUD’s administration of the preservation program is hampered by a
Conclusions   number of problems that, when taken together, seriously limit the
              Department’s ability to ensure that the program is being managed
              effectively and efficiently, that federal funds are being spent wisely, and
              that the program is being carried out in accordance with program
              requirements.

              We recognize that some of the problems affecting the program are due to
              its inherent complexity, the numerous programmatic changes that have
              taken place, and the compressed time frames under which decisions must
              be made. In our view, however, these problems are compounded by
              questionable HUD policies and internal control weaknesses. In particular,
              we believe that HUD’s broad criteria for funding rehabilitation costs, its



              Page 26                                     GAO/RCED-97-169 Housing Preservation
                  B-276544




                  policy of limiting downward adjustments in owners’ equity when
                  additional repair needs are identified to only those cases in which owners
                  were previously aware of the needed repairs and intentionally did not
                  divulge them, its limited oversight of field office activities, and its process
                  for determining initial deposits to replacement reserves have not only
                  increased preservation costs, but are also insufficient to ensure that
                  federal funds are being used wisely, particularly in a budget-constrained
                  environment. Also, HUD’s lack of a uniform up-to-date system to monitor
                  owners’ compliance with preservation program requirements limits HUD’s
                  ability to ensure that owners are adhering to the long-term affordability
                  restrictions placed on their properties.

                  Furthermore, we believe that HUD’s use of waivers to provide funding to
                  properties that would have already been required to continue to provide
                  affordable housing, HUD’s policy allowing owners to retain balances in
                  replacement reserve accounts and then providing funding to purchasers to
                  replenish those reserves, and HUD’s use of the preservation program to
                  resolve enforcement actions do not represent the best use of the
                  program’s limited funds.


                  To strengthen HUD’s administration of the preservation program, we
Recommendations   recommend that the Secretary of Housing and Urban Development
                  undertake a systematic reassessment of the policies and internal controls
                  governing the preservation program to ensure that they provide adequate
                  assurance that the program’s funds are being spent prudently and in
                  accordance with legislative requirements. This assessment should focus, in
                  particular, on policies and controls governing (1) the types of
                  improvements eligible for rehabilitation funding and HUD’s reviews of
                  requests for such funding, (2) HUD’s assessment of the effects of increases
                  in rehabilitation funding on owners’ equity, (3) HUD’s determination of
                  funds needed for initial deposits to replacement reserves, (4) HUD’s
                  oversight of field office activities, and (5) HUD’s monitoring of the owners’
                  compliance with affordability restrictions placed on their properties.

                  In addition, we recommend that the Secretary no longer fund preservation
                  properties that are already bound by use agreements preserving the
                  properties’ affordability for extended periods or use preservation funds to
                  resolve enforcement actions against the owners of multifamily properties
                  and reconsider HUD’s policy allowing owners to retain replacement reserve
                  account balances when transferring properties to new owners.




                  Page 27                                      GAO/RCED-97-169 Housing Preservation
                     B-276544




                     We provided a draft of this report to HUD for its review and comment. In
Agency Comments      commenting on the report, HUD did not disagree with the facts we
and Our Evaluation   presented in the report. However, while HUD accepted our view that
                     internal controls and procedures for preservation program administration
                     need to be strengthened, the Department believed that our conclusions
                     unfairly characterized its overall administration of the preservation
                     program. HUD stated that it believes its overall administration of the
                     program has been effective and has resulted in the preservation of over
                     100,000 affordable housing units. HUD’s comments do not change our view
                     that this program is hampered by a number of factors—including frequent
                     program changes, fragmented program guidance, frequent staff changes,
                     and limited oversight—and that these factors collectively limit HUD’s ability
                     to ensure that the program is being managed effectively and efficiently,
                     that federal funds are being spent wisely, and that the program is being
                     carried out in accordance with program requirements.

                     In addition, HUD took exception to several aspects of our methodology and
                     analysis: the sample of properties that we reviewed and our analyses of
                     property values compared with preservation funding and replacement
                     reserve funding. HUD asserts that our report is misleading because the
                     properties in the sample were not randomly selected and thus overstates
                     average program costs. The sample we used was not intended to estimate
                     funding costs, but rather to respond to the report’s objectives. As the
                     Department acknowledges, our report clearly states that the 40 properties
                     reviewed were not randomly selected and cannot be used to draw
                     conclusions about all properties on HUD’s funding queue. Instead, we
                     focused our work on four field offices with substantial preservation
                     workloads and properties at those offices that were likely to receive
                     funding in fiscal year 1997 or 1998 (if the program is continued). The fact
                     that our results cannot be statistically projected to the universe of
                     preservation properties awaiting funding in no way invalidates our
                     findings that the incentives provided for a substantial number of
                     properties are high—in many cases far exceeding their preservation
                     values—and that improvements are needed in HUD’s controls over
                     preservation funding. We also note that in fiscal year 1997, the Department
                     has funded or plans to fund 32 of the 40 properties that we reviewed.

                     In addition, the Department states that preservation value is an
                     inappropriate basis of comparison with program cost because it is not
                     comparable to the value of a property after improvements funded by the
                     preservation program have been made. We continue to believe that a
                     property’s preservation value was the best available measure that could



                     Page 28                                    GAO/RCED-97-169 Housing Preservation
B-276544




have been used to respond to the House Conference Report’s request that
we compare the funding provided to preservation properties to the
properties’ values. Our report recognizes that preservation values do not
take into account any increases in property values that may result from
improvements funded under the preservation program; however, as HUD
officials have acknowledged, HUD does not require that an appraisal be
performed to determine property value after improvements have been
made. Furthermore, performing appraisals to determine a property’s value
after repairs and improvements are completed would have been difficult, if
not impossible, at the properties we analyzed because they have either
only recently received preservation funding or are still awaiting funding.

Regarding the analysis of replacement reserves, while the Department
states that it has taken action to prevent overfunding of replacement
reserves, it did not present any new information that alters the analysis in
our report. We continue to believe that the Department’s current
methodology for determining the amount of reserves to fund and its
oversight of the process for determining the reserves are insufficient to
prevent overfunding.

The two recommendations in our report address eight specific issues. HUD
did not take exception to the recommendations on five of the issues, but
disagreed with three. Specifically, HUD indicated that its policy allowing
owners selling their properties to keep the existing replacement reserve
balances reflects congressional intent. However, we believe the
information presented by HUD is insufficient to support this assertion. We
continue to believe that HUD should reassess this policy that provides
owners with replacement reserve balances that had been generally funded
by federal subsidies and then replenishes these amounts with preservation
funding provided to the new owners. In addition, the Department
indicated that its existing procedures are adequate to avoid overfunding
replacement reserves. As discussed above, we disagree and believe the
Department should reassess the policies and internal controls governing
replacement reserves.

Finally, the Department did not agree to reassess the effects of increases
in rehabilitation funding on owner’s equity. However, we believe that HUD
misstates its current policy covering equity adjustments (reductions) for
repairs that bring the property to marketable (“good”) condition and thus
does not address the issue raised in our report. Specifically, HUD’s
comments do not reflect the Department’s current policy, promulgated in
1995, which limits the deduction for repairs being funded at the



Page 29                                    GAO/RCED-97-169 Housing Preservation
B-276544




plan-of-action stage that exceed the repairs identified in the capital needs
assessments to only those instances where owners had intentionally
concealed required repairs during the capital needs assessment process.
As discussed in our report, this policy increases program costs to the
extent that additional repairs are funded but the equity payments to
owners are not correspondingly reduced. We continue to believe this
policy should be reassessed. (The complete text of HUD’s comments and
our evaluation of them are provided in appendix VIII.)


We conducted our review from November 1996 through June 1997 in
accordance with generally accepted government auditing standards. (See
app. VII for a discussion of our scope and methodology.) We are sending
copies of this report to appropriate congressional committees; the
Secretary of HUD; the Director, Office of Management and Budget; and
other interested parties. We will also make copies available to others on
request.

Please contact me at (202) 512-7631 if you or your staff have any questions.
Major contributors to this report are listed in appendix IX.




Judy A. England-Joseph
Director, Housing and
  Community Development Issues




Page 30                                    GAO/RCED-97-169 Housing Preservation
Page 31   GAO/RCED-97-169 Housing Preservation
Contents



Letter                                                               1


Appendix I                                                          34

Lessons From HUD’s
Preservation Program
That Are Applicable to
Its Portfolio
Reengineering
Program
Appendix II                                                         39

Preservation Funding
Provided for Sales and
Extensions
Appendix III                                                        42

Carve-Out Funding
Appendix IV                                                         44

Prepayment of
Insured Mortgages on
Preservation-Eligible
Projects
Appendix V                                                          48

Preservation Funding
by Category
Appendix VI                                                         50

Preservation Property
Values and Funding



                         Page 32   GAO/RCED-97-169 Housing Preservation
                        Contents




Appendix VII                                                                                    52

Objectives, Scope,
and Methodology
Appendix VIII                                                                                   55

Comments From the
Department of
Housing and Urban
Development and
GAO’s Evaluation
Appendix IX                                                                                     67

Major Contributors to
This Report
Tables                  Table 1: Preservation Funding and Property Values for 40                 8
                          Properties
                        Table 2: Repair Needs Identified in HUD’s Capital Needs                 11
                          Assessments and Funding for Repairs in Plans of Action
                          Approved by HUD for 40 Properties
                        Table 3: Hypothetical Example of Computation to Determine               15
                          Owner’s Equity Under HUD’s Preservation Program
                        Table II.1: Funding Provided to Owners and Purchasers Through           39
                          Capital Grants for Sales to Priority Purchasers
                        Table II.2: Funding Provided Through Capital Loans for                  41
                          Extensions
                        Table V.1: Approved Preservation Funding for 40 Properties              48
                        Table VI.1: Values and Preservation Funding for 40 Properties           50

                        Abbreviations

                        ELIHPA     Emergency Low-Income Housing and Preservation Act
                        FHA        Federal Housing Administration
                        GAO        General Accounting Office
                        HUD        Department of Housing and Urban Development
                        LIHPRHA    Low-Income Housing Preservation and Resident
                                        Homeownership Act
                        PCNA       preservation capital needs assessment
                        POA        plan of action


                        Page 33                                GAO/RCED-97-169 Housing Preservation
Appendix I

Lessons From HUD’s Preservation Program
That Are Applicable to Its Portfolio
Reengineering Program
                        While the purposes of the Department of Housing and Urban
                        Development’s (HUD) preservation and portfolio reengineering programs
                        differ, a number of important similarities exist in terms of their data needs,
                        administrative processes, and program structures. As such, a variety of
                        learning experiences pertaining to the operations of the preservation
                        program appear relevant to the effective development and management of
                        HUD’s portfolio reengineering program. These experiences include lessons
                        relating to controlling program costs, screening owners, maximizing
                        long-term housing affordability, ensuring sufficient time for evaluating and
                        negotiating reengineering agreements, and avoiding frequent program
                        changes.


HUD’s Portfolio         HUD initially proposed its portfolio reengineering program (then called
Reengineering Program   “mark-to-market”) in 1995 as a way to address the long-standing problems
                        it faces in managing its insured Section 8 multifamily loan portfolio of
                        about 8,600 properties. This portfolio of assets has been affected by three
                        basic problems—high Section 8 subsidy costs, high exposure to defaults
                        and losses to the Federal Housing Administration’s (FHA) insurance fund,
                        and the poor physical condition of some properties. HUD’s portfolio
                        reengineering proposal assumes that long-term cost savings can be
                        achieved by adjusting a property’s rents to market levels and writing down
                        its mortgage as needed to allow operations to continue at a sustainable
                        level. Initially, HUD also proposed to terminate FHA mortgage insurance on
                        the properties and replace project-based Section 8 subsidies with portable
                        tenant-based subsidies. HUD believed that these actions would help address
                        the problems affecting the portfolio by subjecting properties to the forces
                        and disciplines of the commercial market.

                        In April 1997, HUD and the Treasury Department jointly proposed the latest
                        version of portfolio reengineering—a legislative package that, for the first
                        time, would provide several forms of relief for owners with federal tax
                        obligations resulting from reengineering. The proposed legislation’s
                        principal provisions would authorize HUD to adjust above-market Section 8
                        contract rents to local market conditions; restructure existing debt to
                        projected cash flow levels while allowing owners to choose whether or not
                        to retain FHA insurance on restructured debt; substitute tenant-based rental
                        assistance, such as portable vouchers or certificates, for project-based
                        Section 8 assistance in soft market areas unless the properties are targeted
                        to elderly or disabled residents; and help ensure rehabilitation needs are
                        met through the use of project reserves, restructured financing, or grants
                        from HUD. The proposed tax changes would allow the amortization of tax



                        Page 34                                     GAO/RCED-97-169 Housing Preservation
                            Appendix I
                            Lessons From HUD’s Preservation Program
                            That Are Applicable to Its Portfolio
                            Reengineering Program




                            liabilities, resulting from debt forgiveness (in the case of mortgage write
                            downs) and capital gains on sales to nonprofit organizations, over periods
                            of up to 10 and 7 years respectively. With these tax changes, HUD hopes to
                            remove a deterrent to owner participation in the portfolio reengineering
                            effort and also make it easier for nonprofit organizations to purchase
                            properties.

                            HUD is also administering two portfolio reengineering demonstration
                            programs that were authorized in the appropriations acts for fiscal years
                            1996 and 1997. These programs were designed to test the portfolio
                            reengineering concept.1


Controlling Program Costs   Both the preservation program and portfolio reengineering rely on the
                            accumulation, analysis, and review of property-specific information, such
                            as market values, operating income and expenses, and deferred
                            maintenance and rehabilitation requirements. Inaccurate or unreliable
                            information on HUD properties can lead to increased program costs, hinder
                            HUD in its negotiating position with property owners, and delay specific
                            program agreements. To reduce program risks and accurately assess the
                            effects of portfolio reengineering on individual properties, housing experts
                            we spoke with emphasized the need for HUD to include systematic and
                            reliable approaches to determine property values, assess market income
                            potential, and determine the levels and the costs of required physical
                            improvements. In addition, they said that clear and reasonable
                            rehabilitation standards and procedures for overseeing the development of
                            rehabilitation assessments and cost estimates will also be important to
                            holding down overall rehabilitation expenses and minimizing federal costs
                            in the reengineering process. Moreover, to avoid the complications and
                            problems experienced in the preservation program, it will be important
                            that HUD has the capacity to administer and provide for the central
                            oversight and controls needed to minimize exposure to waste, fraud, and
                            abuse; adequate mechanisms to administer third-party technical service
                            contracts for reengineering functions, such as negotiating agreements and
                            executing due diligence work; and reliable information systems to track


                            1
                             The 1996 program was available to owners whose Section 8 contract rent levels exceeded the fair
                            market rents in the geographical area in which their properties were located. Through April 1997, two
                            restructuring agreements were finalized with as many as 10 still under consideration. The 1997
                            program is limited to owners having expiring Section 8 contracts with aggregate rents exceeding
                            120 percent of the fair market rents in their local market areas. For Section 8 contracts lapsing in 1997,
                            owners have the option of extending their contracts for 1 year at 120 percent of the fair market rents
                            or volunteering for portfolio reengineering. By mid-April 1997, 34 owners out of approximately 370
                            having properties with 1997 Section 8 expirations had notified HUD that they desired to participate in
                            the program.



                            Page 35                                                     GAO/RCED-97-169 Housing Preservation
                        Appendix I
                        Lessons From HUD’s Preservation Program
                        That Are Applicable to Its Portfolio
                        Reengineering Program




                        the progress and the status of reengineering proposals and transactions.
                        HUD multifamily officials noted that the complexity of administering about
                        700 preservation program transactions pales in comparison to the scope of
                        negotiating 5,000 or more potential portfolio reengineering deals.


Screening Owners        Numerous HUD-subsidized properties have deteriorated financially and
                        physically due to the mismanagement and neglect of owners. HUD’s
                        Secretary recently noted that serious problems continue to exist and,
                        accordingly, has proposed several new initiatives and legislation to help
                        the Department strengthen its efforts to identify problem owners; take
                        enforcement actions, such as criminal or civil actions; and prevent the
                        misuse of federal resources. Housing experts we interviewed agreed with
                        the Secretary’s assessment of its ownership problems and cited the need
                        for HUD to screen out problem owners as part of its portfolio reengineering
                        process.

                        Because of HUD’s past ownership problems, housing experts believed that
                        examining the background and management record of participating
                        owners and taking appropriate steps to resolve specific ownership
                        problems are important steps needed in the design of the portfolio
                        reengineering process. Some housing experts also believed that the
                        preservation program has provided effective models for transferring
                        properties from existing owners to resident ownership and
                        resident-endorsed nonprofit ownership. They believed that these models
                        could successfully be adapted to portfolio reengineering.2


Maintaining Long-Term   To ensure that subsidized multifamily properties are retained as affordable
Housing Affordability   housing for low-income households, HUD uses legally binding agreements
                        with owners that specify the length of time the properties must be
                        affordable and preserved for low-income households. Determining the
                        appropriate terms of long-term affordability use agreements is an issue in
                        both the preservation and the portfolio reengineering programs. For
                        example, while the title II preservation program established use
                        restrictions for the remaining life of a property’s financing, the length of
                        the restrictions was substantially increased under title VI to the remaining
                        useful life of a property.


                        2
                         Recent work by HUD’s Office of Inspector General has, however, led to some concerns about the
                        extent to which the targeting of funding to sales transactions to priority purchasers (i.e., resident and
                        nonprofit groups) increases the potential for the establishment of “sham” nonprofits. (Audit-Related
                        Memorandum 97-BO-114-0801, Oct. 24, 1996).



                        Page 36                                                     GAO/RCED-97-169 Housing Preservation
                            Appendix I
                            Lessons From HUD’s Preservation Program
                            That Are Applicable to Its Portfolio
                            Reengineering Program




                            Housing experts we spoke with believed that, for portfolio reengineering,
                            careful consideration also needs to be given to designing use agreements
                            that will help ensure the availability of affordable housing into the future.
                            They emphasized the importance of balancing the benefits of portfolio
                            reengineering with a continued commitment to preserving housing for
                            low-income households. According to those we interviewed, a number of
                            factors relevant to these determinations include establishing an acceptable
                            length of time that housing properties are to remain under federal use
                            restrictions, ensuring that properties remain available to tenant-based
                            Section 8 residents, adequately providing rent and relocation protection
                            for current residents, and ensuring that rents actually remain affordable to
                            the range of households being targeted.


Ensuring Sufficient Time    Interviews with housing experts, as well as our discussions with HUD staff
for Evaluating and          during this review, indicated that HUD’s field office staff were often under
Negotiating Reengineering   tight time frames and pressures to approve preservation applications.
                            Similar concerns about compressed processing time frames were
Agreements                  expressed about HUD’s portfolio reengineering program. For example,
                            during the fiscal year 1997 portfolio reengineering demonstration program,
                            180 days are allowed to perform the essential reengineering functions
                            dealing with the application, due diligence, and negotiation processes.
                            During this time frame, HUD and the owner must reach agreement on a
                            wide variety of issues ranging from rent levels, operating expense budgets,
                            and rehabilitation needs, to the most acceptable restructuring approach
                            and financing needs. Each of these steps could encompass a number of
                            time-consuming obstacles that HUD and its designated processors and/or
                            contractors may be under pressure to address and find difficult to control.
                            In general, housing experts believed that the 180-day time frame may not
                            allow HUD the flexibility to adequately address the broad range of issues
                            involved in the reengineering process. Accordingly, they believed that
                            HUD’s ability to administer the program within these time frames needs to
                            be closely monitored and the time frames potentially reexamined.


Avoiding Frequent           Other concerns that surfaced during our interviews, as well during our
Program Changes             review at HUD field offices, were the frequent program changes and
                            modifications to program operations and delivery mechanisms that were
                            characteristic of the preservation program. Housing experts believed that
                            deficiencies comparable to those that have plagued the preservation
                            program can be minimized in reengineering if key areas of concern are
                            resolved early and prior to implementation of a full-scale reengineering



                            Page 37                                    GAO/RCED-97-169 Housing Preservation
Appendix I
Lessons From HUD’s Preservation Program
That Are Applicable to Its Portfolio
Reengineering Program




effort. In general, they favored testing specific portfolio reengineering
design concepts and methods of program administration. They believed
that the demonstration effort, if properly administered, can be an
advantageous tool in providing vital information and data on the range of
questions and issues that will be assessed in reaching final agreement on
the appropriate approach to resolve the multifamily portfolio problems.




Page 38                                   GAO/RCED-97-169 Housing Preservation
Appendix II

Preservation Funding Provided for Sales and
Extensions

                                          Currently, preservation funding is provided through capital grants to
                                          owners and purchasers for sales to nonprofit owners who agree to extend
                                          affordability restrictions at the property. As shown in table II.1, these
                                          grants may cover owner equity take-outs, rehabilitation (i.e., repairs, a
                                          repair contingency, and replacement reserves), and transaction costs.1

Table II.1: Funding Provided to Owners
and Purchasers Through Capital
Grants for Sales to Priority Purchasers   Equity                                              Recipient: Owner selling property
                                                                                              Amount funded: The preservation value
                                                                                              minus outstanding mortgage debt.
                                                                                              Essentially, the preservation value
                                                                                              represents 100 percent of the “as is” fair
                                                                                              market value of the property based on its
                                                                                              highest and best use as an unsubsidized
                                                                                              market-rate residential property, reflecting
                                                                                              the deduction of all improvements, repair
                                                                                              and conversion costs needed to transition
                                                                                              the property from subsidized to
                                                                                              market-rate housing.a
                                          Repairs                                             Recipient: Purchaser
                                                                                              Amount funded: Repairs to restore
                                                                                              property to original condition and
                                                                                              improvements that extend the life of the
                                                                                              property or enhance the livability for
                                                                                              residents.

                                          Repair contingency                                  Recipient: Purchaser
                                                                                              Amount funded: 10 percent of repair and
                                                                                              improvement amount.
                                          Replacement reserves                                Recipient: Purchaser
                                                                                              Amount funded: 100 percent of capital
                                                                                              needs for 5 years and any shortfall for
                                                                                              major capital needs in years 6-10 that will
                                                                                              not be covered by required annual
                                                                                              replacement reserve deposits.

                                          Transaction costs                                   Recipient: Purchaser
                                                                                              Amount funded: Costs include expenses
                                                                                              incurred by purchasers associated with
                                                                                              the acquisition, loan closing, and
                                                                                              implementation of the plan of action. These
                                                                                              costs may include such items as
                                                                                              consultant fees, mortgagee retainer fees,
                                                                                              training fees, and relocation allowances.


                                                                                                                    (Table notes on next page)


                                          1
                                           Replacement reserves are escrow funds established to ensure that funds are available for needed
                                          repair and replacement costs.



                                          Page 39                                                  GAO/RCED-97-169 Housing Preservation
Appendix II
Preservation Funding Provided for Sales and
Extensions




Note: Priority purchasers are defined by HUD as resident councils, community-based nonprofit
organizations with the support of a majority of the tenants, and any nonprofit organization or state
or local agency that agrees to maintain low-income affordability. A priority purchaser may not be
a related party to the owner.
a
 For sales, the value is based on the property’s highest and best use, which may include
something besides multifamily rental housing, such as a condominium. None of the 40 properties
we examined has a highest and best use for something other than a residential market-rate rental
property. In general, the preservation value agreed to represents either (1) the owner’s appraisal
value or 110 percent of HUD’s appraisal if lower than the owner’s, (2) an amount negotiated
between HUD and the property owner based on an appraisal prepared by HUD, or (3) a value
derived from a third, independent appraisal.



Owners who retain the properties and agree to extend the affordability
restrictions receive fewer incentives than the incentives provided to
owners and purchasers as part of preservation sales transactions (see
table II.2). Rather than receiving a grant, extension owners receive a
nonamortizing, noninterest-bearing loan that is due and payable when the
mortgage is paid off, although the Department may defer payment of the
loan under certain conditions. In addition, the loan does not cover
100 percent of the equity, as is available for sales. Instead, the maximum
equity amount available is 65 percent of equity.2 Also, with extensions, the
owner must fund any amounts needed to meet HUD’s reserve requirements.
Finally, owner transaction costs are not funded for extensions, whereas
with sales, new owners may receive funding to cover transaction costs.




2
 The maximum capital loan is the lower of 65 percent of the owner’s equity plus the total approved
costs for repairs or rehabilitation or six times the most recently published annual existing fair market
rent using the appropriate apartment sizes and mix in the eligible project.



Page 40                                                    GAO/RCED-97-169 Housing Preservation
                                       Appendix II
                                       Preservation Funding Provided for Sales and
                                       Extensions




Table II.2: Funding Provided Through
Capital Loans for Extensions
                                       Equity                                               Recipient: Owner
                                                                                            Amount funded: Up to 65 percent of the
                                                                                            preservation value minus outstanding
                                                                                            mortgage debt. Essentially, the
                                                                                            preservation value represents the “as is”
                                                                                            fair market value of the property based on
                                                                                            its highest and best use as an
                                                                                            unsubsidized market-rate residential
                                                                                            property, reflecting the deduction of all
                                                                                            improvements, repair and conversion
                                                                                            costs needed to transition the property
                                                                                            from subsidized to market-rate housing.
                                       Repairs                                              Recipient: Owner
                                                                                            Amount funded: Repairs to restore
                                                                                            property to original condition and
                                                                                            improvements that extend the life of the
                                                                                            property or enhance the livability to
                                                                                            residents.

                                       Repair contingency                                   Recipient: Owner
                                                                                            Amount funded: 10 percent of repair and
                                                                                            improvement amount.
                                       Note: With extensions, the current owner retains the proprerty and agrees to retain affordability
                                       restrictions.



                                       In addition to the funding provided by the preservation program and the
                                       balances in replacement reserve accounts, owners selling their properties
                                       may also receive the balances in residual receipt accounts. Purchasers
                                       may be authorized to use excess rental income for specified purposes.
                                       Also, preservation properties would continue to receive project-based
                                       rental assistance from HUD for units covered by Section 8 rental assistance
                                       contracts. HUD estimates that, on average, about 40-45 percent of the units
                                       in preservation projects are covered by such contracts. Finally, most
                                       preservation properties would also continue to receive mortgage interest
                                       subsidies from HUD that reduce interest payments to as little as 1 percent.




                                       Page 41                                                   GAO/RCED-97-169 Housing Preservation
Appendix III

Carve-Out Funding


                   The fiscal year 1997 Department of Veterans Affairs, HUD, and Independent
                   Agencies appropriations act (P.L. 104-204) requires HUD to set aside
                   $75 million of the $350 million in preservation program funding for three
                   special categories of properties, commonly referred to by HUD and others
                   as “carve-out” projects. Essentially, this provision gave properties falling
                   within these categories priority over other properties that were awaiting
                   preservation funding. The three carve-out categories are as follows:

               •   Properties that are subject to a repayment or settlement agreement that
                   was executed between the owner and the Secretary of HUD before
                   September 1, 1995.
               •   Properties whose submissions for funding were delayed because of their
                   location in an area that was designated as a federal disaster area in a
                   Presidential Disaster Declaration.
               •   Properties for which processing was suspended, deferred, or interrupted
                   for a period of 12 months or more because of differing interpretations, by
                   the Secretary of HUD and an owner or by the Secretary and a state or local
                   rent regulatory agency, concerning the timing of filing eligibility or the
                   effect of a presumptively applicable state or local rent control law or
                   regulation on the determination of preservation value under section 213 of
                   the Low Income Housing Preservation and Resident Homeownership Act
                   (LIHPHRA) if the owner of such project filed a notice of intent to extend
                   the low-income affordability restrictions of the housing or transfer it to a
                   qualified purchaser who would extend such restrictions, on or before
                   November 1, 1993.

                   While the legislation did not specify how the $75 million was to be
                   allocated among the three categories, HUD decided to divide the $75 million
                   equally among them. This resulted in 21 properties being funded as
                   carve-outs, including 6 in Connecticut, 1 in Massachusetts, 9 in California,
                   and 5 in New York.

                   The first carve-out category was used to provide preservation funding to
                   seven properties in Connecticut and Massachusetts. These seven
                   properties were owned by a person who had entered into an agreement
                   with HUD in 1994 to settle allegations in a 1993 HUD Office of Inspector
                   General report that the owner had violated several of the Department’s
                   regulatory agreements. More specifically, the Inspector General
                   determined that the owner had violated HUD’s regulatory agreements by
                   diverting funds from the properties for personal and other business use.
                   Specific violations included diverting $5.2 million, not forwarding
                   $1.1 million of section 236 excess income to the Department, and not



                   Page 42                                    GAO/RCED-97-169 Housing Preservation
Appendix III
Carve-Out Funding




timely forwarding $383,000 of Housing and Urban-Rural Recovery Act rent
refunds to tenants. Additionally, the Inspector General found that the
owner could not support $232,100 of accounting services and did not
maintain the project’s accounting systems entirely in accordance with
HUD’s requirements. The Inspector General’s report also questioned the
independence of a certified public accountant who performed project
audits.

After the Inspector General identified these problems, the owner agreed
with the Secretary of HUD to an $11.1 million settlement that included
penalties. As part of the settlement agreement, the Department allowed
the owner to apply for preservation funding on 34 of his projects and to
use his equity to help defray the penalty costs.

In 1995, HUD provided about $26.7 million in preservation funding for eight
of this owner’s projects, of which $22.2 million was for owner equity. The
$25 million the owner received in April 1997 included about $18 million for
equity. Thus, while the owner’s violations and penalties amounted to
$11.1 million, the owner received a total of about about $51.7 million in
preservation funding.1 All of the properties were funded as extensions
under Title II of the preservation program, thus allowing the owner to
continue ownership of the properties.2

Under the second carve-out category, HUD provided about $25 million in
funding to nine California properties whose applications were processed
by HUD’s Los Angeles field office. HUD determined that the submissions on
these properties had been delayed by the 1994 earthquake in California.

Under the third carve-out category, HUD provided about $25 million in
funding to five properties. Each of these properties’ applications was
handled by HUD’s New York field office.




1
  Reflecting program changes discussed in the report, the funding was provided with FHA-insured
Section 241(f) loans in 1995 and with nonamortizing, noninterest-bearing loans in 1997 that are due
and payable when the mortgages are paid off (although the Department may defer payment of the loan
under certain conditions).
2
 In addition to the properties already funded, the owner has nine more properties awaiting
preservation funding. We also noted that at one of the other properties we examined, Mishawum Park
Apartments in Charlestown, Massachusetts, the owner had entered into an agreement with HUD to
settle alleged violations identified by HUD’s Inspector General. The Inspector General determined that
the owner had diverted funds and charged higher than normal legal fees for work at the property. The
preservation plan of action HUD has approved would provide about $29.7 million to that property.



Page 43                                                  GAO/RCED-97-169 Housing Preservation
Appendix IV

Prepayment of Insured Mortgages on
Preservation-Eligible Projects

                        In the fiscal year 1996 HUD appropriations act (P.L. 104-134), the Congress
                        restored the right of owners to prepay their mortgages and to terminate
                        affordability restrictions at their properties provided the owners agreed
                        not to raise the rents for 60 days. This legislation also provided certain
                        protections for tenants living in properties whose owners decide to
                        prepay. The fiscal year 1997 HUD appropriations act (P.L. 104-204) also
                        authorized protections for tenants living in properties whose owners
                        prepay, although the specific protections available to certain classes of
                        tenants were modified. While owners are no longer required to request HUD
                        approval prior to prepayment, HUD has emphasized that they must notify
                        the Department if they intend to prepay so that steps may be taken to
                        provide affected tenants with the statutory protections.

                        This appendix provides information about the prepayments that have
                        occurred since the 1996 legislation, the protections available to affected
                        tenants, and outstanding issues related to the potential impacts of
                        prepayments on the tenants. Because prepayment rights were restored
                        relatively recently, it is too soon to tell what the effects on tenants will
                        actually be.


Extent of Prepayments   According to data from HUD’s preservation office, as of March 5, 1997,
                        owners had filed notices of intent to prepay the mortgages on 247 projects
                        with about 23,000 units; of these, 131 notices were filed for prepayment in
                        fiscal year 1996 and 116 were filed for prepayment in fiscal year 1997.

                        These notices covered projects located in 37 states.1 About 23 percent, or
                        58 notices, were filed for projects located in California. However, the
                        majority of states have had no more than 5 notices of intent filed, and only
                        four (Oregon, New Mexico, Washington, and California) have had more
                        than 15 notices.

                        Of the 247 notices filed at the time of our review, owners had actually
                        prepaid the mortgages on 109 of the projects with about 9,800 units. There
                        were at least one prepayment in each of 35 states and no more than five
                        prepayments in most states. There were 12 and 10 prepayments in
                        California and Maryland, respectively. In March, HUD’s preservation office
                        initiated a survey of owners to estimate the volume of prepayments likely
                        to occur in the remainder of fiscal year 1997.



                        1
                         Data on the extent of prepayments by state include Washington, D. C.



                        Page 44                                                  GAO/RCED-97-169 Housing Preservation
                     Appendix IV
                     Prepayment of Insured Mortgages on
                     Preservation-Eligible Projects




Tenant Protections   Several pieces of legislation have set forth provisions to help protect
                     tenants from being displaced when property owners prepay. Although the
                     Low Income Housing Preservation and Resident Homeownership Act
                     (LIHPRHA) of 1990 (P.L. 101-625) placed substantial restrictions on owners’
                     ability to prepay the mortgages on their properties, the legislation also
                     included protections for tenants in case an owner did prepay. Depending
                     on the type of tenant, LIHPRHA generally allows eligible tenants to receive
                     tenant-based Section 8 assistance or to remain in their current unit for 3
                     years with no rent increases (except for increases necessary for increased
                     operating costs). These protections are generally available to tenants who
                     are not already receiving project-based or tenant-based Section 8
                     assistance at the time of prepayment. According to HUD guidance, tenants
                     who are already receiving assistance at the time of prepayment continue
                     to receive the assistance under its existing terms. The amount that they
                     contribute to rent is not affected, and the assistance remains in place until
                     it expires or is terminated under regular program rules.

                     The fiscal year 1996 HUD appropriations legislation restored the right of
                     owners to prepay the mortgages on preservation-eligible housing, so long
                     as they agreed not to raise the rents for 60 days after prepayment.2 The law
                     also further defined some of the tenant protections authorized by LIHPRHA.
                     For example, it more specifically identified those eligible for tenant-based
                     Section 8 assistance as unassisted low-income tenants residing in the
                     housing on the date of prepayment whose rent, as a result of an increase
                     occurring no later than 1 year after the date of prepayment, exceeds
                     30 percent of adjusted income.3 The law also added that these tenants may
                     not pay less for rent than they were paying at the time of mortgage
                     prepayment. Under the statute, any tenant receiving this tenant-based
                     assistance may elect to (1) remain in the housing unit and if the new rent
                     exceeds the normal Section 8 limit, the new rent will be considered the
                     applicable limit,4 or (2) move from the housing and the rent will be subject
                     to the normal Section 8 limits. Because this special Section 8 assistance
                     will subsidize rents higher than the normal Section 8 limits so that tenants


                     2
                      For the purposes of the preservation program, the terms prepayment and termination of mortgage
                     insurance are used interchangeably. Whenever either of the terms is used, it should be taken to mean
                     both.
                     3
                      HUD guidance clarifies that the term low-income tenants includes very low-income tenants.
                     4
                      The new rent will be considered the applicable standard if the administering public housing authority
                     deems it reasonable. If the rent for the unit is not reasonable, as determined by the public housing
                     authority, the family may either move and receive the Section 8 tenant-based assistance or elect to stay
                     in the unit, receive the tenant-based assistance, and pay the difference between the rental amount that
                     the public housing authority deems appropriate and the actual gross rent for the unit.



                     Page 45                                                   GAO/RCED-97-169 Housing Preservation
                         Appendix IV
                         Prepayment of Insured Mortgages on
                         Preservation-Eligible Projects




                         can remain in their current units if they wish, it is referred to as “sticky”
                         Section 8 assistance.

                         The fiscal year 1997 HUD appropriations legislation continued the right of
                         owners to prepay, with the 60-day restriction on rent increases, but
                         somewhat modified the protections available to tenants affected by a
                         prepayment. Specifically, the law expanded the category of tenants eligible
                         to receive the “sticky” Section 8 assistance to include moderate-income
                         tenants who are elderly, disabled, or residing in a low-vacancy area.
                         Before the 1997 legislation, these classes of tenants were eligible for the
                         3-year continued occupancy protection of LIHPRHA. However, under the
                         1997 statute, the “sticky” tenant-based Section 8 assistance is given in lieu
                         of the protections (relocation assistance, 3-year continued occupancy, and
                         required acceptance of Section 8 tenants) provided under LIHPRHA.
                         According to HUD guidance, during fiscal year 1997, as long as sufficient
                         appropriations are available to provide tenant-based assistance, the
                         LIHPRHA protections are not applicable. For projects that had filed notices
                         of intent to prepay as of March 5, 1997, HUD estimates that the 1-year cost
                         of “sticky” tenant-based Section 8 assistance provided under the fiscal year
                         1996 and fiscal year 1997 statutes will be about $24 million. For projects
                         that had actually prepaid as of the March date, the 1-year cost of
                         tenant-based assistance is expected to be about $14 million.

                         HUD issued several memorandums in 1996 and 1997, referred to as
                         Preservation Letters, that provide guidance on implementing the
                         provisions of the preservation program, including the protections for
                         tenants affected by mortgage prepayment. For instance, according to the
                         Preservation Letters, owners who prepay must provide HUD with timely
                         information necessary to ensure that those tenants who could be
                         displaced by a prepayment receive the appropriate assistance.5 In addition,
                         the guidance for fiscal year 1996 prepayments clarifies that the 3-year
                         occupancy protection of LIHPRHA is also available to unassisted low- and
                         very low-income tenants whose rents are not raised during the first year
                         following prepayment and who live in a low-vacancy area or are special
                         needs tenants.


Potential Impacts of     It is not yet clear how restoring prepayment rights will affect tenants.
Prepayments on Tenants   While HUD does collect information from owners of properties that prepay
                         in order to determine the amount of Section 8 assistance that tenants will

                         5
                          The owner of a project that currently has Section 8 assistance in 100 percent of its units is exempted
                         from the reporting requirements.



                         Page 46                                                    GAO/RCED-97-169 Housing Preservation
Appendix IV
Prepayment of Insured Mortgages on
Preservation-Eligible Projects




require, it has not established a system to track what happens to tenants
following prepayment. For purposes of estimating the amount of Section 8
assistance required, the preservation office assumes that all tenants who
receive “sticky” Section 8 assistance will choose to remain in the project,
but they do not collect data on the extent to which this assumption is
actually true, nor the extent to which tenants choosing to relocate have
been able to find suitable, affordable housing with their tenant-based
Section 8 assistance.

One issue that could have a substantial effect on the extent to which
prepayment leads to tenant displacement is how long the more costly
“sticky” Section 8 assistance that tenants receive will be renewed at its
enhanced level. If the assistance reverts to normal Section 8 assistance
rules, tenants in projects with rents above the normal limit would face a
choice of relocating and obtaining housing within the regular Section 8
limits or remaining in their current residences and paying the difference
between the project rent and the normal Section 8 limit. Moderate-income
tenants who might not qualify for Section 8 assistance under the regular
Section 8 rules could be required to pay their unit’s full rent amount or
relocate to housing that they can afford without rental assistance. HUD
officials told us that HUD’s fiscal year 1998 budget request proposes the
renewal of “sticky” Section 8 assistance at its enhanced level.

Another issue related to the impact of prepayments on tenants is the
possibility that owners might prepay the mortgages on their projects but
wait to raise rents until more than 1 year after prepayment. As discussed
above, tenants are only eligible for “sticky” Section 8 assistance if their
rent increases within 1 year after prepayment, causing their rent payment
to exceed 30 percent of adjusted income. Under fiscal year 1996 rules, low-
and very low-income unassisted tenants whose rent does not increase
within 1 year after prepayment could still receive the 3-year continued
occupancy protection of LIHPRHA if they live in a low-vacancy area or are
special needs tenants.6 However, under the fiscal year 1997 appropriations
act, unassisted low- and very low-income tenants whose rent does not
increase until after the first year could be displaced because the 3-year
continued occupancy protection is not available and they were ineligible
for “sticky” Section 8 assistance at the time of prepayment.




6
 HUD guidance for the fiscal year 1996 rules defines special needs tenants as those who are elderly or
disabled and large families of five or more persons requiring units with three or more bedrooms.



Page 47                                                   GAO/RCED-97-169 Housing Preservation
Appendix V

Preservation Funding by Category


                                          This appendix provides a table that lists the approved preservation
                                          funding by category (equity, rehabilitation, and transaction costs) for the
                                          40 properties that we reviewed. The rehabilitation category includes
                                          funding for repairs (including improvements), a repair contingency, and
                                          replacement reserves. The approved funding in this table does not reflect
                                          the fiscal year 1997 funding caps because, as of May 1997, it was not clear
                                          how the cuts for a number of properties would be allocated among these
                                          categories.


Table V.1: Approved Preservation Funding for 40 Properties
                                                                                   Category
                                                                                                      Actual or     Per unit
                                          Total                                    Transaction       estimated      funding
Property name                             units Owner’s equity    Rehabilitation         costs         funding         cost
Title VI—Sales
Bayview Towers                              200      $7,743,847      $3,774,017     $1,335,571     $12,853,435       $64,267
Jerome Estates                              176       3,214,000       1,901,008        334,372       5,449,380        30,962
Tariffville Apartments                       81       1,890,639       2,427,001        276,168       4,593,808        56,714
808 Memorial Drive                          301       6,722,297       7,684,287      1,262,808      15,669,392        52,058
Alewife Parkway Apartments                  274       7,126,312       6,929,151        818,368      14,873,831        54,284
ETC & Associates                             71       1,394,769       1,665,916        469,950       3,530,635        49,727
Commonwealth Apartments                     118       1,684,670       6,329,760        935,925       8,950,355        75,850
Glenville Apartments                        117       1,426,698       6,858,878        953,510       9,239,086        78,967
Warren Avenue Apartments                     30       1,178,757       1,775,642        652,313       3,606,712       120,224
Chauncy House                                87       1,948,949       3,581,861        768,274       6,299,084        72,403
Milliken Apartments                         201       2,410,771       2,044,195         67,912       4,522,878        22,502
Spring Meadow Apartments                    270         718,859      16,013,411      1,573,781      18,306,051        67,800
Greenfield Gardens                          201       2,641,596       6,511,954        792,371       9,945,921        49,482
Mishawum Park Apartments                    337       6,403,590      19,573,319      3,782,924      29,759,833        88,308
Waukegan Terrace                            140       1,631,538       3,072,120        593,398       5,297,056        37,836
Cambridge Manor                             312       3,762,047       4,993,822        338,306       9,094,175        29,148
Kenmore Plaza                               324       7,428,629       5,572,626        426,408      13,427,663        41,443
Villa St. Andrews                            14         372,171       1,124,440        148,760       1,645,371       117,527
39th Street Manor                            46         897,009         516,650        105,662       1,519,321        33,029
Mountclef Apartments                         18         761,485         916,206        120,240       1,797,931        99,885
Haven 501                                    50         578,124         387,825        176,295       1,142,244        22,845
Haven 502                                   105         858,948         867,905        218,755       1,945,608        18,530
Casa Development                            158         836,102       8,053,315        177,829       9,067,246        57,388
Manhattan Manor                              26         612,452         506,140        183,090       1,301,682        50,065
Holiday 101-B                               117       1,783,600       5,617,180        969,200       8,369,980        71,538
                                                                                                                  (continued)


                                          Page 48                                     GAO/RCED-97-169 Housing Preservation
                                       Appendix V
                                       Preservation Funding by Category




                                                                                          Category
                                                                                                                 Actual or      Per unit
                                       Total                                              Transaction           estimated       funding
Property name                          units Owner’s equity         Rehabilitation              costs             funding          cost
Los Arboles                               43          2,101,866           4,089,560            676,540           6,867,966      159,720
Granada Gardens                          169          6,924,451           1,695,100            331,510           8,951,061       52,965
Total title VI sales                   3,986       $75,054,176       $124,483,289         $18,490,240        $218,027,705
Average title VI sales per unit                         $18,829             $31,230              $4,639                         $54,698
Title VI—Extensions
La Brea Gardens Apartments               185        $1,487,013            $444,658                     0        $1,931,671      $10,441
Hollywood Knickerbocker                  282          2,607,540             323,355                    0         2,930,895       10,393
Green Hotel Apartments                   138          2,902,258             233,640                    0         3,135,898       22,724
Total title VI extensions                605        $6,996,811          $1,001,653                     0        $7,998,464
Average title VI extensions per unit                    $11,565              $1,656                    0                        $13,221


Total Title VI                         4,591       $82,050,987       $125,484,942         $18,490,240        $226,026,169
Average title VI per unit                               $17,872             $27,333              $4,027                         $49,232


Title II—Extensions
Sunset Apartments                        231        $3,056,171            $173,197                     0        $3,229,368      $13,980
Brookside Gardens                         32            653,624              66,908                    0           720,532       22,517
Kennedy Building                         115          2,150,730             177,933                    0         2,328,663       20,249
Crestwood Park II Apartments             150          2,878,710             272,998                    0         3,151,708       21,011
Summerhill Apartments                    104          1,891,061             265,438                    0         2,156,499       20,736
Woodbury Apartments                      188          3,541,218              85,673                    0         3,626,891       19,292
Willowcrest Apartments                   151          3,273,247             339,853                    0         3,613,100       23,928
Saybrook Apartments                       30            524,688              57,712                    0           582,400       19,413
Stoneycrest Apartments                    49            952,116             110,721                    0         1,062,837       21,691
Lincoln Village                         1213          4,850,141           4,936,198                    0         9,786,339           8,068


Total title II extensions              2,263       $23,771,706          $6,486,631                     0      $30,258,337
Average title II extensions per unit                    $10,505              $2,866                    0                        $13,371


Grand total                            6,854      $105,822,693       $131,971,573         $18,490,240        $256,284,506
Average per unit                                        $15,440             $19,255              $2,698                         $37,392

                                       Note: rehabilitation includes repairs and improvements, repair contingency, and replacement
                                       reserves.




                                       Page 49                                                GAO/RCED-97-169 Housing Preservation
Appendix VI

Preservation Property Values and Funding


                                          This appendix provides a table that lists the property values and
                                          preservation funding for the 40 properties that we reviewed. Property
                                          value represents the value of the property that HUD agreed to in
                                          determining the amount of equity to which the property’s owner would be
                                          entitled—essentially, the “as is” fair market value based on highest and
                                          best use as unsubsidized market-rate residential properties, reflecting the
                                          deduction of all improvements as well as the repair and the conversion
                                          costs to transition the property from subsidized to market-rate housing.
                                          Preservation funding represents the amounts in approved plans of action,
                                          adjusted for the caps mandated by the fiscal year 1997 appropriations law,
                                          except for the two cases where HUD had waiver requests pending as of
                                          May 15, 1997.1


Table VI.1: Values and Preservation Funding for 40 Properties
                                                                                                                    Ratio of
                                                                             Actual or     Difference            funding to      Per unit
                                           Total                            estimated (funding minus                  value      funding
Property name                              units    Property value            funding           value)         (percentage)        costs
Title VI—Sales
Bayview Towers                                200     $12,380,000         $12,853,435              $473,435             104       $64,267
Jerome Estates                                176        5,595,813          5,449,380              –146,433              97        30,962
Tariffville Apartments                         81        2,951,548          4,246,956              1,295,408            144        52,432
808 Memorial Drive                            301       23,500,000         14,613,984             –8,886,016             62        48,551
Alewife Parkway Apartments                    274       12,300,000         14,873,831              2,573,831            121        54,284
ETC & Associates                               71        2,324,000          3,530,635              1,206,635            152        49,727
Commonwealth Apartments                       118        3,784,000          8,023,344              4,239,344            212        67,994
Glenville Apartments                          117        2,904,000          7,257,936              4,353,936            250        62,034
Warren Avenue Apartments                       30        1,540,000          3,606,712              2,066,712            234       120,224
Chauncy House                                  87        3,550,000          6,299,084              2,749,084            177        72,403
Milliken Apartments                           201        5,300,000          4,522,878              –777,122              85        22,502
Spring Meadow Apartments                      270        4,840,000         15,812,496             10,972,496            327        58,565
Greenfield Gardens                            201        5,820,119          9,945,921              4,125,802            171        49,482
Mishawum Park Apartments                      337       13,821,500         27,488,748             13,667,248            199        81,569
Waukegan Terrace                              140        3,140,000          5,297,056              2,157,056            169        37,836
Cambridge Manor                               312        7,457,800          9,094,175              1,636,375            122        29,148
Kenmore Plaza                                 324       12,248,500         13,427,663              1,179,163            110        41,443
Villa St. Andrews                              14          582,835            914,088               331,253             157        65,292
39th Street Manor                              46        1,403,495          1,519,321               115,826             108        33,029
Mountclef Apartments                           18        1,150,000          1,298,808               148,808             113        72,156
                                                                                                                               (continued)
                                          1
                                           HUD disapproved the waiver requests on May 30, 1997.



                                          Page 50                                                  GAO/RCED-97-169 Housing Preservation
                                       Appendix VI
                                       Preservation Property Values and Funding




                                                                                                       Ratio of
                                                                      Actual or     Difference      funding to    Per unit
                                       Total                         estimated (funding minus            value    funding
Property name                          units     Property value        funding           value)   (percentage)      costs
Haven 501                                 50          1,039,500       1,142,244        102,744             110     22,845
Haven 502                                105          2,027,725       1,945,608        –82,117              96     18,530
Casa Development                         158          2,359,191       8,090,544      5,731,353             343     51,206
Manhattan Manor                           26           932,800        1,301,682        368,882             140     50,065
Holiday 101-B                            117          2,812,000       5,965,932      3,153,932             212     50,991
Los Arboles                               43          2,897,335       3,181,248        283,913             110     73,983
Granada Gardens                          169          9,364,000       8,951,061       –412,939              96     52,965
Total title VI sales                   3,986      $148,026,161    $200,654,770     $52,628,609             136
Average title VI sales per unit                        $37,137                         $13,203                    $50,340
Title VI—Extensions
La Brea Gardens Apartments               185        $4,512,000      $1,931,671      –2,580,329              43    $10,441
Hollywood Knickerbocker                  282          7,864,800       2,930,895     –4,933,905              37     10,393
Green Hotel Apartments                   138          6,406,834       3,135,898     –3,270,936              49     22,724
Total title VI extensions                605       $18,783,634      $7,998,464    –$10,785,170              43
Average title VI extensions per unit                   $31,047                        –$17,827                    $13,221


Total title VI                         4,591      $166,809,795    $208,653,234     $41,843,439             125
Average title VI per unit                              $36,334                          $9,114                    $45,448


Title II—Extensions
Sunset Apartments                        231        $7,567,447      $3,229,368     –$4,338,079              43    $13,980
Brookside Gardens                         32          1,107,538        720,532        –387,006              65     22,517
Kennedy Building                         115          3,509,726       2,328,663     –1,181,063              66     20,249
Crestwood Park II Apartments             150          5,016,199       3,151,708     –1,864,491              63     21,011
Summerhill Apartments                    104          3,582,473       2,156,499     –1,425,974              60     20,736
Woodbury Apartments                      188          7,035,941       3,626,891     –3,409,050              52     19,292
Willowcrest Apartments                   151          5,745,127       3,613,100     –2,132,027              63     23,928
Saybrook Apartments                       30          1,041,604        582,400        –459,204              56     19,413
Stoneycrest Apartments                    49          1,840,327       1,062,837       –777,490              58     21,691
Lincoln Village                        1,213        36,937,804        9,786,339    –27,151,465              26      8,068
Total title II extensions              2,263       $73,384,186     $30,258,337    –$43,125,849              41
Average title II extensions per unit                   $32,428                        –$19,057                    $13,371


Grand total                            6,854      $240,193,981    $238,911,571     –$1,282,410
Average per unit                                       $35,044                           –$187                    $34,857




                                       Page 51                                        GAO/RCED-97-169 Housing Preservation
Appendix VII

Objectives, Scope, and Methodology


               The House Conference Report 104-812 accompanying the fiscal year 1997
               appropriations act (P.L. 104-204) included a request for a GAO study on the
               preservation program to assist the Congress in making a determination of
               whether the program is the most cost-effective way to provide affordable
               housing opportunities to low-income families. As requested, we reviewed
               (1) the funding provided to preservation properties as compared with their
               values, (2) the levels of rehabilitation grants provided to properties
               compared with their physical needs, and (3) the administrative and other
               problems that have arisen under the program. In addition, we identified
               lessons from the preservation program that can be applied to portfolio
               reengineering, a program currently being tested on a limited scale
               designed to address long-standing problems affecting FHA’s insured
               portfolio of multifamily properties.

               To respond to the first two objectives, we obtained and reviewed
               information on 40 properties at four HUD field offices located in Boston,
               Massachusetts; Chicago, Illinois; Hartford, Connecticut; and Los Angeles,
               California. Each of these offices had a substantial preservation workload
               in terms of the cases and/or dollars for which it was responsible. The
               properties we selected for review at each field office were those that were
               the highest on HUD’s November 1996 “funding queue” —the list of
               properties with approved incentives that were awaiting funding as of that
               time. As of June 1997, 32 of the 40 cases we reviewed have either been
               funded or are scheduled for funding in fiscal year 1997. The properties we
               reviewed accounted for about 19 percent of the funding for all sales to
               priority purchasers and carve-outs on HUD’s November 1996 funding queue.

               To provide information on the funding provided to preservation properties
               as compared with their values, we used the HUD-approved preservation
               values, which are generally based on independent appraisals and physical
               inspections of the properties. We did not conduct our own independent
               assessments of property values for the 40 properties we examined.
               Essentially, the values we used represent “as is” fair market values of the
               properties based on their highest and best use as unsubsidized market-rate
               rental properties, reflecting the deduction of all improvements, repair and
               conversion costs needed to transition from subsidized to market-rate
               housing. It is important to note that these values do not take into account
               increases in property values that may result from improvements funded
               under the preservation program.

               We compared the HUD-approved values with the HUD-approved financial
               incentives. The financial incentives were taken from HUD’s final approved



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Objectives, Scope, and Methodology




funding queue for fiscal year 1997, dated March 21, 1997, for the 24
properties HUD identified for funding at that time and from HUD’s November
20, 1996, funding queue for the other 16 properties that had not yet been
identified for funding as of March 21, 1997. We lowered the approved
financial incentives on these listings, however, for the cases in which the
incentives shown on the funding queue exceeded the fiscal year 1997
funding caps, except in the two cases for which HUD had waivers pending
as of May 15, 1997.

To provide information on the levels of rehabilitation grants provided to
properties compared with their physical needs, we reviewed HUD’s files for
the 40 cases and obtained the physical needs identified in the preservation
capital needs assessments performed by HUD’s contractors. We compared
the repair needs identified in the preservation capital needs assessments
with the amounts for repairs and the repair contingency in HUD-approved
plans of action for the properties. As discussed in the report, the
rehabilitation costs in the approved plans of action do not fully reflect the
impact of the fiscal year 1997 funding caps. As of May 1997 it was not clear
how the funding cuts needed at some properties to meet the fiscal year
1997 funding caps would be allocated among equity, rehabilitation, and
transaction costs. We also interviewed HUD officials in headquarters and in
the field and reviewed HUD’s regulations and guidance to determine the
basis for the approval of rehabilitation requests.

To determine what administrative and other problems have arisen under
the preservation program, we obtained information from our file reviews
of the 40 cases we examined. We did not attempt to assess the extent to
which each of the 40 transactions we examined was processed in
accordance with preservation program requirements. We also interviewed
HUD officials at headquarters and six field offices (located in Boston,
Chicago, Hartford, Los Angeles, Jacksonville, and Seattle) and industry
officials including representatives from the National Housing Trust, the
Institute for Responsible Housing Preservation, and the Mid-City Financial
Corporation. In addition, we reviewed past HUD Inspector General reports
and held discussions with Office of the Inspector General officials to
identify problems associated with the program and the status of any
recommendations to correct them.

To identify lessons learned from the preservation program that can be
applied in the development of HUD’s portfolio reengineering program, we
obtained comments and opinions from a wide range of officials having
experience with HUD’s multifamily housing programs. These included



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Appendix VII
Objectives, Scope, and Methodology




officials in HUD’s Office of Multifamily Housing Programs at headquarters
and representatives from the four HUD field offices where we performed
our work. We also interviewed a range of representatives from the private
and public sector who were familiar with affordable housing programs.
This included officials from the National Housing Trust; the National
Housing Conference; the National Housing Law Project; the National Low
Income Housing Coalition; the National Housing Partnership;
Recapitalization Advisors Inc., Boston, Massachusetts; On-Site Insight,
Boston, Massachusetts; the Community Economic Development
Assistance Corporation, Boston, Massachusetts; the California Housing
Partnership Corporation, Oakland, California; Emily Achtenberg,
consultant, Boston, Massachusetts; the Kerry Company, Washington, D.C.;
and the Chicago Community Development Corporation, Chicago, Illinois.
In addition, we reviewed portfolio reengineering legislation and
regulations pertaining to HUD’s demonstration program and discussed the
program with demonstration program officials at headquarters and its
demonstration contractor group, the Ernst & Young Kenneth Leventhal
Real Estate Group.

In addition, we obtained information about prepayments by analyzing
spreadsheets compiled by HUD’s preservation office which contained data
for fiscal years 1996 and 1997 on properties for which owners had filed
notices of intent to prepay as of March 5, 1997. We generally used data
from HUD’s multifamily housing data systems to identify the locations of
these properties. We did not verify the accuracy of the location data in
these systems. For information on the protections available to tenants
affected by prepayments, we reviewed the statutory requirements of
LIHPRHA (P.L. 101-625) and of the fiscal year 1996 and fiscal year 1997 HUD
appropriations legislation (P.L. 104-134 and P.L. 104-204, respectively). We
also reviewed HUD’s written regulations and guidance for implementing the
legislative provisions and discussed them with preservation office staff.




Page 54                                    GAO/RCED-97-169 Housing Preservation
Appendix VIII

Comments From the Department of Housing
and Urban Development and GAO’s
Evaluation
Note: GAO comments
supplementing those in the
report text appear at the
end of this appendix.




See comment 1.




See comment 2.




                             Page 55   GAO/RCED-97-169 Housing Preservation
                 Appendix VIII
                 Comments From the Department of Housing
                 and Urban Development and GAO’s
                 Evaluation




See comment 2.




See comment 3.




See comment 4.




See comment 5.




See comment 6.




                 Page 56                                   GAO/RCED-97-169 Housing Preservation
                 Appendix VIII
                 Comments From the Department of Housing
                 and Urban Development and GAO’s
                 Evaluation




See comment 2.




See comment 7.




See comment 8.




                 Page 57                                   GAO/RCED-97-169 Housing Preservation
                        Appendix VIII
                        Comments From the Department of Housing
                        and Urban Development and GAO’s
                        Evaluation




See comment 9.




See comments 7 and 8.




See comment 10.




                        Page 58                                   GAO/RCED-97-169 Housing Preservation
                  Appendix VIII
                  Comments From the Department of Housing
                  and Urban Development and GAO’s
                  Evaluation




See comment 11.




                  Page 59                                   GAO/RCED-97-169 Housing Preservation
Appendix VIII
Comments From the Department of Housing
and Urban Development and GAO’s
Evaluation




Page 60                                   GAO/RCED-97-169 Housing Preservation
Appendix VIII
Comments From the Department of Housing
and Urban Development and GAO’s
Evaluation




Page 61                                   GAO/RCED-97-169 Housing Preservation
                  Appendix VIII
                  Comments From the Department of Housing
                  and Urban Development and GAO’s
                  Evaluation




See comment 12.




See comment 13.




                  Page 62                                   GAO/RCED-97-169 Housing Preservation
Appendix VIII
Comments From the Department of Housing
and Urban Development and GAO’s
Evaluation




The following are GAO’s comments on the Department of Housing and
Urban Development’s (HUD) letter, received on July 10, 1997.

1. We continue to believe that the administrative weaknesses discussed in
the report while not based on a random sample of HUD’s properties
nevertheless have hampered HUD’s ability to ensure that the program is
managed effectively and efficiently, that federal funds are being spent
wisely, and that program requirements are complied with. Furthermore,
the Department’s comments on this report recognize that improvements in
internal controls and procedures for program administration are needed.

2. We continue to believe that our methodology was appropriate to
address the report’s objectives. While, ideally, it may have been desirable
to examine all of the properties scheduled for funding in fiscal year 1997,
this would have involved our carrying out work in 16 HUD field offices.
Such an approach was not practical given the time frames we had to
perform our work and current budget realities. Instead, we focused our
work on field offices with substantial preservation workloads and
properties at those field offices that were likely to receive funding in fiscal
year 1997 or 1998 (if the program is continued). The fact that our results
cannot be statistically projected to the universe of preservation properties
awaiting funding in no way invalidates our findings that the incentives
provided to a substantial number of properties are high, in many cases far
exceeding the properties’ preservation values, and that improvements are
needed in HUD controls over preservation funding. As of June 1997, in
fiscal year 1997 the Department expected to fund 32 of the 40 properties
we reviewed.

3. Our report shows that the rehabilitation costs funded by HUD were
568 percent higher than the repairs identified in the Department’s
preservation capital needs assessments which were to identify, among
other things, the repairs needed to return the properties to good condition.
Our review of rehabilitation costs was not intended to determine the
extent to which repairs funded were appropriate and cost effective but
was to provide information on the levels of rehabilitation grants provided
to properties compared with their physical needs. It does not conclude
that these rehabilitation costs were higher than what was needed to cover
necessary repairs. Rather, our point, with which HUD also agreed, was that
the criteria for improvements that may be funded under preservation is
too broad in light of the limits on HUD staff’s ability to process preservation
funding requests and monitor the program.




Page 63                                     GAO/RCED-97-169 Housing Preservation
Appendix VIII
Comments From the Department of Housing
and Urban Development and GAO’s
Evaluation




4. We continue to believe that a property’s preservation value was the best
available measure of property value that could have been used to respond
to the House Conference Report’s request that we compare the funding
provided to preservation properties to the properties’ values. Our report
recognizes that the preservation value, which is based on its “as is” fair
market value as an unsubsidized market-rate rental property, does not
take into account any increases in property value that may result from
improvements funded under the preservation program. However, as HUD’s
General Deputy Assistant Secretary-FHA recognized in a memorandum
commenting on the facts contained in our report, no appraisals are
required that would determine a property’s value after repairs and
improvements are completed. Also, performing such appraisals would
have been difficult, if not impossible, at the properties we analyzed,
because they have either only recently received preservation funding or
are still awaiting funding. Furthermore, while we in no way assert that
preservation funding should never exceed a property’s preservation value,
we believe that it is reasonable for both HUD and the Congress to carefully
examine the merits of preserving properties that require funding far in
excess of their preservation value.

5. Our report already indicates that the significant growth in funds for
rehabilitation needs that we identified is largely attributable to the
Department’s 1994 policy decision to fund improvements above those
identified in the preservation capital needs assessments and HUD’s desire
to facilitate sales of properties to nonprofit owners.

6. The Department states that GAO is short-sighted for criticizing HUD’s
policy on funding improvements while at the same time agreeing that more
stringent criteria are needed to document the cost effectiveness of
proposed repairs. As noted earlier, our point was that the criteria for
improvements that may be funded under preservation is too broad in light
of the limits on HUD staff’s ability to process preservation funding requests
and monitor the program.

7. We believe the information presented by HUD is insufficient to support
its assertion that the Department’s policy decision to allow owners to keep
the balances in replacement reserves reflects congressional intent.

8. The information presented by HUD does not cause us to change our view
that the Department’s policy and methodology for determining the initial
deposits to replacement reserves are not sufficient to prevent funding
excess amounts. HUD’s revised policy for determining the adequacy of



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Appendix VIII
Comments From the Department of Housing
and Urban Development and GAO’s
Evaluation




replacement reserves, cited as the action taken to prevent overfunding of
reserves, was put in place in 1995. We continue to believe that HUD’s
policies and controls over replacement reserve funding are not sufficient
to prevent overfunding.

9. We believe that the Department’s comments misstate its current policy
covering equity adjustments (reductions) for repairs that bring a property
to marketable (“good”) condition. Specifically, HUD’s comments do not
reflect the Department’s current policy, promulgated in 1995, which limits
the deduction for repairs being funded at the plan-of-action stage that are
in excess of repairs identified in the capital needs assessments to only
those instances where owners had intentionally concealed required
repairs during the preservation capital needs assessment process. As
discussed in the report, this policy increases program costs to the extent
that additional repairs are funded but the equity payments to owners are
not correspondingly reduced. In addition, we are unaware of any provision
in LIHPRHA that would preclude HUD from deducting from equity
improvements funded at the plan of action stage that are also relevant to
converting the property to an unsubsidized use.

10. In our report, we noted that headquarters did not conduct systematic
reviews of field offices that process preservation transactions and
concluded that the information reviewed by headquarters staff is
insufficient to allow them to identify many of the issues and problems that
arise. Therefore, the Department’s commitment to make more frequent
visits to its field offices to, among other things, monitor transactions if
preservation funding is provided in the future is appropriate. Our report
did not indicate that HUD should review all preservation funding
transactions. However, we note that such reviews should provide
sufficient coverage of preservation transactions to assure the Department
that the program is being carried out consistent with program
requirements, is being managed efficiently and effectively, and that
preservation funds are being spent wisely.

11. While the Department commented that it had stopped funding
properties with long-term use agreements 4 years ago, the property
discussed in our report was funded in 1996. In addition, HUD’s comments
indicate that it was necessary to use preservation funds to resolve
enforcement activities because of inadequate enforcement capacity.
However, we question whether enforcement capacity was so inadequate
that it required the Department to use preservation funding for this
purpose.



Page 65                                   GAO/RCED-97-169 Housing Preservation
Appendix VIII
Comments From the Department of Housing
and Urban Development and GAO’s
Evaluation




12. As discussed in our report, HUD officials acknowledged that, ideally, a
third party appraiser would have been engaged in this case, but that
because of timing issues and competing workload demands, they believed
the field office’s action was appropriate. However, we note that there was
sufficient time for HUD to contract for the third appraisal as 9 months
elapsed between the time that the owner raised questions about the HUD
contract appraisal and HUD’s internal appraisal. It is not clear why a third
appraisal was not requested at the time the large discrepancy between the
owner’s and HUD’s appraisal was identified and the owner questioned HUD’s
appraisal.

13. HUD states that approval of the plan of action was not required to
estimate the funding or to place a project on the funding queue so long as
the office had evaluated the financial structure of the transaction and the
repair costs. However, during the review, program staff told us that
properties are to be placed on the preservation funding queue after field
offices had approved their plans of action. The properties then receive
funding in the same order in which they are listed on the queue. The fact
that HUD did not consistently apply this rule allowed a few offices to obtain
funds ahead of most of the other offices which submitted their properties
for funding after they had approved the plans of action. In the case cited in
our report, the property was placed on the funding queue on July 12, 1996,
but the plan of action was not received by the field office until July 15,
1996. This raises questions about how the office would have evaluated the
proposal.




Page 66                                    GAO/RCED-97-169 Housing Preservation
Appendix IX

Major Contributors to This Report


Housing and Community      Mark H. Egger
Development Issue Area     Christine M.B. Fishkin
                           Diana Gilman
                           Richard A. Hale
                           Richard C. LaMore
                           Joseph M. Raple
                           Rose M. Schuville
                           Leigh K. Ward


Design, Methodology, and   Luann M. Moy
Technical Assistance
Group
Economic Analysis Group    Austin J. Kelly

Office of the General      John T. McGrail
Counsel




(385657)                   Page 67                  GAO/RCED-97-169 Housing Preservation
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